COMMODITY PRICES REVISITED

Empirical models of commodity prices are potentially important aids to decision-makers, especially as the economy has grown more complex. A typical time series of commodity prices exhibits positive autocorrelation, occasional spikes, and random variability, and conceptual models have been developed to explain this behavior. But, the leap from theory to empirical applications is large because of model specification and data quality problems. When modeling price expectations, for example, should a price series be deflated and if so, by what deflator? The choice can have a large effect on empirical results. Nonetheless, it is possible in some applications to obtain relatively stable-estimates of structural parameters that are useful for addressing specific problems. This may not happen often, however, because the incentives in academia do not encourage rigorous, in-depth appraisals of empirical results.Demand and Price Analysis,

COMMODITY PRICES AND UNIT ROOT TESTS

Endogenous variables in structural models of agricultural commodity markets are typically treated as stationary. Yet, tests for unit roots have rather frequently implied that commodity prices are not stationary. This seeming inconsistency is investigated by focusing on alternative specifications of unit root tests. We apply various specifications to Illinois farm prices of corn, soybeans, barrows and gilts, and milk for the 1960 through 2002 time span. The preponderance of the evidence suggests that nominal prices do not have unit roots, but under certain specifications, the null hypothesis of a unit root cannot be rejected, particularly when the logarithms of prices are used. If the test specification does not account for a structural change that shifts the mean of the variable, the results are biased toward concluding that a unit root exists. In general, the evidence does not favor the existence of unit roots.Marketing,

Characterizing Distributions of Class III Milk Prices: Implications for Risk Management

Descriptive statistics and time-series econometric models are used to characterize the behavior of monthly fluid milk prices. Prices in April, May and June appear to be more variable than those in subsequent months, and the spring-time prices are perhaps skewed. Econometric models can capture the historical behavior of spot prices, but forecasts converge to the marginal distribution of the sample prices in about six months. Futures prices for Class III milk have the expected time-to-maturity effect and converge to the respective monthly distributions of the cash prices at contract maturity (as they must, since the contracts are cash settled). Thus, econometric models and futures quotes provide similar information about price behavior at contract maturity. Routine hedges in futures, especially those made four or more months prior to maturity, reduce the variance of returns, but over a period of years, lock-in an "average" return. While econometric models and futures quotes provide imprecise forecasts, they can be used in conjunction with historical data to determine whether expected prices are high relative to past experience. This may assist with making decisions about selective hedging. Likewise, historical evidence may be useful in evaluating expected returns from the use of put options. Results from simple hedging strategies using either futures or puts are illustrated, but more work is needed to evaluate "optimal" portfolios for dairy farmers.hedging, marketing strategies, milk futures, milk prices, risk management, Risk and Uncertainty,

COMMODITY PRICES AND UNIT ROOT TESTS

Endogenous variables in structural models of agricultural commodity markets are typically treated as stationary. Yet, tests for unit roots have rather frequently implied that commodity prices are not stationary. This seeming inconsistency is investigated by focusing on alternative specifications of unit root tests. We apply various specifications to Illinois farm prices of corn, soybeans, barrows and gilts, and milk for the 1960 through 2002 time span. The preponderance of the evidence suggests that nominal prices do not have unit roots, but under certain specifications, the null hypothesis of a unit root cannot be rejected, particularly when the logarithms of prices are used. If the test specification does not account for a structural change that shifts the mean of the variable, the results are biased toward concluding that a unit root exists. In general, the evidence does not favor the existence of unit roots.Research Methods/ Statistical Methods,

ON IMPROVING ECONOMETRIC ANALYSES OF GENERIC ADVERTISING IMPACTS

It is possible to obtain robust estimates of structural parameters using observational data, but it is difficult to do so. Necessary, but not sufficient, conditions are to adopt a modeling philosophy and to undertake a comprehensive evaluation of the results. Using a general-to-specific modeling philosophy, we obtained stable estimates of the long-run advertising elasticity for fluid milk. This result contrasts with an earlier, published model which did not provide stable estimates as new data points became available. It is difficult, however, to apply the general-to-specific modeling approach because it requires the researcher to specify an initial general model. But analysts are unlikely to agree on this initial model, and if this is true, then the "generality" of the model is in question. Moreover, it is a fact that the quality of the available data is sometimes insufficient to obtain the desired stable estimates.Marketing,

IMPLICATIONS OF DEFLATING COMMODITY PRICES FOR TIME-SERIES ANALYSIS

The choice of deflators of commodity prices can change the time-series properties of the original series. This is a specific application of the general phenomenon that various kinds of data transformations can create spurious cycles that did not exist in the original data. Different empirical models of expectations result from nominal and various deflated series that have distinct time-series properties, and these models, in turn, produce varying estimates of supply response and measures of price risk. The foregoing is illustrated by annual grain prices, monthly milk prices, and a milk supply analysis. Annual prices of corn and soybeans, for example, appear to vary around a constant mean, but when deflated by general price indexes such as the CPI, the deflated prices are autocorrelated around a declining deterministic trend and/or have a stochastic trend. The quasi-rational expectations hypotheses assumes that farmers base expectations on forecasts from time-series models, but forecasts of real prices, that ultimately become negative, are not rational.deflating, time-series analysis, price expectations, price risk, supply analysis, Demand and Price Analysis,

On the Relationship of Expected Supply and Demand to Futures Prices

Expectations about future economic conditions are important determinants of commodity prices. This paper presents a relatively simple model that makes futures prices for corn a function of expected production and inventories and of variables that account for demand shifts. The intent is to provide an historical, objective context for new price and quantity observations, which may help market analysts.expected supply, futures prices, commodity prices, Demand and Price Analysis, Risk and Uncertainty,

Commodity Prices and Unit Root Tests

WP 2004-07 May 2004Endogenous variables in structural models of agricultural commodity markets are typically treated as stationary. Yet, tests for unit roots have rather frequently implied that commodity prices are not stationary. This seeming inconsistency is investigated by focusing on alternative specifications of unit root tests. We apply various specifications to Illinois farm prices of corn, soybeans, barrows and gilts, and milk for the 1960 through 2002 time span. The preponderance of the evidence suggests that nominal prices do not have unit roots, but under certain specifications, the null hypothesis of a unit root cannot be rejected, particularly when the logarithms of prices are used. If the test specification does not account for a structural change that shifts the mean of the variable, the results are biased toward concluding that a unit root exists. In general, the evidence does not favor the existence of unit roots

Implications of Growing Biofuels Demands on Northeast Livestock Feed Costs

The relationship between complete-feed prices and commodity feedstock prices are estimated to analyze the effect of higher commodity prices on feed costs, with particular attention towards the price effects and substitutability of corn distillers dried grains with solubles (DDGS). Assuming the historical positive correlation between corn and DDGS prices, each $1/ton increase in the price of corn increases per ton feed costs between$0.45 and $0.67 across livestock sectors. A negative price correlation would offset some of the cost increases, but under most scenarios feed costs are expected to be at or above those experienced in 2007.Agricultural Finance,

ELASTICITIES OF DEMAND FOR IMPORTED MEATS IN RUSSIA

Elasticities of demand for meat imports in Russia are estimated using an AIDS model. The model differentiates among sources of imports as well as kinds of meat, but since the number of observations on Russian imports is limited, an improved block-substitutability restriction is introduced to conserve degress of freedom. The estimates of expenditure elasticities are positive for beef, pork, and chicken imported from western countries, and for beef and chicken, are larger than one. The expenditure elasticities are negative for beef and pork imported from former Soviet trade block countries. (Chicken is not imported from these countries.) Consistent with logic, the (compensated) cross-price elasticities indicate that products imported from different sources are substitutes. These estimates are perhaps the first available for the Russian economy, and not surprisingly, they indicate that declining real incomes in Russia mean decreasing meat imports from western countries.Demand and Price Analysis,