European rapeseed and fossil diesel: threshold cointegration analysis and possible implications

In this paper we analyze the long-run relationships between Rapeseed prices at Euronext Paris and the conventional NYMEX diesel prices during the period 2005 to 2010. For the European operators of biofuels plants there are not many hedge vehicles available to hedge their input and output factors. Cross hedges for rape oil (with the rapeseed futures contract) and RME (with the NYMEX diesel futures contract) could be useful instruments. We use recent developments on threshold cointegration approaches to investigate if asymmetric dynamic adjusting processes exist among rapeseed and diesel prices. The results suggest that a three-regime threshold cointegration model suitably explains the dynamics of the data. We demonstrate with statistical significance that - in extreme situations where Rapeseed price is low compared to Heating Oil - Heating Oil adjusts Rapeseed to its long term equilibrium more strongly and faster than in the remaining periods.