Price Dynamics and Structural Change in the World Wheat Export Market: New Methods and New Evidence

This paper examines the price linkages between major exporting countries of wheat, whereby the actions of profit-seeking exporters is expected to form a long-run equilibrium so that the price differences should be no more than the costs of spatial arbitrage. This mechanism is akin to the Law of One Price (LOP hereafter). The global wheat market is an interesting case as it is characterized by market concentration where only a handful of countries account for more than two-thirds of the total wheat exports, along with the fact that wheat as a commodity has different end uses based on its intrinsic characteristics, thereby making it a differentiated product. Furthermore, the wheat export market has undergone structural change over the last decade, such as the signing of new trade agreements, the changing composition of wheat sellers and buyers, the dismantling of single desk monopoly boards, climate change and war. This paper contributes by testing for the LOP that allows for several structural shifts in prices over time, by making use of a novel multivariate flexible fourier form procedure due to Pascalau et al. (2022). We also test for price leadership and use simulations to trace out the response of individual country export prices to competing country price shocks. The empirical results contribute to our understanding of the structure of the world wheat export market.