Agricultural commodity markets: The role of policy, institutions and trade

Recently, agricultural commodity prices have increased, in some cases reaching record high levels. In most cases agricultural prices have become more volatile (Carter, Rausser and Smith). This project will focus on studying price and volume relationships in commodity markets in selected countries to allow policy-makers and farmers to better understand the workings of their local and international markets. The issue of agricultural trade protectionism has been well researched (Anania et. al.). Some economists believe that trade liberalization on a regional basis reduces the cost of liberalizing trade between blocs, making global liberalization easier to achieve. Others claim that regional integration reduces the motivation for liberalizing trade on a more global basis, and results in excessive trade diversion. Despite the overwhelming economic evidence of the costs of protectionism in agriculture, trade barriers remain very high, due to political economy reasons.In fact, there has been little progress in reducing distortions to agricultural trade.China is becoming a larger and larger player in food markets. In 2010, China became the largest export market for U.S. agricultural goods. Trade is expected to take on a greater importancefor China in coming years (Carter, Zhong and Zhu). Most previous studies of China's agricultural trade have focused on the grain and oilseed sector, due to China's erratic trade behavior in these bulk commodities and the potential destabilizing role of China's trade liberalization. Surprisingly, little effort has been devoted to studying China's horticultural sector, despite its global importance. With an abundant rural labor force relative to its land base, it is broadly accepted that China's agriculture has a comparative advantage in labor-intensive horticultural crops, such as fruits and vegetables (Carter) and could become a more significant player in world markets for these food products. This is one of the issues that will be addressed by this project.Trading in futures markets establishes global price levels for many important agricultural, energy and financial assets. Producers and consumers base critical economic decisions on these price signals, such as crop choice. Additionally, futures markets serve an important role as a vehicle for risk management. A significant portion of California agricultural production is devoted to commodities traded on futures markets, such as cattle, dairy products, wheat, rice, and cotton. Additionally, other California products are indirectly affected by futures market prices. Hedge and index fund futures market activity has increased dramatically over the last few years, and now accounts for more than one-half of the open contracts for some commodities. Earlier studies attempting to measure the impact of hedge funds on futures prices can be improved on for two reasons. First, the data used was generally taken from a period before the rapid increase in hedge fund trading. Second, without detailed information regarding supply and demand fundamentals, an identification problem arises in attempting to connect speculative activity to absolute price movements (Janzen et al.). One way to avoid the identification problem is to consider the spread in prices for the same commodity for two different expiry months. In a given market, we expect that inter-temporal price spreads display long-run historical relationships. The rise of hedge funds, and their tendency to trade nearby contracts, may have affected long-run price relatives across expiration months. Furthermore, same crop year contracts for storable commodities should display a related response to fundamental information.