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The determinants of the recent food price surges – A basic supply and demand model

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  • Bernhard Troester
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    Abstract

    This paper analyzes the factors behind the recent trends in food commodity prices, especially the question to what extent the price hikes are caused by fundamentals. Some of the main determinants have been identified and classified in ongoing studies. Based on this categorization, a basic supply and demand model for food commodity markets is developed in this paper that includes two arguments. One is that the growth rate of notional food demand differs from the growth rate of food supply. Consequently the prices have to adjust in order to restore an equilibrium situation in the food market. The second argument is the change in supply and demand elasticities causing swings in food prices. The model is applied for the prices of wheat and corn from 1990 to 2011 and compared with the actual spot prices. The results show that the model can replicate the prices of both food commodities up to 2006/2007 but a significant divergence appears thereafter. Financialization is identified as one reason for this development, but the demand from China and India is neglected as a reason behind price increases in many food commodities.

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    File URL: http://finance-and-trade.htw-berlin.de/fileadmin/working_paper_series/wp_06_2012_Troester_Food-prices.pdf
    File Function: First version, 2012
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    Bibliographic Info

    Paper provided by Hochschule fuer Technik und Wirtschaft, Berlin in its series Competence Centre on Money, Trade, Finance and Development with number 1206.

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    Length: 59 pages
    Date of creation: Jul 2012
    Date of revision:
    Publication status: Published in Berlin Working Papers on Money, Finance, Trade and Development, July 2012
    Handle: RePEc:mtf:wpaper:1206

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    Web page: http://finance-and-trade.htw-berlin.de

    Related research

    Keywords: working paper; daadpartnership; finance-and-trade;

    References

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    1. Bicchetti, David & Maystre, Nicolas, 2012. "The synchronized and long-lasting structural change on commodity markets: evidence from high frequency data," MPRA Paper 37486, University Library of Munich, Germany.
    2. Fattouh, Bassam & Kilian, Lutz & Mahadeva, Lavan, 2012. "The Role of Speculation in Oil Markets: What Have We Learned So Far?," CEPR Discussion Papers 8916, C.E.P.R. Discussion Papers.
    3. Jörg Mayer, 2009. "The Growing Interdependence Between Financial And Commodity Markets," UNCTAD Discussion Papers 195, United Nations Conference on Trade and Development.
    4. Sanders, Dwight R. & Irwin, Scott H. & Merrin, Robert P., 2009. "A Speculative Bubble in Commodity Futures Prices? Cross-Sectional Evidence," 2009 Conference, April 20-21, 2009, St. Louis, Missouri 53050, NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    5. Hernandez, Manuel & Torero, Maximo, 2010. "Examining the dynamic relationship between spot and future prices of agricultural commodities," IFPRI discussion papers 988, International Food Policy Research Institute (IFPRI).
    6. Robert S. Pindyck, 1994. "Inventories and the Short-Run Dynamics of Commodity Prices," RAND Journal of Economics, The RAND Corporation, vol. 25(1), pages 141-159, Spring.
    7. Trostle, Ronald, 2008. "Factors Contributing to Recent Increases in Food Commodity Prices (PowerPoint)," Seminars 43902, USDA Economists Group.
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