Price Transmission Dynamics between Natural Gas and Urea: A Global Analysis Using Cointegration and VECM Approach

Abstract

This study examines the price transmission dynamics between natural gas and urea on a global scale over the period from 2015 to 2024, using monthly data. Recognizing urea’s critical role in agriculture and its susceptibility to input cost fluctuations, we employ Johansen cointegration tests and a Vector Error Correction Model (VECM) to analyze their relationship. Our findings reveal a long-run cointegration between natural gas and urea prices, characterized by an asymmetric transmission. Specifically, natural gas prices significantly influence urea prices, but not vice versa. Moreover, the adjustment to a shock in natural gas prices on urea prices occurs with an estimated lag of approximately five months. These results underscore the vulnerability of agricultural input markets to energy price volatility, highlighting the importance of monitoring energy markets to anticipate movements in fertilizer costs.