Commodity Price Cycles :Commonalities, Heterogeneities, and Drivers

This paper studies commodity price cycles and their underlying drivers using a dynamic factormodel. The study employs a sample of 39 monthly commodity prices over 1970:01 to 2019:12. The analysis identifiesglobal and group–specific cycles in commodity markets and includes them in a structural vector autoregressive modeltogether with measures of global economic activity and global inflation, to disentangle their response to globaldemand, global supply, and commodity market-specific shocks. The findings reveal the following main results. (i) Thereexists a global cycle in commodity markets that accounts for an increasing fraction of co-movement in commodity pricesover the past two decades, particularly for energy, metals, and precious metals. (ii) The results are heterogeneousacross groups of commodities, with group-specific commodity cycles existing for grains and precious metals over the fullsample period, 1970–2019. Metal and energy prices exhibit within-group synchronization over 1970–99; however, inrecent years, their movements have become increasingly aligned with the global business cycle. (iii) Since 2000,the global commodity cycle is largely driven by global supply shocks, such as rapid productivity growth in emergingmarkets and developing economies, which increase demand for commodities. (iv) The large price spikes observed during thetwo most prominent commodity market boom-bust episodes of the past half-century (1972–74 and 2006–08) are drivenadditionally by shocks that are orthogonal to global economic activity such as shifts in speculative demand for commodities.