Rice Price Formation in the Short Run and the Long Run - Working Paper 172

The sudden spike in rice prices in late 2007 and early 2008 exacerbated concerns about volatility in the world rice market. The international community responded mostly by increasing funding for food aid; national governments tried, many with little success, to stabilize their domestic rice prices. These responses only destabilized the world market further.

This paper seeks to understand price formation on the world’s rice markets. Simple supply and demand models are a start, but for storable commodities, storage supply and price expectations are also important in the short run. A model of the “supply of storage,” is used to understand the factors affecting short-run price expectations and price formation. This model cogently explains hoarding behavior and its subsequent impact on prices.

However, the supply of storage model less adeptly explains the influence that “outside” speculators (i.e., those who have no interest in owning the commodity but are investing solely on the basis of expected price changes on futures markets) have on prices. This paper quantifies the impact of financial factors and actors on commodity-price formation using very short-run prices and Granger causality analysis for a wide range of financial and commodity markets, including rice. The results are highly preliminary but are also very provocative. Speculative money seems to surge in and out of commodity markets, strongly linking financial variables with commodity prices during some time periods. But these periods are often short and the relationships disappear entirely for long periods of time. The links between financial markets and commodity markets are not simple, nor are they stable.

Finally, the paper addresses the long-run (since 1900) relationships among prices of the three basic cereal staples, rice, wheat and corn (maize), which all had had trend price declines of more than 1.0 percent per year over the past century. This decline accelerated after the mid-1980s, again for apparently common reasons. Only the recent run-up in cereal prices in 2007–08 returned them to the long-run downward trend. Despite these common features and important cross-commodity linkages, however, price formation for rice has several unique dimensions that are also worthy of further study.