Deconstructing Wheat Price Spikes: A Model of Supply and Demand, Financial Speculation, and Commodity Price Comovement

51 Pages Posted: 1 Oct 2014  

Joseph Janzen

University of California, Davis

Colin A. Carter

University of California, Davis - Department of Agricultural and Resource Economics

Aaron Smith

University of California, Davis - Department of Agricultural and Resource Economics

Michael Adjemian

U.S. Department of Agriculture (USDA) - Economic Research Service (ERS)

Date Written: April 1, 2014

Abstract

In 2008, wheat futures prices spiked and then crashed along with prices for other agricultural and nonagricultural commodities. Market observers offered several theories to explain this common movement, or comovement, in prices, and have proposed policies to address the perceived problem of excessive price volatility. The design of an appropriate policy response would benefit from a better understanding of the cause of the observed price movements. This study uses an econometric model to decompose observed wheat prices into a set of economic factors and measure the relative contribution of each factor to observed price changes. Findings show that market-specific shocks related to supply and demand for wheat were the dominant cause of price spikes in the three U.S. wheat futures markets. Fluctuations in the global macroeconomy associated with broadbased demand shocks were relatively less significant for wheat than for other commodities like crude oil and corn. Finally, little evidence suggests commodity index trading contributed to recent price spikes.

Keywords: commodity prices, comovement, futures, index funds, speculation, wheat

Suggested Citation

Janzen, Joseph and Carter, Colin A. and Smith, Aaron and Adjemian, Michael, Deconstructing Wheat Price Spikes: A Model of Supply and Demand, Financial Speculation, and Commodity Price Comovement (April 1, 2014). USDA-ERS Economic Research Report Number 165. Available at SSRN: https://ssrn.com/abstract=2502922 or http://dx.doi.org/10.2139/ssrn.2502922

Joseph Janzen

University of California, Davis ( email )

One Shields Avenue
Davis, CA 95616
United States

Colin A. Carter

University of California, Davis - Department of Agricultural and Resource Economics ( email )

One Shields Avenue
Davis, CA 95616
United States

Aaron D. Smith

University of California, Davis - Department of Agricultural and Resource Economics ( email )

One Shields Avenue
Davis, CA 95616
United States
530-752-2138 (Phone)
530-752-5614 (Fax)

Michael Adjemian (Contact Author)

U.S. Department of Agriculture (USDA) - Economic Research Service (ERS) ( email )

355 E Street, SW
Washington, DC 20024-3221
United States
(202) 694-5576 (Phone)

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