Are Global Food Prices Becoming More Volatile and More Persistent?

Global food prices have recently exhibited highly volatile and very persistent dynamics. Greater fluctuations in food commodities than manufacturing goods often put more serious hardship to poor countries that tend to specialize in raw commodity industries. The present paper attempts to identify the factors that help explain recent phenomena in world commodity markets. We first document strong dynamic correlations (Engle, 2002) between food commodity prices and the US dollar exchange rate. Employing the PANIC method (Bai and Ng, 2004), we then estimate a latent common factor from 27 food and beverage commodity prices, which seem to be closely related with the exchange rate. Once controlled for the effect of the common latent factor, idiosyncratic components of food commodity prices show substantially lower volatilities and persistence. Recent trends in global food commodity prices, therefore, seem to be well explained by a fairly simple but influential factor, that is, highly volatile and persistent movements of the US exchange rate since the recent financial crisis. Other than that, we do not see any compelling evidence of higher volatility or greater persistence in price dynamics. Our findings also call for special attention on the importance of financial markets in addition to factors that influence economic fundamentals.