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What Explains Agricultural Price Movements?

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Journal of Agricultural Economics

Published online on

Abstract

After 2005, commodity prices experienced their longest and broadest boom since World War II. Agricultural prices have now come down considerably since their 2011 peak, but are still 40% higher in real terms than their 2000 lows. This paper briefly addresses the main arguments on the causes of the agricultural price cycle. It broadens the scope of analysis by focusing on six agricultural commodities, and identifies the relative weights of key quantifiable drivers of their prices. It concludes that increases in real income negatively affect real agricultural prices, consistent with the Prebisch–Singer hypothesis and its predecessor, Engel's Law. Energy prices matter most (not surprisingly, given the energy‐intensive nature of agriculture), followed by stock‐to‐use ratios and, to a lesser extent, ex‐change rate movements. The cost of capital affects prices only marginally, probably because it not only influences demand, but also evokes a supply response. The added value of these results lies in that, when examined in tandem and against market fundamentals, they challenge the conclusions from uni‐dimensional approaches that often put disproportionate weight on an individual factor.