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Did Speculation Affect World Rice Prices?

Author

Listed:
  • C. Peter Timmer

    (Non-resident Fellow, Center for Global Development, Washington D.C., USA)

Abstract
How much did speculation affect the formation of rice prices during the rapid escalation of prices in world markets late in 2007 and early in 2008, through what mechanisms, what will happen as these influences unwind, and how is the story for rice different from other commodities? To answer these questions, this paper addresses four separate topics, each linked to the others by basic mechanisms of price formation. Simple supply and demand models are a start. The difference between short run responses to prices changes, and those responses after full adaptation is possible in the long run, is crucial and the conceptual model highlights the importance of these differences for understanding current prices. History matters. But storage and price expectations also become important for storable commodities in the short run—the length of time the commodity can be stored—a year or so for rice. A model of the “supply of storage,” is used to understand the factors affecting price expectations, and price formation, in the short run. This model is very powerful in its ability to explain hoarding behavior and subsequent impact on prices. Next, an effort is made to understand empirically 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. 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 entirely for long periods of time. The links between financial markets and commodity markets are not simple nor are they stable. Finally, the paper addresses the long-run relationship between prices of the three basic cereal staples, rice, wheat and corn (maize), since 1900. It is clear there has been a long-run decline in the prices of all three cereals. Despite this common pattern, however, and important cross-commodity linkages, price formation for rice has several unique dimensions that are also worthy of further study.

Suggested Citation

  • C. Peter Timmer, 2009. "Did Speculation Affect World Rice Prices?," Working Papers 09-07, Agricultural and Development Economics Division of the Food and Agriculture Organization of the United Nations (FAO - ESA).
    • Handle: RePEc:fao:wpaper:0907
    as

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    References listed on IDEAS

    as
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    7. Lester G. Telser, 1958. "Futures Trading and the Storage of Cotton and Wheat," Journal of Political Economy, University of Chicago Press, vol. 66(3), pages 233-233.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Commodity price formation; speculation; world rice market; world food crisis.;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • L66 - Industrial Organization - - Industry Studies: Manufacturing - - - Food; Beverages; Cosmetics; Tobacco
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • Q11 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Aggregate Supply and Demand Analysis; Prices

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