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Determinants of Agricultural and Mineral Commodity Prices

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  • Frankel, Jeffrey

    (Harvard University)

  • Rose, Andrew K.

    (University of California, Berkeley)

Abstract

Prices of most agricultural and mineral commodities rose strongly in the past decade, peaking sharply in 2008. Popular explanations included strong global growth (especially from China and India), easy monetary policy (as reflected in low real interest rates or expected inflation), a speculative bubble (resulting from bandwagon expectations) and risk (possibly resulting from geopolitical uncertainties). Motivated in part by this episode, this paper presents a theory that allows a role for macroeconomic determinants of real commodity prices, along the lines of the "overshooting" model: the resulting model includes global GDP and the real interest rate as macroeconomic factors. Our model also includes microeconomic determinants; we include inventory levels, measures of uncertainty, and the spot-forward spread. We estimate the equation in a variety of different ways, for eleven individual commodities. Although two macroeconomic fundamentals--global output and inflation--both have positive effects on real commodity prices, the fundamentals that seem to have the most consistent and strongest effects are microeconomic variables: volatility, inventories, and the spot-forward spread. There is also some evidence of a bandwagon effect.

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Paper provided by Harvard University, John F. Kennedy School of Government in its series Working Paper Series with number rwp10-038.

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Date of creation: Sep 2010
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Handle: RePEc:ecl:harjfk:rwp10-038
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Find related papers by JEL classification:
  • Q11 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Aggregate Supply and Demand Analysis; Prices
  • Q39 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Other

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