Rice Price Formation in the Short Run and the Long Run: The Role of Market Structure in Explaining Volatility
46 Pages Posted: 22 May 2009 Last revised: 17 Sep 2009
Date Written: May 21, 2009
This paper analyzes price formation on the world's rice market using simple supply and demand models as a start, but moving to "supply of storage" models - a staple of commodity-market analysis for more than half a century - to explain hoarding behavior and its subsequent impact on prices. The supply of storage model, however, does not account adequately for the influence that "outside" speculators have on prices. This paper quantifies the impact of financial factors and actors on commodity-price formation using very short-run prices and Granger causality analysis for a wide range of financial and commodity markets, including rice. The results are highly preliminary but are also very provocative. Speculative money seems to surge in and out of commodity markets, strongly linking financial variables with commodity prices during some time periods, but these periods are often short and the relationships disappear for long periods of time. Finally, the paper addresses the long-run (since 1900) relationships among the prices of the three basic cereal staples, rice, wheat and corn (maize), which have declined more than 1 percent per year over the past century. The decline accelerated after the mid-1980s; only the recent run-up in cereal prices in 2007-08 returned them to the long-run downward trend. Despite these common features and important cross-commodity linkages, however, price formation for rice has several unique dimensions worthy of further study.
Keywords: rice market, supply of storage, granger causality analysis, rice prices
Suggested Citation: Suggested Citation
Register to save articles to
By Tom Slayton