Price relationships between qualitatively differentiated agricultural products: organic and conventional wheat in Germany

Organic agriculture, which produces commodities that can be qualitatively differentiated from conventional food products, has grown into an important market in many countries. The dynamics of commodity prices in both sectors are partly interdependent, but are also shaped by independent determinants and have rarely been studied. We analyze organic food markets and their interdependencies with conventional markets in the context of wheat markets in Germany, which have been subject to a number of fundamental changes during the last two decades. Based on institutional market characteristics, we suggest a flexible Markov‐switching asymmetric time series model. We find a pronounced temporal sequence of market phases that differ in their asymmetric dynamics and the extent to which the organic price is influenced by the conventional price. Organic wheat prices tend to be increasingly connected to prices of conventional wheat.     

Structural Breaks and the Relationship between Barley and Wheat Futures Prices on the London International Financial Futures Exchange

Co-movement between futures prices can arise when commodities are substitutes. Counterintuitively, Dawson and White fail to find a significant long-run link between feed barley and wheat prices on the London International Financial Futures Exchange. This relationship is re-examined using  Johansen, Mosconi, and Nielsen's co-integration procedure that permits structural breaks. Results show evidence of co-integration and hence price discovery. There is a significant break in October 2000 following Common Agricultural Policy intervention price reductions, the barley–wheat futures market is perfectly integrated, and the barley price Granger-causes the wheat price. Modeling structural breaks in price relationships appears important.     

Market interdependence and volatility transmission among major crops

This article provides a comprehensive analysis of the dynamics of volatility across major agricultural commodities in the United States. Volatility interactions across markets may lower the effectiveness of diversification strategies to mitigate price risks and should be taken into account when analyzing the pricing behavior of different agricultural commodities. We follow a multivariate GARCH approach to evaluate the time evolution of conditional correlations and volatility transmission across corn, wheat, and soybeans price returns on a daily, weekly, and monthly basis. The period of analysis is from 1998 to 2012. The estimation results indicate a lack of lead‐lag relationships between corn, wheat, and soybeans price returns at the mean level. We find, however, important volatility spillovers across commodities, particularly at the weekly and monthly level. Wheat and corn seem to play a major role in terms of volatility transmission. Despite the supposed higher financial market integration of agricultural commodities, we do not observe that agricultural markets have become more interdependent in recent years.     

Agricultural price transmission across space and commodities during price bubbles

This article investigates agricultural price transmission during price bubbles. The empirical approach concerns the horizontal transmission of cereal prices both across different market places and across different commodities. The trade policy intervention put forward to mitigate the impact of price exuberance is considered. The analysis is performed using Italian and international weekly spot (cash) price data over years 2006–2010, a period of generalized turbulence of agricultural markets. Firstly, the properties of price time series are explored; then, interdependence across prices is specified and estimated by adopting appropriate cointegration techniques. Results suggest that the bubble had only a slight impact on the price spread and the temporary trade‐policy measure, when effective, has limited this impact.     

Post–Uruguay Round price linkages between developed and developing countries: the case of rice and wheat markets

The Uruguay Round Agreement on agriculture attempted to lower distortions in global agricultural markets. However, the significant fall in commodity prices in the late 1990s may have reduced the incentives for both developed and developing countries to better integrate into world markets. This study analyzes price linkages and adjustment between developed and developing countries during the post–Uruguay Round period. Prices of two key commodities, long‐grain rice and medium‐hard wheat, are assembled for major exporters and producers. Results of multivariate cointegration analysis suggest partial market integration between developed and developing countries in the post–Uruguay Round period. Developed countries are found to be price leaders in these two markets, and in most cases, changes in their prices have relatively large impacts on those of the developing countries. Developing countries (e.g., Vietnam and Argentina) have faced considerable price adjustment due to changes in the developed countries' prices.     

High food commodity prices: will they stay? who will pay?

Much of the public discussion of the food price crisis has focused on the sharply increased use of food commodities for biofuel production, framing debate in simple food versus fuel terms. Reality is more complex. Multiple forces drove food prices to high levels and, according to findings we report in this article, these forces will sustain high prices over the medium term. We also find that the distinction between high world prices for food commodities and the consumer costs of food is an important one to make. Food consumers do not buy raw food commodities at international prices. The degree to which the price of traded food commodities and the price of food are related depends on a long list of factors, most of which operate to dampen price transmission. In the search for appropriate policy response, it is essential to measure consumer effects correctly and to apportion properly the causes of current high prices.     

Price shock transmission: evidence from the wheat‐bread market value chain in Ethiopia

This study assesses the degree of vertical price transmission along the wheat‐bread value chain in Ethiopia. This is pursued by applying a vector error correction model and an impulse response analysis using monthly price data for the period 2000–2015. Our analysis considers transmission of price shocks across different market levels, including from the international and domestic wheat grain markets at the upstream to the domestic wheat bread market at the downstream of the value chain. The empirical findings indicate that significant cointegration exists across prices of the different market stages. There is a transmission from international prices to domestic prices at downstream markets, in particular to flour and bread prices. Prices at upstream markets are largely influenced by the domestic wholesale market. In general, the speed of adjustment is quite slow with a half‐life of about one year for restoring the equilibrium price relationship. As price margins between the different market stages in the value chain have substantially decreased in the last 15 years, higher transmission, and thus exposure to international market shocks, can be expected in the future. The results also show that causal relationships exist between prices at different market stages—with the wholesale market identified as the key market level where prices and price expectations are formed.     

A roller coaster ride: an empirical investigation of the main drivers of the international wheat price

Over the last decade, commodity prices have registered substantial booms and busts marked by extreme volatility. Wheat in particular, one of the main nonoil commodities, has registered a roller coaster in price levels which seems to be inconsistent with supply and demand fundamentals. To acutely investigate the drivers of wheat prices and quantify their impact, a vector error correction model (VECM) has been used. The exogenous variables have been distinguished into four groups: market‐specific factors, broad macroeconomic determinants, speculative components, and weather variables. The quadriangulation of the determinants will enable us to better understand the movements in wheat price and identify the specific role of each component. The results show that a mix of factors are contributing to wheat price movements, including speculation, global demand, and real effective exchange rate.     

Black Sea and World Wheat Market Price Integration Analysis

In 2008–10, Russia and Ukraine together exported an average of 29 million tons of wheat per year, and have become important players in the international wheat market. This research summarizes the short‐ and long‐run wheat price dynamics between Ukraine and Russia, and other major wheat exporters—the United States, European Union (EU), and Canada—from 2004 to 2010. Tests of market price co‐integration (Johansen maximum likelihood test and residual‐based tests) as well as threshold error correction techniques were performed for this purpose. The results suggest that Russian wheat prices were co‐integrated with EU and U.S. wheat prices but not with Canadian wheat prices. Ukrainian wheat prices were found to be co‐integrated with French wheat prices only. The estimated long‐run wheat price transmission elasticities were estimated to be equal to 1.04 between Russian and French (a representative country of the EU) wheat prices, 1.16 between Russian and U.S. wheat prices, and 1.05 between Ukrainian and French wheat prices. We also found the short‐term relationships between the co‐integrated series to be statistically significant. Price adjustments in all co‐integrated prices were found to be symmetric.     

Structural Breaks,the Export Enhancement Program and the Relationship between Canadian and US Hard Wheat Prices

This paper examines the long‐term relationship between the export prices of Canadian and US hard wheat and the effects of the US Export Enhancement Program (EEP). Using monthly prices for 1974–2001, we adopt the cointegration procedure of Johansen et al. (2000) which permits structural breaks. Results show that a long‐term relationship exists, and there are two breaks that coincide with the EEP. The first break is in late 1985 when the long‐term US/Canadian price ratio fell by 5.5%, while the second is in early 1995 when it increased by 9.2%. Weak exogeneity tests imply that Canada is the price leader, and impulse responses show that long‐term equilibrium is restored within five months following a shock to either price.     

WELFARE IMPLICATIONS OF MORE ACCURATE RATIONAL FORECAST PRICES

Models are constructed to assess the welfare effects for producers, consumers and society of producers using forecast prices based on more accurate estimates of variables causing shifts in the demand for and supply of commodities. The basic model is a stochastic cobweb model in which producers' forecast price is the rational forecast price. The model is extended for many commodities, for partial producer response to more accurate forecast prices, and to include stock holding. In terms of economic surplus, producers and consumers gain from more accurate estimates of demand shift variables, producers gain and consumers lose from more accurate estimates of supply shift variables, and in both cases there is a net society gain.     

THE RELATIONSHIP BETWEEN WORLD PRICE INSTABILITY AND THE PRICES FARMERS RECEIVE IN DEVELOPING COUNTRIES

World prices for agricultural commodities are traditionally unstable, but they were particularly turbulent during the late 1970s and early 1980s. This paper uses available post-War data on individual commodity prices to test whether world price instability is increasing, and to examine its impact on the prices producers receive in developing countries. It is found that the recent turbulence was more a statistical fluke than the beginning of any longer-term increase in market instability. Further, while the variability in world prices has been almost entirely transmitted to developing countries in the dollar value of their export unit values, it has not been fully transmitted to average producer prices. Real exchange rates, domestic marketing arrangements and government intervention have acted to buffer price movements for producers in many developing countries.     

CANADIAN WHEAT ACREAGE RESPONSE*

In spite of the criticisms which have been levied against statistical estimation of supply response, it is used in this study to determine the factors causing yearly fluctuations in Canadian wheat acreage. The estimates are derived from 1947–1966 time series data. In formulating price expectations, both the traditional and distributed lag models are used.
It was found that wheat acreage response is not a random process. From a statistical standpoint, wheat and flax prices, wheat stocks on farms, and export sales did affect farmers' wheat acreage decisions. Among the elasticities computed, those for wheat prices were the largest but generally less than one. Barley prices, rainfall prior to seeding, and cattle prices were also considered but did not appear to have a serious influence on wheat acreage.     

Information-rich wheat markets in the early days of COVID-19

This paper uses the information implicit in commodity futures and options prices to infer market beliefs about the impact of early-stages COVID-19 on commodity market fundamentals. The particular commodity examined is soft red winter (SRW) wheat, and the timeframe is early February to late March 2020. The analysis highlights various adjustments in the cash and futures price of SRW wheat in light of surging short-run demand from consumer hoarding of staple food products, and a weakening long-run market from growing wheat stocks and an emerging global recession. This split is causing the forward curve to flatten and basis levels to invert. The change over time in the price of options on wheat futures reveals increased price volatility in response to growing uncertainty about the COVID-19 impacts. Similarly, changes in the skewness of the option's volatility smile illustrate a shift in traders’ perception about risk in the right versus left tail of the price distribution.     

Inter‐ and intra‐seasonal crop acreage response to international food prices and implications of volatility

Understanding how producers make decisions to allot acreage among crops and how decisions about land use are affected by changes in prices and their volatility is fundamental for predicting the supply of staple crops and, hence, assessing the global food supply situation. This study makes estimations of monthly (i.e., seasonal) versus annual global acreage response models for the world's principal staple food crops: wheat, corn, soybeans, and rice. Primary emphasis is given to the magnitude and speed of the allocation process. Estimation of intra‐annual acreage elasticity is crucial for expected food supply and for input demand, especially in the light of the recent short‐term volatility in food prices. The econometric results indicate that global crop acreage responds to crop prices and price risks, input costs as well as a time trend. Depending on respective crop, short‐run elasticities are about 0.05 to 0.40; price volatility tends to reduce acreage for some of the crops; comparison of the annual and the monthly acreage response elasticities suggests that acreage adjusts seasonally around the globe to new information and expectations. Given the seasonality of agriculture, time is of an essence for acreage response. The analysis indicates that acreage allocation is more sensitive to prices in the northern hemisphere spring than in winter and the response varies across months.     

Shocks to food market systems: A network approach

In order to better understand how cross-border price shocks are transmitted to domestic food markets, we augment an error correction model with a network approach and apply it to Tanzania. We show the following. First, Dar es Salaam, Tanzania's largest city and port, is not a significant influence. Second, demand shocks emanate primarily from border markets that may serve as conduits for informal trade. Third, market linkages differ considerably across seasons and commodities. Fourth, prices in areas with high production potential are especially sensitive to systemic shocks. More broadly, we show that a network approach in conjunction with time series analysis can enhance our understanding of the origins and channels through which shocks are transmitted to food markets.     

On the Comovement of Commodity Prices

We present strong evidence against the excess-comovement hypothesis—that the prices of commodities move together beyond what can be explained by fundamentals. Prior studies employ broad macroeconomic indicators to explain common price movements, and potentially correlated fundamentals are not controlled for. We use inventory and harvest data to fit a partial equilibrium model that more effectively captures the variation in individual prices. The model explains the majority of the comovements among commodities with high price correlation, and all of the comovements among those with marginal price correlation. Common movements in supply factors appear to play an important role in the observed comovements in commodity prices.     

Price Asymmetry in the International Wheat Market

Most wheat exports are accounted for by a limited number of countries with different policy regimes and specializing, for the most part, in particular classes of wheat. Under these circumstances, there is likely to be considerable interaction among the major exporting countries in the determination of wheat prices. In this paper, price linkages between the U.S. and other exporting countries (Canada, the European Union, Argentina and Australia) in the world wheat market are investigated. After determining that the direction of causality is from U. S. prices to the prices of other exporting countries, the nature of the price linkages is studied. The results suggest that the major exporting countries respond asymmetrically to U.S. price changes. The degree of asymmetry differs from one exporting country to another, Argentina and the European Union show greater response to falling prices than to rising prices, while the opposite is true for Canada and Australia.     

Using a functional approach to test trending volatility in the price of Mexican and international agricultural products

In this article, we extend the traditional GARCH(1,1) model by including a functional trend term in the conditional volatility of a time series. We derive the main properties of the model and apply it to all agricultural commodities in the Mexican CPI basket, as well as to the international prices of maize, wheat, swine, poultry, and beef products for three different time periods that implied changes in price regulations and behavior: before the North American Free Trade Agreement (NAFTA; 1987–1993), post‐NAFTA (1994–2005), and commodity supercycle (2006–2014). The proposed model seems to adequately fit the volatility process and, according to heteroscedasticity tests, also outperforms the ARCH(1) and GARCH(1,1) models, some of the most popular approaches used in the literature to analyze price volatility. Our results show that, consistent with anecdotal evidence, price volatility trends increased from the period 1987–1993 to 1994–2005. From 1994–2005 to 2006–2014, trends decreased but the persistence of volatility increased for most products, especially for international commodities. In addition, we identify some agricultural products such as avocado, beans, and chicken that, due to their increasing price volatility trends in the 2006–2014 period, may present a risk for food inflation in the short run.     

Agricultural Commodity Prices: Perspectives and PoliciesLandwirtschaftliche Rohstoffpreise: Perspektiven und PolitikenLes prix des produits de base agricoles : perspectives et politiques

Agricultural Commodity Prices: Perspectives and Policies World prices of wheat, coarse grains, rice and oilseed crops nearly doubled between 2005 and 2007 and continued to rise into 2008, although some of them later started to fall back. The price increases have been a significant factor driving up the price of food to consumers and the cost of feed for cereal-based livestock producers. They have drawn heightened attention to problems of food security and hunger, especially for poorer food consumers in developing countries. A major question is whether these price increases reflect a fundamental change in global food markets and an end to the long-term downward trend in falling real prices of agricultural commodities. Understanding the causes of the recent price increases in the context of long-term trends is vital in order to identify the appropriate policy responses by governments. This article, based on the latest OECD-FAO Agricultural Outlook, 2008–2017, focuses on the factors behind the price increases, the medium-term perspectives, and the appropriate policy responses. Rising food prices is an issue of a truly global nature. A calm, objective response is needed now from individual governments and from international organisations in order to ensure an effective and a coherent global response, and to avoid making a difficult situation worse.