Did Speculation Affect World Rice Prices?

How much did speculation affect the formation of rice prices during the rapid escalation of prices in world markets late in 2007 and early in 2008, through what mechanisms, what will happen as these influences unwind, and how is the story for rice different from other commodities? To answer these questions, this paper addresses four separate topics, each linked to the others by basic mechanisms of price formation. Simple supply and demand models are a start. The difference between short run responses to prices changes, and those responses after full adaptation is possible in the long run, is crucial and the conceptual model highlights the importance of these differences for understanding current prices. History matters. But storage and price expectations also become important for storable commodities in the short run—the length of time the commodity can be stored—a year or so for rice. A model of the “supply of storage,” is used to understand the factors affecting price expectations, and price formation, in the short run. This model is very powerful in its ability to explain hoarding behavior and subsequent impact on prices. Next, an effort is made to understand empirically the impact of financial factors and actors on commodity price formation using very short run prices and Granger causality analysis, for a wide range of financial and commodity markets, including rice. Speculative money seems to surge in and out of commodity markets, strongly linking financial variables with commodity prices during some time periods. But these periods are often short and the relationships disappear entirely for long periods of time. The links between financial markets and commodity markets are not simple nor are they stable. Finally, the paper addresses the long-run relationship between prices of the three basic cereal staples, rice, wheat and corn (maize), since 1900. It is clear there has been a long-run decline in the prices of all three cereals. Despite this common pattern, however, and important cross-commodity linkages, price formation for rice has several unique dimensions that are also worthy of further study.