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Understanding the role of supply and demand factors in the global wheat market: a Structural Vector Autoregressive approach

Author

Listed:
  • Daniele Valenti

    (Department of Management, Economics and Industrial Engineering, Politecnico di Milano School of Management and Fondazione Eni Enrico Mattei)

  • Danilo Bertoni

    (Department of Environmental Science and Policy, University of Milan)

  • Daniele Cavicchioli

    (Department of Environmental Science and Policy, University of Milan)

  • Alessandro Olper

    (Department of Environmental Science and Policy, University of Milan)

Abstract

We present a Bayesian structural Vector Autoregressive model of the global wheat market to examine the relative importance of supply and demand shocks, which are interpreted as the fundamental driving forces of wheat price. To our knowledge, this is the first SVAR analysis that jointly considers (i) a Bayesian non-recursive specification, (ii) production and inventories as endogenous variables (iii) and an inventory-based detection strategy. Our main results indicate that: (i) the posterior median estimates for the price elasticity of supply and demand are mostly similar in their order of magnitude but opposite in signs (0.19 for supply and -0.20 for demand); (ii) the price and the inventories respond to global wheat market shocks differently, depending on the type of structural shock. We also show that the results obtained from Cholesy-type identified annual SVAR models for wheat market are potentially misleading and difficult to reconcile with the economic theory of competitive storage. Finally, we illustrate how unpredictable shifts in supply and demand contributed to the dynamic of wheat price between 2000 and 2022.

Suggested Citation

  • Daniele Valenti & Danilo Bertoni & Daniele Cavicchioli & Alessandro Olper, 2023. "Understanding the role of supply and demand factors in the global wheat market: a Structural Vector Autoregressive approach," Working Papers 2023.21, Fondazione Eni Enrico Mattei.
    • Handle: RePEc:fem:femwpa:2023.21
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    More about this item

    Keywords

    Bayesian structural VAR model; Price analysis; Global wheat market;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • Q11 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Aggregate Supply and Demand Analysis; Prices
    • Q13 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Markets and Marketing; Cooperatives; Agribusiness

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