Is there excess co-movement of primary commodity prices? A co-integration test

It is a common perception that primary commodity prices tend to move together. This perception is especially common among commodity traders who may justify an increase in the price of one commodity because the prices of other commodities have increased. This commodity price co-movement can be identified among commodities that seem unrelated in terms of production or consumption substitutability or complementarity. But there is no reason for believing that prices of unrelated commodities should move together, except for macroeconomic shocks affecting commodity markets in general. For example, in a recession commodity prices decline across the board because demand declines; and in periods of generalinflation commodity prices rise, partly because commodities provide a hedge against inflation. However, after accounting for macroeconomic shocks, is co-movement among prices still evident? In this paper, the authors test for co-movement and excess co-movement of primary commodity prices using the econometric tests of co-integration in time series and the resulting error-correction models (ECM). The ECMs will be used to examine the existence of short-run excess co-movement between commodity prices, taking into consideration the long-run relationship between them.Crops&Crop Management Systems,Environmental Economics&Policies,Montreal Protocol,Markets and Market Access,Access to Markets

How policy changes affected cocoa sectors in sub-Saharan African countries

Structural adjustment programs in sub-Saharan African countries in the 1980s removed trade restrictions, price controls, and export taxes and abolished state-owned commodity marketing bodies. The authors studied the effects of these policy changes on the coca sector, using a global econometric model specifying major producer countries through the vintage-capital approach. They focused on Ghana and Nigeria (major cocoa producers that undertook structural adjustment programs), as well as on Cote d'Ivoire and Cameroon. The impact on world cocoa prices of structural adjustment programs in Ghana and Nigeria was relatively small. The results imply that, without structural adjustment programs in Ghana and Nigeria, world cocoa prices in the late 1980s would have been about US$1,060/ton (in 1985 constant dollars), instead of US$850/ton. So, without the structural adjustment programs, 1989-90 world prices in real terms would have been about 45 percent lower than they were in the early 1980s, compared with an actual decline of 55 percent. Much more important in depressing prices in this period was the rapid increase in production in Brazil, Cote d'Ivoire, Indonesia, and Malaysia (which together accounted for about 75 percent of the increased production in that decade). That increased production resulted largely from tree planting in response to higher world cocoa prices in the late 1970s -- and subsequent increases in productivity. The results of counterfactual simulations suggest that cocoa production in Ghana would have been at almost half its 1989-90 level if Ghana had not implemented its structural adjustment program. The producers'surplus would have been lower without the program, and the government's budget deficit would have been unsustainable. The effects of the structural adjustment program in Nigeria are mixed. The simulation results show lower cocoa production but higher government revenue without the reforms. But the program was evaluated only three years after the reforms, so the full effects on production had not been realized. The structural adjustment programs in Ghana and Nigeria had a negative effect on other cocoa-producing countries in sub-Saharan Africa and the rest of the world -- producing an estimated loss (in government revenue from cocoa exports and producer surplus) of about 15 percent in other sub-Saharan African countries. Results show that both Cote d'Ivoire and Cameroon would have been better off had they set export taxes at a higher level (closer to an estimated"optimal"level) at the same time that they depreciated the real exchange rate. Producer prices could have been sustained at their earlier higher level, or even raised, without hurting government revenues. Structural adjustment programs in Ghana and Nigeria had a negative effect on producers in other countries, but not adopting such policies would have been economically irrational, contend the authors.Environmental Economics&Policies,Economic Theory&Research,Economic Stabilization,Access to Markets,Markets and Market Access