Post on 04-Apr-2018
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Policy Research Working Paper 5371
P t 2006/08 Cmmdt P Bmt Ptv
John Baes
assos Haniotis
T Wd BDvmt Pt Gu
Ju 2010
WPS5371
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Pdud b t R Sut m
Abstract
Te Policy Research Working Paper Series disseminates the ndings o work in progress to encourage the exchange o ideas about development
issues. An objective o the series is to get the ndings out quickly, even i the presentations are less than ully polished. Te papers carry the
names o the authors and should be cited accordingly. Te ndings, interpretations, and conclusions expressed in this paper are entirely those
o the authors. Tey do not necessarily represent the views o the International Bank or Reconstruction and Development/World Bank and
its afliated organizations, or those o the Executive Directors o the World Bank or the governments they represent.
Policy Research Working Paper 5371
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Placingthe2006/08CommodityPriceBoom
intoPerspective
JohnBaffes
THEWORLDBANKjbaffes@worldbank.org
TassosHaniotis
EUROPEANCOMISSION
anastassios.haniotis@ec.europa.eu
Theviewsexpressedinthispaperarethoseoftheauthorsandshouldnotbeattributedtotheir
affiliatedinstitutions.WewouldliketothankAtamanAksoy,JulieDana,BettyDow,ChrisGil
bert,LouisGoreux,BernardHoekman, andGaureshRajadhyaksha for commentsand sugges
tionsonpreliminarydrafts.RachelWeavingprovidedexcellentediting.Thepaperisacontribu
tiontotheWorldBankDFIDGlobalTradeandFinancialArchitectureproject.
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1.Introduction
The200608commodityboomwasoneof the longestandbroadestof thepost
WWIIperiod.Theboomand especially the 2008 rally,when crudeoilprices
peaked atUS$ 133/barrel (up 94 percent from a year earlier) and rice prices
doubledwithinjustfivemonthshasrenewedinterestinthelongtermbehavior
and determinants of commodity prices, and raised questions about whether
commoditypriceshave reversed thedownward course thatmost of them fol
lowedduringmostofthepastcentury.1Ithasalsoproducednumerouscallsfor
coordinatedpolicyactionsatthenationalandinternationalleveltoaddressfood
availabilityandfoodsecurityconcerns.2
Toput therecentcommodityboom intoperspectivecalls foragoodun
derstandingofthekeycharacteristicsanddeterminantsoflongtermcommodity
pricemovementsandanappreciationofhowlimitedthisunderstandingis,es
peciallywith respect to theconditionsunderwhich the recentboomunfolded.Suchaperspectiveisimportantinordertoavoidpolicypitfallsthatinthename
ofmitigatingfoodsecurityconcernsorimprovingthefunctioningofthemarkets
may,infact,exacerbateexistingproblems.
Thispaperhastwoobjectives.Thefirstistoanalyzethenatureofthere
centboom,especiallyinfoodcommodities,byexaminingwhichkeyfactorsfu
eled itandwhethersuch factorsare likely to remain inplace in the long term.
Thesecondobjective is toplace theboom intoperspectivebyexamining long
term trends and characteristics of commodity prices. The next sectionbegins
withadiscussion
of
recent
price
trends,
including
the
causes
of
the
boom
as
well
asacomparisonwithearlierepisodesofhighprices.Particularattentionispaid
tothreekey(realorperceived)causesoftheboom:excessliquidityandspecula
tion,fooddemandgrowthbyemergingeconomies,anduseofsomefoodcom
moditiestoproducebiofuels.Section3analyzesthelongtermbehaviorofcom
modityprices, including stationarity,comovementamongpricesof foodcom
modities,and theprice linkbetweenenergyandnonenergycommodities.The
finalsectionsummarizesanddiscusses somepolicy issues, including the ratio
nalityandviabilityofproposalsfordealingwithpricespikes.
We conclude that a stronger linkbetween energy andnonenergy com
moditypricesislikelytohavebeenthedominantinfluenceondevelopmentsincommodity, and especially food,markets.Demandbydeveloping countries is
unlikely tohaveputadditionalpressureon thepricesof foodcommodities,al
thoughitmayhavecreatedsuchpressureindirectly throughenergyprices.We
alsoconclude that theeffectofbiofuelson foodpriceshasnotbeenas largeas
originally thought,but that the use of commoditiesby investment fundsmay
havebeenpartlyresponsibleforthe2007/08spike.Finally,econometricanalysis
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ofthelongtermevolutionofcommoditypricessupportsthethesisthatpriceva
riabilityoverwhelmspricetrends.
2.TheNatureandCausesoftheRecentCommodityBoom
The recent commodityboomemerged in themid2000safternearly threedec
adesoflowanddecliningcommodityprices(Figure1).Thelongtermdeclinein
realpriceshadbeenespeciallymarkedinfoodandagriculture.Between197576
and200001,world foodpricesdeclinedby53percent in realUSdollar terms.
Suchpricedeclinesraisedconcerns,especiallywithregardtothewelfareofpoor
agriculturalproducers.Infact,oneoftheDohaRoundschiefmotives(andalso
oneof itsperceivedmain obstacles)was the reduction of agricultural support
andtradebarriersinhighincomecountriesasetofreformsthatwasexpected
toinduceincreasesincommoditypricesandhenceimprovethewelfareoflow
income commodity producers (Aksoy and Beghin 2005). Starting in themid2000s,however,mostcommoditypricesreversedtheirdownwardcourse,even
tuallyleadingtoanunprecedentedcommoditypriceboom.
Between2003and2008,nominalpricesofenergyandmetalsincreasedby
230percent, thoseoffoodandpreciousmetalsdoubled,and thoseoffertilizers
increased fourfold. Theboom reached its zenith inJuly 2008,when crude oil
prices averagedUS$ 133/barrel,up 94percent from a year earlier.Riceprices
doubledwithinjustfivemonthsof2008,fromUS$375/toninJanuaryto$757/ton
inJune.
Therecentboomshares twosimilaritieswith the twoearliermajorcommodityboomsof thepostWWIIperiod,during theKoreanWarand theearly
1970senergycrisis(seeRadetzki(2006)foradiscussionofthethreebooms).Each
ofthethreeboomstookplaceagainstabackdropofhighandsustainedeconomic
growthaswellasanexpansionarymacroeconomicenvironment,andeachwas
followedbyasevereslowdownofeconomicactivity.Andallthreetriggereddis
cussionsoncoordinatedpolicyactionstoaddressfoodandenergysecuritycon
cerns.
Yettherecentboomalsoshowssomeimportantdifferencesfromthepre
viousones.Bymostaccounts,itwasthelongestlastingandthebroadestinthe
numbersofcommodities involved. Itwas theonlyone that simultaneously in
volvedallthreemaincommoditygroupsenergy,metals,andagriculturewith
itspeakshowingfoodandagriculturepricesincreasinglessthanallothercom
modityprices(WorldBank2009).Itwasnotassociatedwithhigh inflation,un
liketheboomofthe1970s(althoughtheincreaseinfoodpriceshadsomenota
ble,albeit shortlived, impacton inflation).Finally, itunfolded simultaneously
with the development of two otherboomsin real estate and in equitymar
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ketswhoseend ledmostdevelopedcountries to theirmostseverepostWWII
recession.
The recentboom tookplace inaperiodwhenmostcountries,especially
developingones,sustainedstrongeconomicgrowth.During200307,growthin
developingcountriesaveraged6.9percent, thehighest fiveyearaverage in re
centhistory (Figure2).Yetapart frombroadandprolongedeconomicgrowth,
thecausesoftherecentboomwerenumerous,includingmacroandlongtermas
wellassectorspecificandshorttermfactors.
Fiscal expansion inmany countries and laxmonetarypolicy created an
environment that favoredhigh commodityprices.3Thedepreciationof theUS
dollarthecurrencyofchoiceformost internationalcommodity transactions
strengtheneddemand(andlimitedsupply)fromnonUS$commodityconsumers
(andproducers).Other important contributing factors include lowpast invest
ment,especiallyinextractivecommodities;4investmentfundactivitybyfinancial
institutionsthatchosetoincludecommoditiesintheirportfolios;andgeopoliticalconcerns,especiallyinenergymarkets.
Inthecaseofagriculturalcommodities,priceswereaffectedbythecom
binationofadverseweatherconditionsandthediversionofsomefoodcommod
itiestotheproductionofbiofuels(notablymaizeintheUSandedibleoilsinEu
rope).That led toglobalstocktouseratiosofseveralagriculturalcommodities
down to levelsnotseensince theearly1970s, furtheraccelerating theprice in
creases(Figure3).Policyresponsesincludingexportbansandprohibitive taxes
thatwereintroducedin2008tooffsettheimpactofincreasingworldfoodprices
contributedtocreatingtheconditionsfortheperfectstorm.Theweakeningand/orreversalofthesefactors,coupledwiththefinancial
crisisthateruptedinSeptember2008andthesubsequentglobaleconomicdown
turn, induced sharppricedeclinesacrossmost commodity sectors.But though
commoditypriceshavedeclinedsharplysincetheirmid2008peak,theypicked
upagainrecentlyandthekeycommoditypriceindicesarestilltwiceashighas
theirearly2000slevels(Figure4).
Thus thekeyquestion iswhetherat leastsomeof thefactorsbehind the
recentboomaremorepermanent innature,and likely to remain inplace.Past
experiencerevealsthatfoodcommoditypricespikesweremainlydrivenbyneg
ativesupplyshocks,withhighpricesoftenactingasthebestincentiveformiti
gatingtheshocksthatgeneratedthem.Yetthepertinenceofsuchexperiencefor
futuredevelopmentshasbeenquestioned,andinattemptstoexplainthecurrent
boom,somefactorshavereceivedconsiderablymoreattention(orevensubjected
toaconsiderableamountofmisinformation)thanothers.Withthisinmind,the
restofthissectionexaminesthecontributionsmadebythreesuchfactors,name
ly, excess liquidity and speculation, income growth and dietary changes in
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emerging economies, and the diversion of some food commodities tobiofuel
production.
Excessliquidityandspeculation
Duringthecourseoftherecentboom,ithasbeenarguedoftenthatfundamentalsdonottell thewholestoryandcommoditypriceshavebeendriven,inpart,by
factors that go beyond demand and supply considerations. Excess liquidity,
whichisoftenplacedwithinthebroadercontextofspeculation,isoftenargued
tohavefueledacommoditybubble.
Togaugetheimportanceoftheissue,considerthefollowing.Betweenthe
secondhalfof2007andthefirsthalfof2008productionofpetroleumincreased
from85.8millionbarrelsperday (mb/d) to86.8mb/d.Consumption fell from
86.5mb/d to86.3mb/d.Pricesshouldhave fallen. InDecember2007,crudeoil
averagedUS$ 90/barrelwhile inJune 2008 it averagedUS$ 132/barrel, almost
50% up. Recent figures on spare capacity give an equally perplexing picture.
During2009,OPECsparecapacitystoodat6.3mb/dwhilepetroleumpricesav
eraged$62/barrel.However,similarcapacitylevelsduringtheearly2000swere
associatedwith $20/barrel. Stocks of key food commodities are 20% higher in
2009/10 compared to 2007/08; yet the nominal foodprice index averaged 23%
higherinDecember2009comparedtoayearago,rathersurprisinggiventhatan
oftencitedreason for the foodpricespikeof2008was low inventories.Admit
tedly, theapparentdivergencebetweencommoditypricesand fundamentals
deserves(andhasreceived)attention.
While fundamentals haveplayed a key role in commoditypricemovements,observationssuchastheabovehaveledmanyresearchersandanalyststo
argue that the commodity priceboom reflected, in part, excess liquidity and
speculation. Inotherwords,a lotofnewmoney (aresultofexcess liquidity)
chasedtoofewassetsandeventuallyfounditswayintocommoditymarkets,in
turncausingaspeculativebubble.
Variousconcepts related to speculationhavebeendiscussedoften inter
changeablyandhavebeenanalyzedinisolationfromeachother,ortheyarepre
sented inanoversimplifiedmanner,especially invariouseditorialsandblogs.
Theseconcepts
include:
excess
liquidity
(one
of
the
three
sources
of
new
mon
ey); index fund activity (the chief investment vehicle for the newmoney);
speculation(anactivitynotwelldefinedbutnecessaryforthefunctioningoffu
turesexchangesandsometimes thesourceofmarketmanipulation); theroleof
commodity futuresexchanges (thenervecentersofcommoditypricediscovery
mechanisms); inventories (which matter most for nonperishable agricultural
commodities,mostlygrains);andspeculativebubble(averybroadanddifficult
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toquantify issue).Notsurprisingly,suchcomplexityhas led todifferentviews
andmixedempiricalevidence.Theremainingofthissectionelaboratesonthese
concepts (seeAppendixA for adiscussionon speculation in commoditymar
kets).
Broadlyspeaking,thenewmoneywhichisnotassociatedwithphysi
calcommoditytransactionscanbelinkedtothreesources:
Diversificationofinvestmentvehicles.Duringthepastdecadeorso,investmentfundmanagersnoticedthatexistingassetclasseswerebecomingincrea
singlycorrelated.Intheirsearchfornew(uncorrelated)assetstheybroadened
theirportfoliosbyincludingassetsfromemergingeconomies.Whentheseas
setsbecamethemselvescorrelated(becauseofthesystemiceffectofallfunds
investedinthesameassets)fundmanagersbeganinvestingincommodities,
thus setting the stage for the socalled financialization of commoditiesa
roletypicallyreservedforgold,after1973.Totheextentthatcommoditiesare
viewedasanotherassetclass,diversificationmayhaveapermanentcharac
ter.
Rebalancingofinvestmentportfolios.Therebalancingofinvestmentportfoliosby shifting funds fromUS$denominated (andother)holdings to com
moditiesaddedfurtherinflowsintocommoditymarkets.Thestrong inverse
relationshipbetween theUS$andcommoditypricesespeciallycrudeoil
hasbeen invokedoftenasevidence for such rebalancing (seeMedlockand
Jaffe2009).5Theeffectof rebalancing is lesspermanent thandiversification
anddepends largely on how long investors risk attitudeswill favor com
moditiesordisfavorotherassets. Excessliquidity.Thelowinterestrateenvironmentsupportedbymanycentralbanks resulted inexcess liquidity,partofwhich found itsway tocom
moditymarkets (on top of theprice increasedue to expansion ofphysical
demandforcommodities).Itisbelievedthatexcessliquidityhasbeenthekey
reasonbehindtheboominrealestatemarkets.Theeffectofexcessliquidityis
likelytolastforaslongasinterestratesremainlow.
The key channel throughwhich the newmoney found itsway into
commoditymarkets is indexfunds.Themostwidelyusedandcloselywatched
indicesaretheDowJonesAIGandS&PGoldmanSachsCommodityIndex(alsoknownasDJAIGandS&PGSCI).About95percentof funds indexed tocom
modities are replicatedby these two indices.The funds take longpositions in
commodityfuturesexchangesbybuyingcontractsand,priortoexpiration,roll
ing themover.While therearenopreciseestimateson theirsize,abroadlyac
ceptedrangeasofmid2008was$250to$300billion(Masters2008).Areportby
amajorcommercialbankestimatedthatanadditional$60billonwentintocom
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moditiesduring2009,placing the2009totalestimateto$230240billion,margi
nallylowerfrom2008duetoweakercommodityprices.Althoughtheseamounts
ofmoneyrepresentaboutonepercentof theglobalvalueofpensionandsove
reignwealthfundholdings(bothkeycontributorstoindexfunds,withtheglob
alvalueof these twogroupsestimatedat$20and$4 trillion,respectively) they
arelargecomparedtothesizeofcommoditymarkets.6
Theeffectof thenewmoneyoncommoditypriceshasbeenassociated
withspeculationthatmighthaveledtoapricebubble.Theviewsonthesubject,
however,havebeen,forthemostpart,extreme.Forexample,Krugmaninase
riesofNewYorkTimesblogsandeditorials,notonlyrejectedtheviewthatspecu
lationfueledtheboombutalsodismissedtheideathatcommoditytradingactiv
ityinfuturesexchangesmayhaveaffectedcommoditypricesatall,arguingthat
afuturescontractisabetaboutthefutureprice.Ithasno,zero,nadadirectef
fecton thespotprice(NewYorkTimes,June23,2008).Others toohaveargued
thatspeculationplayednorole.Wolfisoftheopinionthatifspeculationwereraisingpricesabovethewarrantedlevel,onewouldexpecttoseeinventoriespil
inguprapidly,assupplyexceedstherateatwhichoilisburned.Yetthereisno
evidenceofsuchaspikeininventories(FinancialTimes,May13,2008).Frankel
citedtheCongressionaltestimonybythechiefeconomistoftheCommoditiesFu
turesTradingCommission(CFTC)onApril3,2008tosupportinhisweblog(Ju
ly25,2008) thatTheevidencedoesnotsupport theclaim thatspeculationhas
beenthesourceof,orhasexacerbatedthepriceincreases.Verleger(2009),based
on IEA (2009) analysis, concluded at hisCFTC testimony that the increase in
crudeoilpricebetween2007and2008wascausedbytheincompatibilityofenvironmentalregulationsandspeculationhadnothingtodowiththepricerise.7The
IOSCOTaskForce (2009), formedat therequestofG8 toexamine the issueof
speculationincommoditymarkets,foundthateconomicfundamentals,notspe
culative activity, are thepossible explanation for recentprice changes in com
modities.8Wright(2009)echoedsimilarviewsbynotingthatiflongfuturesposi
tionswerebehindthegrainpricespikeof2008,stockswouldhaveincreased.
At the other end of the spectrum, Soros (2008) called commodity index
tradingathisUScongressionaltestimonyintellectuallyunsound,potentiallydes
tabilizing, and distinctly harmful in its economic consequences.Eckaus (2008)
andKhan(2009)authoredpapersentitledTheOilPriceIsReallyaSpeculative
BubbleandThe2008OilPriceBubble,respectively.Calvo (2008)noted that
speculationandlowinventoriesarenotnecessarilyinconsistentwitheachother
andconcludedthat[increasesin]commoditypricesaretheresultofportfolio
shiftagainstliquidassetsbysovereigninvestors,sovereignwealthfunds,partly
triggeredbylaxmonetarypolicy,especiallyintheUS.Roubini(2009)saidthis
ontheearly2009crudeoilpriceincrease:improvingfundamentalsjustify
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oilgoingfrom$30tomaybe$50.Ithinktheother$30isallspeculativedemand
feedingonitspeculatorsandherdingbehavior.Similarviewswereechoedby
othersaswell,includingMedlockandJaffe(2009)andWray(2008).
Theempiricalevidenceon thesubjecthasbeenmixed.Two IMFstudies
(2006, 2008) found no evidence that speculation had systematically influenced
commodityprices.Asimilarconclusionwasreachedbyaseriesofstudiesunder
takenbytheUSCommoditiesFuturesTradingCommission,theagencythatre
gulatesUSfuturesexchanges.9Sanders,Irwin,andMerrin(2008)expressedskep
ticismabouttheassertionthatspeculationhasledtobubblesinagriculturalfu
turesprices.
Otherauthorssharesomewhatdifferentviews.Roblesandothers (2009)
identified speculative activity in the futuresmarket as a sourceof the 2007/08
agriculturalcommodityprice increases.Plastina (2008)concluded thatbetween
January 2006 andFebruary 2008, investment fund activitymighthavepushed
cottonprices14percenthigherthantheywouldotherwisehavebeen.Inthenonferrousmetalsmarket,Gilbert (2007) foundnodirectevidenceof the impactof
investoractivityon thepricesofmetals,butfoundstrongevidence that thefu
turespositionsof indexprovidershadaffected thepricesof soybeans (though
notofmaize) in theUS futuresexchanges.Perhaps, thestrongestevidence isa
subsequentstudybyGilbert(2010:420)whoconcludedthatByinvestingacross
theentirerangeofcommodityfutures,indexbasedinvestorsappeartohavein
flatedfoodcommodityprices.
Whyistheempiricalevidencemixed?Often it isargued thatdespite the
fact that investment fund activity remained steady or even increasedbetweenmid andend2008,pricesdeclinedsharplyduringthatperiod.Hence,theargu
mentgoes, investmentfundsdidnotaffectcommodityprices.However,that is
basedon the logic that if investment fund activity continued to increase, then
priceswould increase forever (or,at least theywouldnotdecline),anunlikely
outcome.Supplyanddemandfundamentalswillprevail,eventually.Thus,from
anempiricalperspective, thekeyquestion shouldbewhether investment fund
activity contributed to the recent boom (or any boom, for that matter), not
whetheritaffectscommoditypricesingeneral.Consequently,examiningtherole
ofinvestmentfundsincommoditymarketsrequiresfirst,theidentificationofthe
boomperiodandsecond,eitheranalyzethatperiodinisolationperhapswithin
aunivariatemodelingframeworkoruseofearlierperiods(orsomeotherprior)
ascounterfactuals.
Identifyingthesuspectperiodwillcontainalargeelementofsubjectivi
ty and hencewill inevitably lead todiffering opinions.However, there are at
leastthreereasonswhyinvestmentfundactivitymayhaveinfluencedcommodi
typrices.First,investmentincommoditiesisarelativelynewphenomenon,and
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fundshave todateflowedmostly in,notout, implyingthatsomemarketsmay
havebeensubjecttoextrapolativepricebehavior; thatis,highpricesleading to
morebuyingbyinvestmentfunds,inturnleadingtoevenhigherprices,andso
on.Infact,thatmayhavebeenthecasewiththesovereignwealthfunds,whose
revenuecomes fromcommodities,which in turn it is invested incommodities.
Second,indexfundsinvestonthebasisoffixedweightsorpastperformancecri
teria,andhence investmentoftenbehavesdifferently fromwhatmarketfunda
mentalswoulddictate.Third,thelargesizeofthesefundscomparedtocommod
itymarketsmayexacerbatepricemovements.Or,asSoros(2008:3)characteristi
callyputittheinstitutionsarepilinginononesideofthemarketandthey
havesufficientweighttounbalanceit.
Whatconclusioncanbederivedfromofallthisinthecontextofexcessli
quidityandspeculation?Wasinvestmentfundactivityatleastpartlyresponsible
fortherecentcommodityboom?Anycommodityrelatedactivityonthefinancial
side isunlikely toalter longtermprice trends,whichwillultimatelybedeterminedbymarketfundamentals.But,suchactivitiescan inducehigherpriceva
riabilityinthesenseofexacerbatingthelengthandtheamplitudeofpricecycles,
astheymostlikelydidduringtheperfectstormof2007/08.
Dietarychangesandincomegrowthinmiddle-incomecountries
Typicallyagriculturalpriceboomsare linked tosupplyshockssuchasweather
events or animal diseases that disturb normal production patterns. Supply
shockswerenoexception in the recentboom.Droughtsplayedamajor role in
thereductionofdairyexports fromNewZealand.Australiasgrainproductionwasseverelyaffectedbythethreedroughtsexperiencedduring2002/08(ahighly
unusualweatherpattern,often linked toglobalwarming).The2009drought in
SouthAmericaaffectedtheoilseedsmarketformorethanayear.Butthemagni
tude of these events, although cumulative and coming after a long period of
normalweatherpatterns, falls short of explaining the extent of the foodprice
spike.
Could ademand shockoffer amoreplausible explanation, ashasoften
beensuggested?Forthistohavebeenthecase,suchashockshouldhavetaken
placeeither
unexpectedly
and
suddenly
or
through
arapid
shift
in
long
term
ex
pectationsaboutfooddemandpatterns.Ithasoftenbeenarguedthatastructural
shifthas takenplace in thedemand forgrainbyemergingcountries, including
ChinaandIndia,andespeciallyduringthepastdecadewhenthesetwocountries
experiencedhighincomegrowth.TheJune2009issueofNationalGeographic,for
example, noted that as countries like China and India prosper and their
peoplemoveup thefood ladder,demandforgrainshas increased.Similarar
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gumentshavebeenadvancedbynoted scholarsaswell.Krugmanargued that
theresthemarchofthemeateatingChinesethatis,thegrowingnumberof
people inemergingeconomieswhoare, for the first time, richenough to start
eatinglikeWesterners(NewYorkTimeseditorial,April7,2008).Likewise,Wolf
askedSowhyhavepricesof food risen so strongly?and thenanswered
strongrises in incomesperhead inChina, India,andotheremergingcountries
haveraiseddemandforfood,notablymeatandtherelatedanimalfeeds(Finan
cialTimes,April29,2008).Indeed,thesizeofChinaandIndia,whichtogetherac
countfor27percentoftheworldspopulation,impliesthatevenaminorchange
intheirpatternofdemandgrowthhasamajoreffectonworldmarketprices.
Butacloserlookatthegrowthtrendsofpopulationandincomeoverthe
pastdecades, coupledwith those ofdemand for food commodities, showsno
evidence that fooddemandgrowthacceleratedeither inChinaand Indiaor in
theworldasawhole.Table1summarizesdemandgrowthpatternsforanumber
ofkeyfoodcommoditiessince1961forfour12yearperiodsroughlycorrespondingtofourpricecycles:theperiodofthegreenrevolution(196172);theafter
mathofthetwoenergyshocks(197384),therecoveryofagriculturalpricesuntil
theirmid1990sprice spike (198596),and the lastperioduntil the recentprice
peak(199708).Thedataclearlyshowthatdemandgrowthhasslowedformost
grainsincluding thoseused for feed, reflectinga slowdown in thegrowthof
demandformeat.
Duringthemostrecentdecade,despiteaclearaccelerationofGDPgrowth
since2003,strongerdemandforagriculturalproductsbothatworldlevelandin
Chinaand Indiahasbeen theexceptionitoccurred inmaizeand insoybeans(drivenbydemandforedibleoils),andwasrathermixedingrains,butcertainly
didnotoccur inmeatsordairyproducts (seeTable2withabreakdownof the
19972008period for theworld,China,and India).Similar findingson the role
(or,thenonrole)ofChinaandIndiahavebeendiscussedinAlexandratos(2008:
673)whoemphaticallystatedthattheir[ChinasandIndias]combinedaver
age annual increment in consumption (both growth rates and absolute incre
ments)waslowerintheyearsofthepricesurges,200208,thaninthepreceding
period19952001.FAO(2009)arrivedatnearlyidenticalconclusions.
These developments reflect the huge gap that existed during the price
boombetweenthefundamentalsofagriculturalmarketsandthecorresponding
price levels.No other example demonstrates thisbetter than the fact that the
highestprice increases tookplace in twocommoditieswheatandricewhere
fooddemandwasstagnatingandyetwerewidelyexplainedasbeingdrivenby
strongfooddemand.Thus,whilesupplyshocksmayexplainsomeof theprice
pressures incertain foodcommodities,bycontrastdemandgrowthaccelerated
inrecentyearsincommoditiesusedforbiofuels,suchasmaizeandedibleoils.
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Biofuels
The increasing interactionbetween the pricemovements of energy and non
energycommoditiesduring theboomfocusedattentionontheimpactofgrow
ingdemand forbiofuels, including formaizebasedethanol (mainly in theUS)
and oilseedbasedbiodieselproduction (mainly inEurope).During theboom,maizeandcrudeoilpricesmovedintandem,pointingtoanemergingnewand
fixedrelationshipbetweenthem.Obviously,maizeanditsuseforethanolmoved
into the picture as significant factors affecting price developments. But how
much impactwas there,andwasthereasimilaroneinoilseeds,resultingfrom
theiruseforbiodiesel?
Thecontributionofbiofuels to the recentpriceboom,andespecially the
pricespikeof2007/08,hasbeenhotlydebated.Mitchell (2009)argued thatbio
fuelproductionfromgrainsandoilseedsintheUSandtheEUwasthemostim
portantfactorbehindthefoodpriceincreasebetween2002and2008,accounting,perhaps, forasmuchas two thirdsof theprice increase.Gilbert (2010),on the
otherhand, found littledirectevidence thatdemand forgrainsandoilseedsas
biofuelfeedstockswasacauseofthepricespike.
FAO (2008) compared abaseline scenario,which assumes thatbiofuel
productionwilldoubleby2018, toanassumption thatbiofuelproductionwill
remainatits2007levels;itconcludedthatinthelattercasegrainpriceswouldbe
12percent lower,wheatprices7percentlower,andvegetableoilprices15per
centlowerthaninthebaselinescenario.OECD(2008)arrivedatsimilarconclu
sionsforvegetableoils,findingthattheirpriceswouldbe16percentlowerthan
thebaselineifbiofuelsupportpolicieswereabolished;eliminatingbiofuelsubsi
dieswouldhavesmaller impactson thepricesofcoarsegrains(7percent)and
wheat (5percent).Rosegrant (2008),who simulatedmarketdevelopmentsbe
tween2000and2007(excludingthesurgeinbiofuelproduction),concludedthat
biofuelgrowthaccountedfor30percentofthefoodprice increasesseeninthat
period,withthecontributionvaryingfrom39percentformaizeto21percentfor
rice.Lookingahead,Rosegrantfound that ifbiofuelproductionweretoremain
atits2007levels,ratherthanreachingitsmandatedlevel,maizepriceswouldbe
lowerby14percentin2015andby6percentin2020.10
Banseandothers(2008)comparedtheimpactoftheEUscurrentmandateto(i)anomandatescenarioand(ii)amandatewherebytheUS,Japan,Brazilal
soadopttargetsforbiofuelconsumption.Theyestimatethatby2020,inthebase
linescenario (nomandate),cerealandoilseedpriceswillhavedecreasedby12
and7percent,respectively.IntheEUonlyscenario,thecomparablechangesare
7percentforcerealand+2percentforoilseeds.Bycontrast,undertheglobal
scenario(addingbiofueltargetsinUS,Japan,andBrazil)oilseedpriceswillhave
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risenby19percentandcerealpricesbyabout5percent.TheEuropeanCommis
sionsownassessmentofthelongterm(2020)impactsofthe10percenttargetfor
biofuels(i.e.thatrenewableenergyfortransport,includingbiofuels,willsupply
10 percent of all EU fuel consumptionby 2020) predicts fairlyminor impacts
fromethanolproduction,whichwouldraisecerealsprices36percentby2020,
butlargerimpactsfrombiodieselproductiononoilseedprices;thegreatestpro
jectedimpactisonsunflower(+15percent),whoseglobalproductionpotentialis
quitelimited.Taheripourandothers(2008)simulatethebiofueleconomyduring
200106.Byisolatingtheeconomicimpactofbiofueldrivers(suchasthecrudeoil
priceand theUSandEUbiofuelsubsidies)fromotherfactorsataglobalscale,
theyestimatetheimpactofthesefactorsoncoarsegrainpricesintheUS,EU,and
Brazilat14percent,16percent,and9.6percent,respectively.
AjointUSDepartmentofAgricultureandDepartmentofEnergyassess
ment (USDA/USDE2008)concluded that the recent increase inmaizeandsoy
beanpricesappears tohave little todowith therunup inpricesofwheatandrice.Itfoundthatiftheamountsofcornusedforethanolandedibleoilusedfor
biodiesel in theUS had remainedunchanged at their 2005/06 levels,prices in
2007/2008wouldhavebeen15percentlowerformaize,18percentforsoybean,
and13percentforsoybeanoil.Theassessmentalsoconcludedthattheimpactof
biofuelsproductionin2007wasa34percentincreaseinretailfoodpricesanda
0.10.15percentincreaseintheallfoodCPI.
ClearlyUSmaizebased ethanolproduction, and (to a lesser extent)EU
biodieselproduction)affected thecorrespondingmarketbalancesand landuse
inbothUSmaize and EU oilseeds.Yet,worldwide,biofuels account for onlyabout1.5percentoftheareaundergrains/oilseeds(Table3).Thisraisesserious
doubtsaboutclaimsthatbiofuelsaccountforabigshiftinglobaldemand.Even
thoughwidespreadperceptionsaboutsuchashiftplayedabigroleduring the
recentcommoditypriceboom,itisstrikingthatmaizepriceshardlymoveddur
ing the first period of increase inUS ethanol production, and oilseed prices
droppedwhen theEU increased impressively itsuseofbiodiesel.On theother
hand,pricesspikedwhileethanolusewasslowingdownintheUSandbiodiesel
usewasstabilizingintheEU.
Yetwhilethedebatehasfocusedmostlyontheamountoffoodcropsthat
havebeendivertedtotheproductionofbiofuels,andtheresultingeffectonpric
es,lessattentionhasbeenpaidtoamoreimportantissuelinkedtothisdevelop
mentthe level atwhich energy prices provide a floor to agricultural prices.
Analytically,thisisaverycomplexissue;inadditiontothepricesoftherespec
tivecommodities(energyandfeedstockforbiofuels),itinvolvesnumerousother
elements,includingsubsidies,mandates,traderestrictions,andsunkcostsofthe
biofuelindustry.Therefore,analystsoftenusevariousrulesofthumbtoexpress
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aperceivednewrelationshipbetweenagriculturalandcrudeoilprices.Onesuch
ruleisthatthepriceofmaizeexpressedinUS$/tonisroughlydoublethepriceof
crudeoil inUS$/barrel (thus aUS$ 75/barrelprice for crudeoilwould corres
pond toUS$150/ton formaize).Other commentators (in theUS)have argued
thatapriceofUS$3/gallonofgasolineatthepumpisthelevelatwhichthema
izeprice isdeterminedby thecrudeoilprice.TheWorldBank (2009) reported
that crude oil prices aboveUS$ 50/barrel effectively dictatemaize prices; this
conclusionwasbased on the strong correlationbetween themaize price and
crudeoilpricesaboveUS$50/barreland theabsenceofcorrelationbelow that
level.TheUSGovernmentAccountabilityOffice (2009:101)whileacknowledg
ingthateconomistshavedisagreedaboutthecircumstancesthatwouldmakethe
2009USbiofuelmandatesnonbinding(i.e.biofuelsbecomeprofitableatcurrent
energyprices), itgavearangebetween$80and$120perbarrel (therangewas
basedonanecdotalevidencebasedon interviews).Theempiricalbasisofsuch
rulesislinkedtotheissuediscussedinthenextsection.
3.CommodityPrices:LongertermTrends
This section focuseson threekey characteristicsof commoditypricebehavior:
lackof trends,comovementamongprices,andaspecialcaseof the latter, i.e.,
thelinkbetweenenergyandnonenergycommodityprices.
Trends,cycles,andeverythinginbetween
The longtermbehaviorofcommoditypriceswas firstexaminedsystematicallybyPrebisch (1950)andSinger (1950),whonoted thatsince the late19thcentury
thepricesofprimary commoditieshadbeendeclining relative to thepricesof
manufacturedgoods(oftenreferredtoasthebartertermsoftrade).Theywarned
ofpotentialproblemsforproducersofprimarycommodities,andinfacttheno
tionofdeclining termsof trade formed thecornerstoneof the industrialization
policiesthatmanydevelopingcountriespursuedduringthe1960sand1970s.
ThesocalledPrebischSinger(PSH)hypothesishasbeen,perhaps,oneof
themost researched topics in commodity pricebehavior. Early research (e.g.,
Spraos 1980; Sapsford 1985;Grilli and Yang 1988),which focusedmainly onidentifying trends, supplied broad support for PSH. However, later authors
foundthatpricesdidnotsimplymovealongalineartrendbutinsteadcontained
strongstochasticelements, i.e., longand irregularcycles, thusproducingmore
mixedresults(e.g.,CuddingtonandUrzua1989;Cuddington1992).Studiesus
ingbettereconometric techniquesand longer timeseriesallowed forstructural
breaks (e.g.,Leon and Soto 1997;Zanias 2005;Kellard andWohar 2006).And
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very recent literature, focusingonnonlinearor timevaryingalternatives (e.g.,
BalagtasandHolt2009),findsevenlesssupportforPSH.
All thisresearch isperhapsbestsummarizedbyCashinandMcDermott
(2002)whoconcluded that thedownward trend in realcommodityprices isof
littlepolicy relevancebecause it is smallwhen compared to the variability of
prices.OrasDeaton(1999:27)succinctlyputit,whatcommoditypriceslackin
trend,theymakeupforinvariance.
Commodityprice variability is at the core of the currentpolicydebate.
The difficulty associatedwith describing past pricebehavior, and hencewith
making inferences regarding future trends, canbe inferred fromFigure 1; the
conclusionsreacheddependonwhattimeperiodischosenforanalysis.Statisti
cally, thisdifficultyreflects theproblemofnonstationarity, i.e. the fact that the
averagepricedoesnotexistinthestatisticalsense.Table4showstheresultsof
ananalysisofstationarityforpricesofsixfoodcommodities(wheat,maize,rice,
soybeans,soybeanoil,andpalmoil).Forsensitivitypurposes,wereportresultsfromtwotests,withandwithouttrend,bothinnominalandrealterms(wealso
usedUSCPI inaddition toMUVand theresultswereremarkablysimilar).All
lendstrongsupporttononstationarity,thusreaffirmingtheconclusionsreached
byCashinandMcDermott(2002)andDeaton(1999).
Thefactthatcommoditypricevariabilityoverwhelmstrendshasanum
ber ofkey implications.On themethodological side, analysis involvingprices
needstorecognizethatcorrelationsmaynotbemeaningfulunlesscertaincondi
tionsaremet (seenextsection),andalso thatbecauseameanora trendof the
priceseriescannotbeproperlydefined,thevariabilityinpricesisdifficulttocalculate.
Onthepolicyside,attemptstointroducemechanismswithpricetriggers
(as has oftenbeenproposed recently) are likely to fail. In fact, the absence of
trends (orsimplyput, thenonexistenceofanaverageprice)maybe thekey
reasonwhyearlierpricestabilization(orother)mechanismsfailed.11Whenprices
stay low for longperiods, stabilization funds run out of resources, andwhen
pricesstayhighforlongperiods,stabilizationfundstendtobemisused.Consid
er,forexample,thattheagriculturalcommoditypriceindex(showninFigure1)
exceededitsperiodaverage(equalto173)inallyearsduring194871andfellbe
lowitinallyearsduring19812007.
Co-movement
Becausesomeagriculturalcommoditiescanbesubstitutedforoneanother(e.g.
variousedibleoils),whileresourcesontheinputside(e.g.,land,labor,andma
chinery)canbeshiftedfromonecroptoanother,thechangesinfundamentalsor
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policyactions inonemarketwilleventuallybe transmitted toothermarketsas
well.Thus,assessinghowthepricesofvariousfoodcommoditiesmovewithre
spect to eachother isparamount inunderstanding theway and thedegree to
whichmarketconditionsandpoliciesaffectprices.Examiningsuchrelationships
ultimately comesdown toestimating thedegreeofprice comovementamong
variouscommodities.
Whilethegeneralsubjectofpricecomovementhasbeenextensivelystu
died in the literature, analysis of the comovement among prices of different
commodities is scarce. (Forabrief literature reviewofpricecomovementand
thereasonswhytheissuehasnotbeenadequatelyresearchedseetheAppendix
B.)
Hereweanalyze the comovementofpricesusinga simpleeconometric
model.Thedegreeof comovementwas analyzed among six food commodity
prices,usingordinaryleastsquareswithannualdatafrom1960to2008:Pti=+
1Ptj+2MUVt
+3t
+t,
wherePtiandPtjdenotethelogarithmofcommodityprice
iandjinyeart(expressedinnominaldollarterms),MUVtdenotesthedeflator,t
isthetimetrend,andtdenotestheerrorterm;,1,2,and3areparametersto
beestimated.
TheresultsarereportedinTable5.Becausepricesarenonstationary(see
previoussection)examiningthestationaritypropertiesoftheerrortermisacru
cialstepinestablishingthevalidityofthemodel.Alltheregressionsshowstrong
performance,withanaverageR2of0.84andwithunitrootstatisticsthatstrongly
confirm thestationarityof theerror term.Moreover, inallcases the slopeesti
mateofthepricevariableissignificantatthe1percentlevel.Theresults imply that it is importantnot toanalyzecommoditymarkets
inisolationfromoneanother,becausetheimpactofeventsthatseeminglyaffect
onemarketwilleventuallybeequalizedamongmostcommoditysectors.Con
sider,forexample,thepalmoil/soybeanoilparameterestimateof0.97andanR2
of0.93(Table5,bottomrow).Thissuggestsanalmostsynchronousmovementof
palmandsoybeanoilprices,despitethefact thatsoybeanoil isanannualcrop
producedchiefly inNorthandSouthAmericaandpalmoil isa treecroppro
ducedalmostexclusively inEastAsia.The implication is that,whetherbiofuel
mandates are applied to one or the other edible oilmarket, the effectwillbe
eventuallydiffusedamongalledibleoilmarkets.Not surprisingly,policies fa
voringbiofuelproductioninthenameofenvironmentalbenefitsmayinfactlead
to lessdesirable outcomes.That is, the environmentalbenefits from switching
from fossil fueluse to,say, rapeseedbasedbiodiesel inEuropeorsoybeanoil
basedbiodieselintheUSmaybelessthantheenvironmentalcostsofexpanding
palmoilproduction inEastAsia.12Similarly,pricesofwheat,maize, and soy
beanskeyfoodcrops,producedprimarilyintheUS,EU,andSouthAmerica
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(Table7,toprow).15Whenthesampleunderlyingthecurrentanalysisisadjusted
tomatchthesamplesusedinthesestudies,thepassthroughcoefficientbecomes
remarkablysimilar,at0.13,0.12,and0.18,respectively.
Underlying these aggregate passthrough coefficients for nonenergy
commoditypricesarevariationswithinsubindices.Amongthesubindices,the
highestpassthroughelasticityisinfertilizer,at0.55notsurprisingly,sinceni
trogenbasedfertilizersaremadedirectlyfromnaturalgas.Interestingly,thefer
tilizerandenergypriceincreasesduringtherecentboomwereinlinewiththose
experienced during the first oil shock: from 1973 to 1974 phosphate rock and
ureapricesincreasedfourfoldandthreefold,whilethecrudeoilpriceincreased
fromUS$2.81/barreltoUS$10.97/barrel.
The passthrough elasticity for agriculture, estimated at 0.27, reflects a
wide range among the components of the agriculture index:beverages (0.38),
food(0.27),andrawmaterials(0.11).Forthecomponentsofthefoodpriceindex,
bycontrast,theelasticityestimatesfallwithinaverynarrowrange:cereals(0.28),edibleoils(0.29),andotherfood(0.22).Basedonthesameregression,Table8re
portsparameterestimatesforthesixfoodcommoditiesunderconsideration.The
estimatesforallsixfallwithinanarrowrange,fromalowof0.27inmaizetoa
highof0.36insoybeanoil.Thisresultcontrastssharplywithestimatesformet
als,whichshowahighdegreeofdiversity(seeChaudhri2001;Baffes2007).
Anumberofkeyconclusionsemergefromtheseresults.First,thepricesof
mostcommoditiesrespondstrongly toenergyprices,with theresponsefurther
strengthening inperiodsofhighprices (thevaluesof theestimatedelasticities
increaseconsiderablywhen the recentboom is included in theanalysis).Moreimportantly, thedifferencebetween the last twoestimates(last twocolumnsof
Table7)indicatesthattheeffectofenergypricesonthepricesofallcommodities
has increasedconsiderablywhen therecentboom is taken intoconsideration
suggesting that the energy/nonenergyprice linkhas strengthened (see earlier
discussion).Manyobservershaveattributedsuchstrengtheningof therelation
shiptotheuseofbiofuels,whichalsocoincides(roughly)withtheboom.Yet,it
isimportanttonotethatthestrengtheningoftheeffectofenergyonnonenergy
prices ismore pronounced in nonfood commodities (e.g. rawmaterials and
metals)thaninfood.Thus,commonfactorsappeartohaveplayedamoreprom
inentroleintherecentboom(seeVansteenkiste2009;Gilbert2010).
Second,foodcommoditypricesrespondtoenergypricesbymovingina
verysynchronousmannersince theelasticities fallwithinaverynarrow range
(from0.25to0.36).Suchresultnotonlyemphasizestheinterdependenceofagri
culturalmarkets (asdiscussedearlier)butalso indicates thatsinceakeydeter
minantof food commodityprices isenergyprices, analyzing foodmarkets re
quiresanunderstandingofenergymarketsaswell.
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Third,thoughthetransmissionelasticitiesofenergypricestononenergy
pricesarebroadlysimilar tooneanother, this isnot thecasewith the inflation
coefficient,estimatesofwhichvaryconsiderablyinsign,magnitude,andlevelof
significance.The inflationcoefficient ispositiveandsignificantlydifferentfrom
zero only for agriculture and some of its subindices, and effectively zero for
metals and fertilizers.This implies that the relationshipbetween inflation and
nominalcommoditypricesismuchmorecomplexand,perhaps,changingover
time.Thismaynotbesurprising ifoneconsiders thatduring197280 (aperiod
thatincludedbothoilshocks)theMUVincreasedby45percent,andthatduring
200008itincreasedbyonlyhalfasmuch.Theincreasesintheindexofnominal
nonenergypricesduringthesetwoeightyearperiodswereidentical,at170per
cent.
Lastly, theestimatesof trendparametersare spreadoverawider range
than theestimatesofenergypricepassthroughand inflation.Forexample, the
aggregate indexofnonenergypricesshowsno trendatall,while the indexofmetalpricesshowsanalmost2percentpositiveannual trendand the indexof
agriculturepricesshowsa1percentnegativeannualtrend.Further,thetrendpa
rameterestimatesoftheagriculturesubindicesvaryconsiderably,from0.08for
rawmaterials to 3.12 forbeveragesconfirming the pointmade earlier that
commoditypricesdonotexhibitwelldefined trends,evenwhenoneaccounts
fortheeffectofenergyprices.
4.ConcludingRemarks
Numerous factors have contributed to the recent commodityboom, and have
beenanalyzedextensivelyintheliterature.Yettheirrelativeweightcontinuesto
beanareaofcontention.Inthispaperweexaminedthreekeyfactorswhoserole
hasbeen somewhat controversial: speculation, thegrowthofdemand for food
commoditiesbyemergingeconomiesandtheroleofbiofuels.Weconjecturethat
indexfundactivity(onetypeofspeculativeactivityamongthemanythatthe
literaturerefersto)playedakeyroleduringthe2008pricespike.Biofuelsplayed
someroletoo,butmuchlessthaninitiallythought.Andwefindnoevidencethat
allegedstrongerdemandbyemergingeconomieshadanyeffectonworldprices.
Although tentative, theseconclusionsprovide insights into thedeterminantsof
thefuturepathofcommodityprices,whichisstilluncertain.
Centralamong theuncertainties is therelationshipbetween thepricesof
energyandof foodcommodities.Ourexaminationof thekeycharacteristicsof
longerterm commoditypricebehavior revealed a strong linkbetween energy
andnonenergyprices,whichincreasedconsiderablyduringtherecentboom;it
also revealed thatcomovementamong thepricesof foodcommodities isvery
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Page19
strong.The latter implies thatevents takingplace inone sector (e.g., increased
demandformaizefortheproductionofethanol)willaffectothermarkets(e.g.,
forwheat)throughreallocationofresources,especiallyland.Italsoimpliesthat
policy changes inonemarketmay affectothermarkets.Forexample, expecta
tionsabouttheuseofcornforbiofuelscouldresultinhighwheatpricesevenin
thepresenceofrecordlevelsofwheatstocks.Ourresultsalsoshowthatagricul
turalcommoditymarket fundamentalsappear, in theshort term, tobeplaying
somewhat less of a role than in thepast, tending tobe overshadowedby the
muchstrongerpullofenergyprices.
Ourconclusionaboutthelongtermevolutionofcommoditypricesiscon
sistentwithearlierliterature,andsupportsthethesisthatpricevariabilityover
whelmsprice trends.Variability issuch that theaveragepricedoesnotexistin
thestatisticalsense(i.e.,pricesexhibitnonstationarybehavior),andtheconclu
sionsreachedabouttrendsdependonwhattimeperiodischosenfortheanaly
sis.Despiteitssimplicity,thisconclusionhasimportantimplications.Follow
ingtherecentfoodpricespike,therehavebeencallsforpolicyactions,essential
ly aiming to alleviate the impacts of price spikes on developing countries,
throughrelianceonsomelevelofbufferstocks(whetherphysicalorvirtual).His
toryhasnotbeenkindtocollectivemeasuresdesignedtopreventthedeclineor
reducethevariabilityofprices.Whattypeofmeasureswouldbemorepertinent
tomitigateanyundesiredeffectsofpricevariabilitywoulddependonthebetter
understandingofthefactorsthatnotonlyaffect,butalsopotentiallyalter,long
termpricetrends.
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Endnotes1Numerousauthorshaveanalyzedtherecentcommodityboom.See,forexample,Abbott,Hurt,
andTyner(2008),Timmer(2008),Gilbert(2009),Mitchell(2009),PiesseandThirtle(2009),Sarris
(2009),Trostle(2008),andCoady,Dorosh,andMinten(2009).AgriculturalEconomicsdevotedan
entireissuetothesubject(MastersandShiverly2008).2See,forexample,VonBraunandTorero(2009)onvirtualreservesandMendoza(2009)onrice
insurancemechanisms.Todaysdiscussions call tomind those in earlierbooms (for example,
Meadowsandothers1972).
3Calvo (2008)andFrankel (2007)haveargued that interest ratesplayedakey roleduring the
boom.
4Althoughunderinvestmenthasbeencitedveryoftenasthekeyfactorintheboom,thisassess
mentisessentiallyderivedexpost.Certainly,anylevelofpastinvestmentwillbeconsideredlow
athighpricesandhighatlowprices.Yet,researchreportedinWorldBank(2009)showsthatthe
levelofinvestmentwasrightatthetimeitwasmade.Forexample,during19802007,R&Dand
investmentexpendituresbymajormultinationaloilandgascompaniestrackverycloselyoutput
prices (asevidencedby theirstrongcorrelationwithenergyprices,R2=0.95).Similarly,publicR&DagriculturalexpendituresfollowagriculturalGDP.
5ThisinverserelationshipisinadditiontotheeffectoftheUS$exchangerateagainstcurrencies
ofcommodityproducingandconsumingcountriesmentionedearlier.
6Informationonpensionand,especially,sovereignwealthfundsisnotwidelyavailable.There
centlypublishedfirstannualreportonsovereignwealthfundsisanattempttofillthisgap(SWF
2009).
7Yet,Verleger (2009:2)argued thatThecollapse inoilprices fromJuly2008 toDecember31,
2008canbetiedtothepossibleliquidationoffuturespositions.Whichbegsthequestion:If
the liquidationoffuturespositionswerepartlyresponsible forthecollapse inoilprices,should
notthetakingofsuchpositionsberesponsibleforthecorrespondingincreaseinoilprices?
8TheIOSCO(2009:3)reportsrecommendations,whichwerebasedonreviewingotherstudies,
were:(i)understandwithgreaterclaritytheroleofspeculativeandcommercialactivityincom
modity futuresmarkets; (ii) gain amore comprehensiveviewof trading activities in, and the
structureof,theunderlyingmarketsthatmayaffectpriceformationoncommodityfuturesmar
kets; and (iii) detect, deter, and prosecutemanipulation and other trading abuses involving
commodityfutures,andrelatedcommoditymarkets.
9See,forexample,Bykahin,Haigh,andRobe(2008)andCommodityFuturesTradingCom
mission(2008).
10Themodelsused in the studiesdiscussed in this section are the following:FAO (2008) and
OECD (2008) used AGLINK; Rosegrant (2008) used IMPACT; Banse and others (2008) used
GTAPE;EU (2008)usedESIMPE;Mitchell (2009)used simple statisticalanalysis;andGilbert
(2009)usedaCAPMtypeeconometricmodel.
11Suchfailedarrangements includethe1962InternationalCoffeeAgreement(andasubsequent
series of agreements) to restrict exports andboost coffee prices, the 1972 InternationalCocoa
Agreement,andsimilareffortsbyproducersofcottonandgrains; the InternationalTinAgree
ment;andtheInternationalNaturalRubberOrganization.Foradiscussionofsuchagreementsee
Gilbert(1996)andRadetzki(2009).
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12A largebodyof literaturediscussesthis issue;see forexample,Searchingerandothers(2008)
andFargioneandothers(2008).
13The lowenergypricesbetweenmid1980sandearly2000spromptedmostanalysts toargue
thatthehighpricesofthe1970swereanaberrationandthatthepre1973levelswerethenorm.
ForexampleinitsMarch6,1999edition,theEconomistsleaderarticleentitledDrowninginOilconcluded that (p. 19): $10might actuallybe too optimistic.Wemaybe heading forUS$ 5.
Thankstonewtechnologyandproductivitygains,youmightexpectthepriceofoil,likethatof
mostothercommodities,tofallslowlyovertheyears.JudgingbytheoilmarketinthepreOPEC
era, a normalmarket pricemight nowbe in theUS$ 510 range. Factor in the current slow
growthoftheworldeconomyandthenormalpricedropstothebottomofthatrange.Indeed,
most energy analystswere forecasting real prices to averagebetweenUS$ 15/barrel andUS$
20/barrelinthelongrun.Forexample,theWorldBanksnominalcrudeoilpriceforecastin1999
wasUS$18/barrelfor2005andUS$19/barrelfor2010.TheDecember2008WTIfuturescontract
openedatUS$18.88 inJanuary15,2002,when itwas first introduced.During2008, crudeoil
pricesaveragedUS$97/barrel,almostfivetimeshigherthanthehighestforecasts.
14Herethemodelisthesameastheoneusedaboveforcomovement,exceptthatPtidenotesthe
pricesoffoodcommoditiesandPtjdenotestheenergypriceindex.Therestofthecoefficientsand
variableshave the same interpretation.However, incontrast to thepricecomovement regres
sions, regressing foodprices on energypriceshas awelldefined endogeneitypattern; energy
affects foodpricesbutnotviceversa.Thus,weestimatedonly theregressionswith theenergy
priceindex(alongwithdeflatorandtimetrend)astheexplanatoryvariables.Theestimatescan
beviewedasenergypricetransmissionelasticitiesratherthanjustcointegrationparameters.See
Baffes(2009)forthestructureoftheindices.
15Table7indicatesthattheelasticitiesforfoodcommoditiesarehigherthanthoseforrawmate
rials andmetals. This is consistentwith the inputoutput table of theGTAPdatabase,which
shows that thedirectenergycomponent in theUSagricultureandmanufacturing sectors is12
percentand3percentrespectively.
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TABLE1
ANNUALGROWTH(PERCENT)INGLOBALGDP,POPULATION,
ANDCONSUMPTIONFORSELECTEDCOMMODITIES
196172 197384 198596 19972008
MACRO
VARIABLES
Population 2.0 1.8 1.6 1.3
GDP,real 5.5 3.4 2.8 3.0
CONSUMPTION
Rice 3.3 2.7 1.9 1.2
Wheat 3.9 2.9 1.4 0.9
Maize 3.7 2.5 2.7 2.8
Soybeans 4.8 2.6 5.5 4.0
PalmOil 8.4 10.2 7.7 8.8
Beef 3.2 1.8 1.1 1.0
Pork 3.7 4.9 2.7 2.2
Poultry 12.1 6.9 6.8 4.0
Source:AuthorscalculationsbasedonFAO,FAPRI,WorldBank,andUNdata.
TABLE2
ANNUALGROWTH(PERCENT)INCONSUMPTIONOFSELECTEDCOMMODITIES
WORLD CHINA INDIA
19972002 200308 19972002 200308 19972002 200308
GDP 2.9 3.3 8.4 10.4 5.1 8.5
Wheat 1.3 2.7 0.7 0.2 2.7 1.8
Rice 1.6 1.5 0.5 0.6 1.0 1.9
Maize 1.8 3.6 2.8 3.4 1.9 5.5
Soybeans 5.8 3.3 16.1 8.7 1.4 7.1
PalmOil 10.5 7.5 22.1 8.2 21.4 7.2
Beef 0.8 1.6 3.8 2.8 0.5 2.2
Pork 2.7 1.3 2.8 1.2 1.0 0.4
Poultry 4.7 3.8 4.9 4.6 17.6 7.7
Source:AuthorscalculationsbasedonFAO,FAPRI,WorldBank,andUNdata.
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TABLE3
KEYBIOFUELSTATISTICS
200001 200203 200405 200607 200809
Biofuelsasashareofglobalgrainandoilseedarea(percent)
EUoilseeds 0.00 0.06 0.15 0.24 0.34USmaize 0.13 0.27 0.37 0.76 1.11
LandusedforUSethanolfrommaizeasashareof(percent)
USMaizearea 3.63 7.32 9.45 18.03 27.54
USGrainarea 0.99 2.00 2.79 5.68 8.44
Worldgrainarea 0.16 0.32 0.43 0.85 1.26
Notes:Theshareshavebeencalculatedbasedonaverageworldyields.
TABLE
4
STATIONARITYSTATISTICSFORKEYFOODCOMMODITYPRICES,19602008
WithoutTrend WithTrend
ADF PP ADF PP
REAL(MUVDeflated)SERIES
Wheat 2.32 1.70 1.83 1.47
Maize 1.59 1.49 1.84 1.83
Rice 1.59 1.71 3.08 1.92
Soybeans 1.72 1.59 2.09 1.96
Soybeanoil 1.34 2.06 0.96 2.28
Palmoil 1.41 2.14 1.31 2.47
NOMINALSERIES
Wheat 1.63 0.84 3.10 2.02
Maize 1.69 1.22 2.76 2.21
Rice 2.53 1.62 3.40* 2.27
Soybeans 1.32 1.23 2.11 2.14
Soybeanoil 1.08 1.17 1.99 2.56
Palmoil 1.41 2.14 1.31 2.47
Notes:ADFandPPdenotetheAugmentedDickeyFuller(DickeyandFuller1979)andPhillips
Perron (Phillips andPerron, 1988) statistics forunit roots.Asterisks in this and the following
tablesdenotesignificanceat10%(*),5%(**),and1%(***)levels.Thecorrespondingtstatisticsare
2.60, 2.93,and 3.58forthetestswithouttrendand 3.18, 3.50,and 4.16forthetestswithtrend.
TheADF statisticcorresponds to theMacKinnononesidedpvalue.The lag lengthof theADF
equationswasdeterminedbyminimizingtheSchwarzlossfunctionwhilethebandwidthofthe
PPstatisticwasbasedontheNeweyWestmethod.
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Page24
TABLE5
PARAMETERESTIMATES:COMOVEMENTREGRESSIONS
1 2 100* 3 AdjR2 ADF
MaizeWheat 0.29
(1.37)
0.85@
(14.40)
0.06
(0.77)
0.33
(1.35)
0.94 4.86***
SoybeansWheat 0.90@
(3.20)
0.78@
(10.21)
0.19@
(1.99)
0.45
(1.40)
0.92 5.20***
WheatRice 0.34
(1.01)
0.60@
(8.31)
0.26@
(2.36)
0.41
(1.02)
0.90 4.54***
SoyoilWheat 1.75@
(3.90)
0.97@
(7.83)
0.08
(0.51)
0.03
(0.05)
0.81 6.54***
WheatPalmoil 0.02
(0.02)
0.63@
(6.64)
0.39@
(3.26)
0.04
(0.10)
0.87 5.30***
MaizeSoybeans 0.16
(0.54)
0.85@
(10.82)
0.04
(0.39)
0.01
(0.92)
0.91 6.18***
RiceMaize 0.48
(0.99)
1.02@
(7.24)
0.13
(0.81)
0.86
(1.54)
0.77 5.60***
PalmoilMaize 1.27@
(2.69)
1.09@
(8.00)
0.04
(0.27)
0.17
(0.31)
0.79 5.64***
SoyoilMaize 1.45@
(3.64)
1.12@
(9.72)
0.13
(0.98)
0.39
(0.86)
0.86 6.90***
RiceSoybeans 0.00
(0.01)
1.01@
(7.13)
0.06
(0.32)
0.79
(1.41)
0.76 5.19***
SoybeansPalmoil 0.54
(1.48)
0.53@
(7.75)
0.41
(3.96)
0.35
(0.91)
0.89 4.54***
SoyoilSoybeans 0.89@
(2.09)
1.12@
(9.82)
0.23
(1.61)
0.47
(1.04)
0.86 7.73***
PalmoilRice 1.70@
(1.48)
0.64@
(5.40)
0.18
(1.01)
0.01
(0.02)
0.69 5.15***
SoyoilRice 1.94@
(3.71)
0.64@
(5.80)
0.12
(0.53)
0.71
(0.86)
0.74 5.71***
PalmoilSoyoil 0.13
(0.44)
0.97@
(16.83)
0.08
(1.03)
0.54@
(1.79)
0.93 4.32***
Notes:Allregressionswereruninbothdirections.(@)denotesparameterestimatesignificantatthe 5percent level.We report thedirectionwith the largestADF statistic.Thevarianceshave
beenestimatedusingWhitesmethodforheteroskedasticityconsistentstandarderrors.Forother
notesseetable4.
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Page25
TABLE6
PARAMETERESTIMATES:PRICEINDICESREGRESSEDONENERGYPRICEINDEX
1 2 100* 3 AdjR2 ADF
NonEnergy 3.03@
(6.54)
0.28@
(5.24)
0.12
(0.68)
0.01
(0.02)
0.90 3.35**
Metals 3.77@
(4.80)
0.25@
(3.14)
0.17
(0.60)
1.93@
(2.31)
0.82 3.30**
Fertilizers 3.58@
(4.12)
0.55@
(4.79)
0.30
(0.95)
0.39
(0.48)
0.81 3.97***
Agriculture 2.51@
(6.90)
0.26@
(5.54)
0.33@
(2.43)
0.99@
(2.73)
0.90 3.81***
Beverages 1.83@
(3.10)
0.38@
(4.87)
0.55@
(2.63)
3.12@
(5.22)
0.76 4.95***
Rawmaterials 1.85@
(4.16)
0.11@
(2.15)
0.51@
(3.15)
0.08
(0.19)
0.91 3.15**
Food 2.91@
(7.11)
0.27@
(4.93)
0.21
(1.39)
0.71
(1.80)
0.85 3.85***
Cereals 3.13@
(5.94)
0.28@
(4.23)
0.17
(0.89)
0.87
(1.76)
0.78 3.83***
Edibleoils 3.33@
(6.16)
0.29@
(4.51)
0.12
(0.58)
0.80
(1.50)
0.80 2.82*
Otherfood 1.86@
(6.28)
0.22@
(3.81)
0.45@
(4.44)
0.42
(1.18)
0.89 3.60***
Preciousmetals 1.40@
(3.58)
0.46@
(9.40)
1.05@
(7.61)
1.75@
(3.68)
0.98 3.91***
Notes:SeeTables4and5.
Source:Baffes(2009).
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Page26
TABLE7
COMPARINGLONGRUNTRANSMISSIONELASTICITIES
Holtham
(1988)
1967:S1
1984:S2
Gilbert(1989)
1965:Q1
1986:Q2
Borensztein&
Reinhart(1994)
1970:Q1
1992:Q3
Baffes(2007)
19602005
Baffes(2009)
19602008
Nonenergy 0.12 0.11 0.16 0.28
Food 0.25 0.18 0.27
Rawmaterials 0.08 0.04 0.11
Metals 0.17 0.11 0.11 0.25
Notes:Holthamusessemiannualdata,GilbertandBorensztein&Reinhartquarterly,andBaffes
alongwiththepresentstudyannual.Gilbertselasticitiesdenoteaveragesbasedoffourspecifica
tions.Holthams rawmaterialselasticity isanaverageof two elasticitiesbasedon two setsof
weights.indicatesthattheestimateisnotavailable.
Source:Holtham(1988),Gilbert(1989),BorenszteinandReinhart(1994),Baffes(2007,2009).
TABLE8
PARAMETERESTIMATES:INDIVIDUALCOMMODITIESONENERGYPRICEINDEX
1 2 100* 3 AdjR2 ADF
Wheat 3.27@
(6.50)
0.30@
(5.02)
0.12
(1.49)
0.49
(1.07)
0.84 4.35**
Maize 3.15@
(6.23)
0.27@
(4.66)
0.13
(0.70)
0.74
(1.58)
0.80 3.49**
Soybeans 3.58@
(8.11)
0.26@
(4.92)
0.25
(1.51)
0.82
(1.83)
0.82 3.85***
Rice 3.57@
(5.14)
0.25@
(2.67)
0.32
(0.26)
1.62@
(2.78)
0.58 4.05***
Palmoil 4.94@
(6.44)
0.35@
(3.72)
0.01
(0.02)
0.95
(1.38)
0.63 3.16**
Soybeanoil 5.25@
(7.83)
0.36@
(4.13)
0.09
(0.39)
0.42
(0.53)
0.70 2.56
Notes:Seetables4and5.
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Page27
Figure1
CommodityPriceIndices(Real,MUVdeflated,2000=100)
Figure2
RealGDPGrowth(AnnualPercentChange)
1
0
50
100
150
200
250
300
350
1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008
Agriculture
Source:WorldBank
Korean
war
Oil
shocks
Recent
boom
4
2
0
2
4
6
8
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Developingcountries
Source: World Bank
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Page28
Figure3
GlobalGrainStockstoUseRation(Percent)
Figure4
CommodityPriceIndices(Nominal,2000=100)
3
10%
15%
20%
25%
30%
35%
40%
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
IncludingChina
Source:USDepartmentofAgriculture
4
100
200
300
400
500
Jan04 Jan05 Jan06 Jan07 Jan08 Jan09 Jan10
Agriculture
Source:WorldBank
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Page36
APPENDIXA.WHATISSPECULATION?
Blaming speculative activity inperiods of sharpprice increases isnotuncom
mon.Pushedbysuchabelief,numerousattemptshavebeenmadetorestrictor
evenclosetheUSfuturesmarkets.Markham(1987)reportsthatduring190709
(60thUSCongress),25billswereintroduced,designedtoprohibitfuturestradingforacomprehensive treatmentofallattempts to regulateand/orprohibit
futures trading seeCowing (1965).BaffesandKaltsas (2004)describehownu
merouscottonfuturesexchangeswereshutdownduringthefirsthalfofthe20th
century as the result of government intervention, againbecause of perceived
speculativeactivity.Schaede (1989)documents similarattempts for theDjima
ricemarketinJapan,oftencitedastheworldsoldestfuturesexchangeitbegan
operationin1730.
Whatmakestherecentdebateonspeculationinterestingisthatithasdi
vided even noted scholars and analysts.Apart from the insufficient empiricalevidenceonthesubject,suchdivisionpartlyreflectsthedifferenttypesofspe
culativeactivitythatanalystsandeconomistsreferto.Indeed,thelinesbetween
hedgersandspeculators,betweenphysicalandfinancialtransactions,aswellas
between legaland illegal tradingactivitiesarecomplex,blurry,andgobeyond
textbookdefinitions.Togaugesuchcomplexities,considerthetraditionalsepa
rationoftheplaceinwhichtransactionstakeplace(physicalversusfinancial)and
theactorsinvolved(hedgersversusspeculators),asdepictedintableA1.Thefirst
columnshowshedgingtransactionsbyproducers,consumers,andtraders(with
thebanksas intermediaries) that takeplaceeither inphysicalor financialmar
kets (the latter in commodity futures exchanges).This is the typical textbook
case. The picturebecomes complicated, however,when speculators engage in
physicaltransactionsbyholdinginventories,keepingresourcesintheground,or
engaging in various types ofmarketmanipulation. Amore complex picture
emergeswhenspeculatorsengageinfinancialtransactions(oftencombinedwith
physicaltransactions).
Hence, understanding the complexities and the controversial nature of
speculationultimatelycomesdowntounderstandingtherightbottomcellofthe
TableA1.Onewaytoanalyzespeculationistomapitssourcesanditseffecton
commoditymarkets to the placewhere transactions take place, the actors involved,andtheirmotivation.
Placeoftransaction
Commoditytransactionstakeplaceeitherinfuturesexchangesorphysicalmar
kets.Speculation takingplace in commodity exchanges forms thebackboneof
the functioning of the futuresmarketsby injecting the necessary liquidity to
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complete the transactions.This is the typeofspeculativeactivity thatwas typi
cally given as a reason for the closure of commodity futures exchangesmen
tionedabove.
Inthephysicalmarket,ontheotherhand,tradersmaybuyandholdlarge
quantities of commoditieswith the expectation that an upwardmovement in
priceswillgenerateprofits(oftencalledhoarding).Thisisthetypeofspeculative
activity thatPaulKrugman andMartinWolf (among others)have referred to.
Unlesssuchactivityentailsmarketmanipulation (inwhichcase itwouldbean
illegal activity), it is the intertemporal equivalent ofAdam Smiths invisible
hand:tradersbuyatcurrentpricestoselllaterwhen(intheiropinion)themar
ketwillbetight,therebybalancingthemarketandhencereducingpricevariabil
ity.There isno evidence thathoarding tookplaceduring the recentboom, as
knowninventoriesinalmostallcommoditiesreachedhistoricallows.However,
inthecaseofextractivecommoditiesespeciallycrudeoilonemaywellargue
thattargetingoutputtolevelsbelowwhatthemarketfundamentalsdictate(asis thecasewithOPECquotas) isa formofhoarding.Thedifference is that the
commodityiskeptintheground,ratherthaninabovegroundandthereforeoff
themarketstoragefacilities.
Actorsinvolved
Apart from the hedgers (e.g., producers and consumers)with interest in the
physicaltransactionofcommodities,twootheractorshavebeenoperatinginthe
marketduringthelasttwoorsodecadeswithpurelyfinancialincentivesandno
transactionsinthephysicalmarkets.Theyarehedgefundsandcommoditytrading advisors (CTAs). During the past few years, investment funds (mostly
pensionfundsandsovereignwealthfunds)alsoenteredthefinancialmarkets.It
hasbeen argued that thesegroups (mostly the latter)mayhave affected com
modityprices.
Hedgefunds.Theseundertake investmentandtradingactivities inabroadrangeofassets, includingcommoditymarkets.Ahedge fundmay tradeand invest incom
modityassetclassesinordertohedgethediverserisksinherentintheirportfolios.
Insuchacase,takingapositioninthefuturesmarketforaparticularcommodityor
commodityclasscanrepresentaninvestmentinanoncorrelatedassetthatprovides
diversificationbenefitstotheoverallportfolio.Hedgefundshaveexistedfordecadesandtheireffectoncommoditymarketsistypicallyofshorttermnature(i.e.,theyaf
fectshorttermpricemovements).
Commoditytradingadvisors(CTAs)areassetmanagersthatoperatealmostexclusivelyincommoditymarkets.Theyinvestforportfoliosundermanagementandforclients
with theobjectiveof earningprofits frommarketvolatility.Perhaps,CTA activity
reducespricevolatility since they tradeon thebasis ofmarket fundamentals and
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technicalanalysis.
Investmentfunds.Theyincludesovereignwealthandpensionfundswhichduringthepastfewyearsbegan includingcommoditiesintheirportfoliomixasanotherasset
class.Their chiefmotivationhasbeenassetdiversification. Inaddition to theway
thesefundsinvestinfuturesmarkets(i.e.,fixedweightsandpastperformancecrite
ria),itistheirsheersizethatmattersmost(seediscussioninmaintext).
Motivation
Veryoftenspeculationtakesplaceintheformofmarketmanipulation.Thisre
ferstoillegalactivitytypicallyisolatedinoneorafewcommoditymarkets.Itcan
takeplaceinthephysicalorfinancialmarkets(oftenitinvolvesboth).Wellpub
licizedcasesare theUSonionmarket in the1950s,whereonionproducersar
guedthattradersintheChicagoMercantileExchangecorneredthemarket(this
resulted in thepassageof theOnionsFuturesActwhichprohibitedfuturescon
tractsononions);theHuntbrotherswhoattemptedtocornerthesilvermarketinthelate1970sandearly1980s;Sumitomoschiefcoppertrader,YasuoHamana
ka,whocornered thecoppermarket in the1990s;and theBPcorneringof the
propanemarketin2006,whichresultedinaUS$300millionfine.Suchactivityis
notknowntohaveprevailedduringtherecentboom.
TABLEA1:SPECULATIONINCOMMODITYMARKETS
ACTOR
PLACEHEDGERS SPECULATORS
PHYSICAL
Producers/consumers Traders Banks
Holdinginventories(e.g.,hoarding) Keepingresourcesintheground(e.g.,OPEC) Marketmanipulation(e.g.,corneringthemarket)
FINANCIAL
Producers/consumers Traders Banks
Investmentfunds(e.g.,pensionfunds,sovereignwealthfunds)
Investmentanddiversificationinstruments(e.g.,CTAs,hedgefunds)
Marketmanipulation(e.g.,corneringthemarket)
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APPENDIXB.COMOVEMENTOFCOMMODITYPRICES
Thegeneralsubjectofcommoditypricecomovementhasbeenexaminedexten
sivelyandinvariouscontexts.Yetsometopicshavereceivedmuchmoreatten
tionthanothers.Thetopicsthathavereceived lessattentionmattermostinthe
currentpolicydebate.Overall,theresearchoncommoditypricecomovementfallslargelywith
intwostrands.Thefirstexaminescomovementamongpricesofthesamecom
modityindifferentlocationswithinthemarketefficiencycontext,aphenomenon
alsoknownasspatialmarketintegrationorthelawofoneprice.Whilemostof
thesestudiesexaminecomovementinabivariatecontext,someusemodelsca
pableofexamining itwithinamultivariatesetting.This topichasbeenstudied
extensively (seeFackler andGoodwin 2001 for a literature review).A less re
searched subject (thoughonemoreuseful forpolicy analysispurposes)within
thatstrandhasbeenthecomovementbetweenworldanddomesticcommodityprices,arelationshipthatincludesapolicydimension.Specifically,thesestudies
examinewhetherworldprice signals havebeen fully transmitted todomestic
marketsor insteadhavebeen subjected topolicydistortions (see, forexample,
Baffes and Gardner 2003;Mundlak and Larson 1992). Now, for agricultural
products, a research project ledbyKymAnderson hasproduced a consistent
globaldatabasethatincludespricesreceivedbyfarmersandpaidbyconsumers
in75countries(Andersonandothers2008).Thatdatabaseisexpectedtogenerate
moreresearchonthesubject.
Thesecondstrandofliteratureexaminespricecomovement(orlackthe
reof) amongdifferent commodities.Thegenesis of this literature goesback to
Granger(1986:218),whowrote:Ifxtandytareapairofpricesfromajointlyef
ficient,speculativemarket,theycannotbecointegratedifthetwopriceswere
cointegrated,onecanbeusedtohelpforecasttheotherandthiswouldcontra
dicttheefficientmarketassumption.Thus,forexample,goldandsilverprices,if
generatedbyanefficientmarket,cannotmovecloselytogetherinthelongrun.
Grangersassertionledtoresearchincommoditymarkets(e.g.,MacDonaldand
Taylor1988)andothermarketsaswell,notablyexchangerates(see,amongoth
ers,BaillieandBollerslev1989;HakkioandRush1989).Thisresearchwas later
questionedonseveralgroundsincludingthefactthatcomovementreflectsresponses tocommon fundamentalsrather thanmarket inefficiencies. (See, forex
ample,Agbeyebbe1992;Baffes1993;DwyerandWallace1992;andSephtonand
Larsen1991.)
Asimilarlycontroversialsubjecthasbeen theexcesscomovementhy
pothesis firstdiscussedbyPindyckandRotemberg (1990)who,afteranalyzing
pricemovementsofsevenseeminglyunrelatedcommodities(cocoa,copper,cot
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