The role of market fundamentals and trade policy in past wheat price fluctuations

Food grain prices have risen sharply several times within the last decade, significantly exceeding previous long-term maxima and causing humanitarian crises in parts of the world. So far, there is no agreement in the literature as to the main drivers of these recent price spikes. Some authors have invoked speculation or external factors such as oil prices or stock market crashes, ascribing only a minor role to market fundamentals. Others have cited trade policies and/or panic purchases in response to initial price rises caused by yield shortfalls. However, these analyses are either narrative or based on empirical models that do not resolve trade dynamics. Our objective is to advance the debate using a new, transparent quantitative model of agricultural commodity trade. We introduce a simple equilibrium model of annual world grain prices that integrates grain stocks into the supply and demand functions. This innovation allows to describe both the effect of production changes and of trade responses in a single model. Driven only by reported annual production and by long-term demand trends, the model reproduces most observed variations of the past 40 years in both the global storage volume and the price of wheat. To our knowledge, this is the first time that such a long section of observed prices has been reproduced in a consistent quantitative model. In addition, we demonstrate how recent price peaks can be better reproduced by accounting for documented trade restrictions and importing strategies. The consistent inclusion of storage into a dynamic supply-demand model closes an important gap when it comes to explaining the processes driving historical price fluctuations. Their explicit representation may help to explore our options to respond to future changes in production variability under climate and land-use change.