Are Shocks Transitory or Permanent? An Inquiry into Agricultural Commodity Prices

Abstract

This paper contributes to the contentious topic of whether shocks to agricultural commodity prices are permanent or transitory. This is an important issue with regards to forecasting, economic modelling of agricultural prices and risk management. Past studies have not accounted for important characteristics of agricultural prices that matter when testing whether shocks to prices are permanent or transitory. These include the presence or absence of a deterministic trend, the possible break in the trend, non‐stationary volatility, and the problem of the initial deviation of commodity prices from their long‐run mean or trend. We conduct a comprehensive test that incorporates all these characteristics known to plague agricultural commodity prices. Though the conclusion is mixed, the balance is in favour of agricultural price shocks being permanent in nature. This result departs from the general view that in theory, agricultural prices should be stationary, suggesting that the controversy of whether shocks to agricultural prices are temporary or permanent is not yet over.

Co-movement of commodity price indexes and energy price index: a wavelet coherence approach

“…In this study, the DF-GLS, KPSS, and Z-A unit root tests are employed to explore the order of integration of the Agricultural Raw Materials Price Index, Industry Input Price Index, Metal Price Index, and Energy Price Index. Also applied is the more recent unit root test of Cavaliere et al (2011), which "allows for a possible structural break and non-stationary volatility, where the volatility includes both single and multiple abrupt breaks in variance, polynomially trending volatility, piecewise trending volatility, and smooth transition variance breaks" (Ghoshray 2019).…”

“…The unit root test of Cavaliere et al (2011) is also employed to capture the integration order for the variables of EPI, API, IPI, and MPI. This test "allows for a possible structural break and non-stationary volatility, where the volatility includes both single and multiple abrupt breaks in variance, polynomially trending volatility, piecewise trending volatility, and smooth transition variance breaks" (Ghoshray 2019). The results of the test are presented in Table 3 and show that the time series variables have a unit root at the level.…”

Price bubbles in agricultural commodity markets and contributing factors: evidence for corn and soybeans in China

“…This pooling is due to the rare occurrences of bubbles, which may result in a biased estimation of the parameters using the conventional multinomial logistic model (King and Zeng, 2001). However, though some price co-movement caused by common macroeconomic factors can be seen in the commodity markets, Ghoshray (2018), Kellard and Wohar (2006) find that the price dynamics for related commodities, such as corn and soybeans, tend to be distinctly different from each other and warn against the aggregation of commodities. This is particularly true in the case of China.…”

Forecasting Commodity Prices: Looking for a Benchmark

“…For the agricultural products, Wang and Tomek [40] claim that the impact of shocks on agricultural product prices is transitory. On the contrary, the conclusions of a more recent study by Ghoshray [41] are more in favor of agricultural price shocks being permanent in nature.…”