Shifts in Price Discovery in Commodity Markets: Implications for United States Agriculture

Paper Session

Friday, Jan. 6, 2017 8:00 AM – 10:00 AM

Swissotel Chicago, Montreux 1
Hosted By: Agricultural and Applied Economics Association
  • Chair: Getachew Nigatu, USDA Economic Research Service

Is the United States Role in the Price Determination of Major Agricultural Commodities Changing?

Getachew Nigatu
,
USDA Economic Research Service
Michael K. Adjemian
,
USDA Economic Research Service

Abstract

The United States has historically played a dominant role in the global trade, and therefore price formation, of major food, feed and fiber commodities. As the share of agricultural commodities exports produced by the US has recently declined, international supply and demand fundamentals likely play a larger role in setting even domestic commodity prices. Using wavelet coherence methods, this article examine the relationship between U.S. and international prices for corn, soybeans, and cotton. Our results reveal that integration between the markets of major exporters and importers of these commodities evolves over time: short-run (around 20 trading days) relationships between domestic and international prices are, in many cases, not stable, and even the long-run relationships between many price pairs is subject to distinct structural breaks. As the two major agricultural commodity exporters of corn and soybeans, the US and Brazil exhibit integration in the form of consistently significant long-run price relationships. In contrast, we show that Chinese agricultural commodity prices share little or no distinguishable relationship with the U.S., even though China is one of the biggest importers of U.S. products. This is likely due to Chinese trade barriers and price support policies that, while insulating domestic prices from external shocks, kept its own prices substantially higher than other countries from 2009-2016.

Price Discovery When the Market Structure Is Changing: The Case of Corn

Carlos Arnade
,
USDA Economic Research Service
Linwood Hoffman
,
USDA Economic Research Service

Abstract

Over the past decade trade patterns in international corn markets have changed; Ukraine has emerged as major exporter of corn; trade restrictions in Argentina have led Brazil to expand both the production and exporting of corn; and ethanol production in the United States has utilized almost one-third of U.S. corn production. This paper analyzes the relationship of corn from each of these four regions of the globe, (the US, Argentina, Brazil, and Ukraine). We adopt the threshold co-integration methods to evaluating the role production of export quantities in price transmission, we will evaluate the role of quantity plays in price discovery. Our hypothesis is the prices are primarily discovered in the markets with largest quantity of exports or production.

Assessing the Impacts of Global Shocks on United States Livestock Prices

John Crespi
,
Iowa State University
Lee Schulz
,
Iowa State University
William F. Hahn
,
USDA Economic Research Service
Keithly Jones
,
USDA Economic Research Service

Abstract

The underlying biological cycle of livestock creates dynamics in commodity prices that differ from the price determination for other commodities. There has been little focus on any price determination function as U.S. livestock markets have moved toward greater industrialization. Global shocks such as currency devaluation in major importing countries will certainly affect commodity prices, but the question remains whether the evolution of the U.S. livestock industry in terms marketing, management and industry structure has alleviated those price impacts. This paper will examine the global determinants of price discovery for beef cattle, hogs and poultry in light of both the underlying biological dynamics of the livestock sectors and the change in industry structure. Knowing the degree to which price movements in these three sectors have become more (or less) insulated from global shocks is an important but previously unexamined aspect of research in livestock economics.

Estimating the Location of World Wheat Price Determination

Joseph P. Janzen
,
Montana State University
Michael K. Adjemian
,
USDA Economic Research Service

Abstract

This paper examines the relationship between price determination and discovery in wheat futures markets and the globally distributed set of shocks to supply and demand fundamentals for the underlying physical commodity. We use high frequency transaction price data for the four major world wheat futures contracts (Chicago, Kansas City, Minneapolis, and Paris) to study price discovery and the reaction of prices to new information about supply and demand conditions for wheat inside a given trading day. We analyze the price determination process across wheat futures markets to identify the location of price discovery for wheat using cointegration-based econometric models. In doing so, we determine whether new wheat price benchmarks are complements or substitutes for the price-determining role traditionally played by U.S. wheat futures markets and whether the increasing importance of production in other areas has led to a decreased price discovery role for U.S. markets.
JEL Classifications
  • Q0 - General
  • Q1 - Agriculture