What Explains Agricultural Price Movements?

After 2005, commodity prices experienced their longest and broadest boom since World War II. Agricultural prices have now come down considerably since their 2011 peak, but are still 40% higher in real terms than their 2000 lows. This paper briefly addresses the main arguments on the causes of the agricultural price cycle. It broadens the scope of analysis by focusing on six agricultural commodities, and identifies the relative weights of key quantifiable drivers of their prices. It concludes that increases in real income negatively affect real agricultural prices, consistent with the Prebisch–Singer hypothesis and its predecessor, Engel's Law. Energy prices matter most (not surprisingly, given the energy‐intensive nature of agriculture), followed by stock‐to‐use ratios and, to a lesser extent, ex‐change rate movements. The cost of capital affects prices only marginally, probably because it not only influences demand, but also evokes a supply response. The added value of these results lies in that, when examined in tandem and against market fundamentals, they challenge the conclusions from uni‐dimensional approaches that often put disproportionate weight on an individual factor.     

Dairy disaggregation and joint production in an economy‐wide model*‡

We examine the impact of dairy disaggregation and joint production on trade liberalisation outcomes in an economy‐wide model. Depending on parameterisation, our model includes either (i) a single dairy commodity, (ii) several dairy commodities without joint production or (iii) several dairy commodities with joint production. In a numerical application, we consider the removal of US tariffs on dairy exports from New Zealand (the world’s largest dairy exporter). We show that failing to account for joint production when dairy commodities are disaggregated leads to misleading results. Our preferred dairy production function differs from those used in other applied trade models. Our analysis can be used to determine when accounting for joint production in other sectors is important.     

The declining price anomaly in sequential auctions of identical commodities with asymmetric bidders: empirical evidence from the Nephrops norvegicus market in France

The declining price anomaly for sequential sales of identical commodities challenges auction theory which predicts constant prices within a day. Among other hypotheses explaining the phenomenon stands the dual value of goods including a risk premium in early transactions. We consider that asymmetric bidder groups (primary processors, fishmongers, supermarket buyers) and seasonal landings may also affect the daily price pattern. On the basis of stylized facts and several panel data models, this hypothesis is tested on a Redundant French fish market of homogenous goods (live Nephrops norvegicus) when the time effects (high and low seasons, weekday effect) affecting the demand and supply conditions are taken into consideration. All models support the evidence of a daily declining pattern, but not to the same extent for all days and seasons, and all categories of buyers. Our results also show an earlier and steeper decline on periods of lower supply (or higher demand), supporting the theoretical hypothesis of risk‐averse behaviors of bidders, especially fishmongers with respect to primary processors and supermarkets.     

Measuring Market Power for Food Retail Activities: French Evidence

In this paper we develop and estimate an empirical model of pricing behaviour for food retail firms in both a quantity‐setting oligopoly engaged in the joint production of demand‐related final goods and a quantity‐setting oligopsony for supply‐unrelated wholesale goods. The procedure consists of estimating an inverse demand system for the final goods, single supply functions for the wholesale goods and the retail industry first‐order profit‐maximisation conditions, from which an estimate of the degree of imperfect competition and of oligopoly‐oligopsony power for the different commodities can be retrieved. The model is applied to the French food retail industry and three commodities are distinguished: dairy products, meat products and other food products. We strongly reject the hypothesis that French food retail firms behave competitively, and more than 20 and 17 per cent of the wholesale‐to‐retail price margins for dairy products and meat products, respectively, can be attributed to oligopoly‐oligopsony distortions.     

Are commodity prices chaotic?

We conduct tests for the presence of low‐dimensional chaotic structure in the futures prices of four important agricultural commodities. Though there is strong evidence of non‐linear dependence, the evidence suggests that there is no long‐lasting chaotic structure. The dimension estimates for the commodity futures series are generally much higher than would be for low dimension chaotic series. Our test results indicate that autoregressive conditional heteroskedasticity (ARCH)‐type processes, with controls for seasonality and contract‐maturity effects, explain much of the non‐linearity in the data. We make a case that employing seasonally adjusted price series is important in obtaining robust results via some of the existing tests for chaotic structure. Finally, maximum likelihood methodologies, that are robust to the non‐linear dynamics, lend strong support to the Samuelson hypothesis of maturity effects in futures price changes.     

Food Aid, Food Prices, and Producer Disincentives in Ethiopia

Although the short-term aims of food aid are well conceived, strong concerns have been voiced regarding the long-term impacts of such aid on incentives for agricultural producers in recipient countries. This article examines the statistical link between food aid shipments and food prices in Ethiopia over the period 1996–2006. Monthly data from three markets and three commodities are used to estimate a system of seemingly unrelated regression models for food prices. Results indicate that previous year food aid shipments reduce prices in all producer and consumer markets. These effects, however, appear to be limited to the set of internationally traded commodities that are domestically marketed. A recursive regression procedure is used to identify the food aid threshold at which a negative aid effect emerges. Food aid shipments that constitute less than 10% of domestic production appear to be benign, but shipments above this level show signs of being disruptive to local markets. We use a simple policy simulation to argue that production-sensitive targeting, e.g., conditioning food aid on local food production, would help to circumvent disincentive effects.     

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.     

Regime Shifts in the Fish Meal/Soybean Meal Price Ratio

Aquaculture growth has led to worries about overfishing and reduction in wild‐caught food fish supply because of increased demand for fish meal. As such, the price ratio between fish meal and soybean meal has received much attention as an indicator of changing market conditions. In recent years, the price ratio between these two commodities has become more volatile. Several authors have suggested that the traditional relationship between fish meal and soybean meal has broken down and that this is evidence of increased demand pressure on fish meal. In this article, we investigate the hypothesis that there are two regimes for the relative price between fish meal and soybean meal. The empirical results support this hypothesis, with the low‐price regime representing the traditional stable relative price. The continued linkages between the fish meal and the soybean meal markets indicate that aquaculture is reducing its dependency on marine proteins in favour of vegetable proteins.     

The interaction of speculators and index investors in agricultural derivatives markets

Through the analysis of the weekly Commodity Futures Trading Commission reports on 12 US traded agricultural commodities, we revisit the heated debate on the impact of index flows on commodities prices. After introducing a novel stock‐to‐use proxy that may be used to represent inventory variations at the intra‐month level, we show that speculators, contrary to index investors, are sensitive to commodity‐specific fundamental information. Their endogeneity to commodities markets hinders the estimation of their market impact. Regarding the market impact of index flows, the endogeneity problem is alleviated in two ways: first, we restrict the scope to agricultural commodities, for which index flows are more exogenous to market prices; second, we introduce two novel instrumental variables that are computed from index flows outside the market under analysis. We find that index investment flows are offset by commercial players, not speculators. The serial correlation of index flows may explain the tendency of speculators to synchronize with index investors. There is strong evidence of an index flows' impact in those commodities markets where speculative and index positions are the most correlated. The market impact of index flows is located in periods of liquidity stress, as is the correlation between speculative and index positions. Overall, our results demonstrate an impact of index investors on some agricultural prices and suggest that the synchronicity between speculative and index positions is an important determinant of this impact.     

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.     

Identification of habit in Japanese food consumption

Demand models were estimated for five commodities using annual retail level Japanese data. Estimates were made with the Houthakker‐Taylor [Houthakker, H.S., Taylor, L.D., 1970. Consumer Demand in the United States; Analysis and Projections. Harvard University Press, New York, MA] state adjustment model. Significant lags were found for meat and cereal, which means that habit is important for these commodities. Some habit affects were also found for seafood.     

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.     

Long‐Run Drift,Co‐Movement and Persistence in Real Wheat and Maize Prices

Trends in real prices for food commodities are both important and controversial. Paying particular attention to issues of methodology, this paper assesses the evidence for a downward drift in the real prices of wheat and maize. It is found that the apparent strength of that evidence depends substantially on whether the time series generating models are taken to be trend‐stationary or difference‐stationary, and on whether allowance is made, through incorporation of dummy variables in the models, for events in one or two extreme years. Once dummy variables are incorporated, we find little evidence against difference‐stationarity. The analysis then proceeds, through tests for cointegration, to the construction of error‐correction models linking the two prices and to the estimation of persistence of shocks in this bivariate framework. The paper presents modest evidence for downward drift in real grain prices of about 1 to 1.5 per cent per annum, shows that wheat and maize prices cointegrate and estimates that direct and cross‐persistence measures take values of less than unity.     

Dynamic factor demand equations in U.S. and Canadian agriculture

This research provides one of the first empirical estimates of a data-based dynamic factor demand model for American and Canadian agriculture. Models such as these deserve more widespread use in the empirical analysis of agriculture. These models have the advantage that they do not impose inappropriate dynamics on the data. Rather they permit the data to select the appropriate dynamics. We use a model originally developed by Anderson and Blundell. This model is a general first-order dynamic model which contains as testable hypothesis several simpler models. This model permits us to estimate the long-run agricultural production structure as a subset of the dynamic parameter estimates. We will test this long-run structure for symmetry, homotheticity and neutral technical change. The estimated models may be used to test for three alternative dynamic structures. In the limit, dynamics may not be needed and we can test for the static long-run equilibrium model. Two intermediate cases are the autoregressive and the partial adjustment models which are simpler than the general model but still include dynamics. Our results suggest that the long-run equilibrium model is unsatisfactory in both countries. A dynamic model is needed. In both countries, the two more restricted dynamic models are rejected. The general dynamic model is required. In Canada, the long-run equilibrium structure is homothetic with neutral technical change. In the United States, homotheticity is also accepted but neutral technical change is rejected.     

RELATIVE PRICE VARIABILITY AMONG AGRICULTURAL COMMODITIES AND MACROECONOMIC INSTABILITY IN THE UNITED KINGDOM

This paper develops measures of relative price variability among agricultural commodities in the UK farm sector for the period 1956-88. Econometric tests of the hypothesis that relative price variability is positively correlated with instability in the macroeconomy are carried out. The results indicate that UK agricultural commodity prices become more volatile relative to one another when the economy-wide inflation rate increases and when aggregate output becomes more variable. These findings suggest that UK producers and consumers of domestically grown farm products experience increased risk and uncertainty in their production and consumption decisions during periods of macroeconomic instability. The effects of UK entry into the European Community are also examined; no evidence is found to suggest that adoption of the Common Agricultural Policy reduced year-to-year relative price variability among agricultural commodities.     

THE SECTORAL INCIDENCE OF PROTECTION AND ZIMBABWEAN AGRICULTURE

This article applies the literature on ‘incidence analysis’ to the case of Zimbabwe, the main hypothesis being that industrial protection indirectly taxes agricultural exports by increasing the price of non-tradeables. The extent to which industrial protection increases the price of non-tradeables is measured by Sjaastad's incidence parameter. The study shows that there exists a generally high level of incidence and finds major differences in ‘true protection’ across categories of exportables and individual agricultural export commodities. The calculated price effects of industrial protection indicate substantial indirect disincentives to the production of agricultural exportables. On average, these are more than offset by direct subsidies in the case of beef. For other agricultural export commodities, indirect taxes either overcompensate direct subsidies or exacerbate the negative direct protection resulting in extremely high true taxation.     

An Empirical Comparison of "Frisch" and "Time Series" Demand price Elasticities for individual Commodities

In a classical article in 1959, Ragnar Frisch [8] developed a procedure, which, under the assumption of want independence¹ and given commodity budget shares, income elasticities, and one own-price elasticity, allows one to calculate a complete matrix of own and cross price elasticities. Between broad commodity groups such an assumption (want independence) has becme increasingly accepted and in fact under the label of separability has formed the basis for a family of demand models that are increasingly used to estimate demand elasticities for broad commodity groups (the linear expenditure system, the Rotterdam model, etc.). At the individual commodity level however, the assumption of want independence seems less viable, e.g., the utility one derives from pork is in general not considered independent from one's consumption of beef. However, it has become increasingly common (and apparently acceptable) to find the Frisch methodology utilized to develop demand price elasticity estimates for individual agricultural commodities [4, 7, 17].     

The Use of Input-Output Analysis in Evaluating Water Resource Development

This paper describes an analytical model for studying the demand for water resource development. The final version of the model used the rectangular input-output format, which is readily convertible to a linear programming form. The rectangular model differs from the traditional square model by distinguishing between commodities and the industries producing them and not requiring a one-to-one coreespondence between them. The traditional establishment basis for classifying industries and transactions does not permit an accurate determination of the impacts of changes in final demands. The use of commodity-technology input data largely overcomes this problem. The use of dummy commodities and industries is an accounting convenience which can cause difficulties in impact and linear programming analyses. The analytical problems can be avoided by re-allocating the inputs of dummy industries to the users of dummy commodities. Cette étude d'ecril un modele analytique afin d'étudier la demande de développement des ressources d'eau. La version finale du modele utilisail le format reclangulaire de donnees-sorties celui-ci étant aisément convertible en uneforme deprogrammalion lineaire. Le modele reclangulaire differe du modele carr'e traditionnel. en faisant la difference entre les produits et les industries les produisant. et en ne reclamant pas de relation exacte el equitable entre ceux-ci. La base traditionnele etablie, afin de classifier les industries et les transactions. ne permel pas de determination precise des impacts des contrbles finaux. L'usage des donnees de production, des produits et de la technologie. surmonle grandement le probfeme. L'usage de produits el d'industries fact ices est une commodite de compatabilite qui peul causer des difficultés dans Vimpact et les analyses à programme lineaire. Les probtemes analytiques peuvent étre évités en redistribuant les productions des industries factices aux utilisateurs des produits factices.     

The Contingent Tariff of the Special Safeguard Mechanism: What Happens When Markets are Imperfectly Competitive?

Contingent tariffs for agri‐food commodities have been proposed as a Special Safeguard Mechanism (SSM) in the Doha Round negotiations by the G33 group of countries as an instrument to control downward spikes in their border prices and/or surges of imports. The objective is to safeguard the livelihood security of farm households in poor countries. To date, most analysis of such tariffs uses stochastic partial equilibrium models with perfect competition. Yet in many markets for such commodities, imperfectly competitive market intermediaries play an important role in determining producers' prices, as do state trading enterprises (STEs). A stochastic partial equilibrium model of a typical importing country situation is specified in which there are either imperfectly competitive domestic intermediaries with a contingent tariff or an STE. The role of these intermediaries in influencing price behaviour and livelihood security in the presence of contingent tariffs alters the conclusion based on models of perfect competition. Using Monte‐Carlo simulation, it is shown that the efficacy of a contingent tariff is substantially reduced as the number of firms declines because increasingly they absorb the tariff, and the procurement price and producer surplus do not increase to the extent that they do under perfect competition.     

A time series analysis of Danish markets for pork, chicken, and beef

We offer a first-time empirical depiction of Danish dynamic meat price/quantity transmissions by formulating, estimating, and testing a VAR model of market-clearing quantities and prices of the Danish pork, chicken, and beef markets. The analysis illuminates how these markets dynamically handle shocks, and it is demonstrated that: (i) the three meats are close substitutes; (ii) chicken and pork market shocks have own-market and cross-market effects that occur rapidly and swiftly, while beef market shocks have more enduring impacts on pork and chicken markets; (iii) prices are in general more endogenous than quantities; and (iv) the price of chicken is much more endogenous than the prices of pork and beef.