Journal of Agricultural Economics, Vol. 65, No.

3, 2014, 557578
doi: 10.1111/1477-9552.12073

Volatility in Cereal Prices:

Intra- Versus Inter-annual Volatility
Herve Ott1
(Original submitted December 2012, revision received March 2014, accepted
May 2014.)

Abstract
Intra-annual (within crop year) price volatility and inter-annual (between crop
years) price volatility are measured for wheat, maize, rice, barley, oats and rye. A
set of explanatory variables is used in a pooled regression to explain variations in
these price volatilities. With low cereal stocks, supply (yield) shocks (dened here
as volatilities, as for the price volatilities) mostly inuence inter-annual volatility
while other inuential factors are the crude oil price and exchange rate. Cereal
demand and interest rate shocks combined with low stocks aect intra-annual vola-
tility, while other explanatory factors include exchange rate and crude oil price
shocks. The derivatives market activity appears to have no signicant eect on
either intra- or inter-annual volatility. In contrast, large cereal stocks and a
well-functioning international cereal market reduce the eects of shocks in the
explanatory variables on both intra- and inter-annual volatilities.

Keywords: Agricultural commodities; cereal price volatility; instrumental variables;

pooled GMM estimates; unit root tests.
JEL classifications: C26, C32, Q11.

1. Introduction
Agricultural commodities have exhibited signicant boom-bust cycles since the mid-
2000s. For instance, the hard red winter wheat (No. 1, Gulf of Mexico) traded at
approximately US$ 195 per metric ton in May 2007. Exactly 1 year later, it rose to
US$ 329 but then fell to US$ 220 by the end of 2008. Again, the wheat price almost
doubled from June 2010 to May 2011 reaching a new record high at US$ 355, falling
to US$ 264 exactly 1 year later. It again reached a new record high in November 2012

1
Herve Ott is with the Thuenen Institut, Market Analysis, Brunswick, Germany and is also with
the European Commission, Joint Research Centre, Institute for Prospective Technological
Studies, Seville, Spain. E-mail: herve.ott@ti.bund.de for correspondence. The author would like
to thank rst, the Editor, David Harvey, and the reviewers of the JAE who have improved the
writing and the content of the study. Also big thanks are due to Oliver von Ledebur for his com-
ments during the 123rd EAAE seminar Price Volatility and Farm Income Stabilisation; Model-
ling outcomes and assessing market and policy based responses in 2012 in Dublin, Ireland. The
views expressed here are solely those of the author.

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558 Herve Ott

at US$ 361 and then fell more moderately to US$ 308 in April 2013. Other agricul-
tural commodities, such as soybeans, maize and rice, exhibited similar volatility which
cannot be explained simply by seasonality. For wheat, Ott (2014) suggests that a new
period of high volatility began in 2006 with price data through 2010. More recent
price developments conrm that a new era of high cereal price volatility began around
the mid-2000s. This new evidence has triggered renewed interest in an old subject,
especially the causes of volatility. Gilbert and Morgan (2010, 2011) show that the
extent of price volatility depends upon the following: (i) the variability of production
and/or consumption; (ii) the variability of stock demand; and (iii) the degree of elas-
ticity of the supply and the demand. Since the Ecient Market Hypothesis may not
generally hold, the uncertainty about future supplies and demand, information ows
and their reliability may also have an impact. There is less agreement, however, on the
decisive factors explaining the recent volatility surge.
Climate scientists note that climate change increases the occurrence and the area
covered by extreme weather events such as heat waves, cold winters, rainfall and
oods (see Peterson et al., 2012 for some examples). For instance, Hansen et al.
(2012) argues that the strong la Ni~ na of 2011 may have contributed to the heat
and drought in southern USA and Mexico in 2012. Climate change and associated
increased variability of agricultural production can be expected to have increased
price volatility. However, Gilbert and Morgan (2011) downplay the global warming
argument and instead suggest that the negative eects of global warming on agri-
cultural yield may be limited to some dry regions such as Australia and Africa bor-
dering the Sahara and to some crops. They further argue that global warning
cannot explain the volatility increase observed in the entire spectrum of agricultural
commodities.
The revolution in information technology has radically changed the trading prac-
tice of commodities on the spot and even more on the futures market, and this
might have impinged on the price volatility. Futures and options exchanges world-
wide have shifted from conventional open-outcry markets to electronic trading
platforms (e.g. GLOBEX, LIFFE Connect) thanks to progress in information tech-
nology. Execution speed and transaction costs are considerably lower in the elec-
tronic market (Shah and Brorsen, 2011). In turn, this has increased liquidity by
increasing the volume of trades. Furthermore disintermediation (no need for bro-
kers) and globally decentralised markets (Domowitz, 2002) followed. The recent
implementation of automated algorithmic trading and particularly HFT (High Fre-
quency Trading) might exacerbate price volatility due to large directional bets: one
large trade can trigger a domino eect because of HFT aggressive sales to elimi-
nate positions. Thus, the new highly liquid and decentralised futures commodity
market with automated computerised trading orders might be more vulnerable to
large price swings. Furthermore, since the mid-2000s, substantial volumes of invest-
ment funds have owed into the commodity derivatives market via index-based
swaps, a phenomenon called the nancialisation of commodity markets (Gilbert,
2010a). Numerous non-academic authors and practitioners (see Urbanchuk, 2011
for a review) blame derivatives market activity for amplifying price oscillation on
the physical market. For instance, the FAO (Food and Agriculture Organization)
(2010) mentions, trading in futures markets may have amplied volatility in the
short-run, while Urbanchuk (2011) blames the non-commercial index traders for
exacerbating the volatility. While some of the arguments put forward in this litera-
ture appear incoherent (see Irwin et al., 2009 for a critique), one possible coherent

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explanation may be through the price-discovery function of the futures market.

The derivative market is more liquid than the spot market and so responds more
quickly to new information. As index traders seek to take advantage of apparent
short-term trends in prices the derivative market is more subject to speculative
bubbles and bursts. Due to uncertainty or chartist traders, the futures prices may
oscillate in a short period of time with higher frequency than normal. These swings
would be mimicked in the physical market, thus mirroring the futures market
expectations. However, Ott (2014) does not nd empirical support for nancialisa-
tion as a cause of intra-annual volatility.
Another explanation is that cereals have become a source of energy. High crude oil
prices and new energy and agricultural policies, e.g. biofuel mandates in the USA and
the EU, have led to the partial integration of agricultural and energy markets. When
crude oil prices rise above a certain threshold, the demand for biofuel feedstock rises
rapidly with crude oil price, and when the prices fall below the threshold, the demand
falls sharply (Meyer and Thompson, 2010). Du et al. (2011) nd some evidence of oil
price volatility being imported into the maize market. Similarly, Serra and Gil (2013)
recently conrmed the transmission of ethanol price volatility in the maize market. As
maize and wheat are relatively close substitutes for feed and food grain, energy shocks
may simultaneously impact the wheat and maize markets. This can lead to an increase
in variances of demand shocks, which, in turn, could increase volatility in agricultural
commodity prices. However, the discussion based on the literature in Zilberman et al.
(2013) provides clear evidence that the impact of biofuel only impacts the agricultural
commodities when biofuel is competing with food crops for resources, such as land
and water. Meyer and Thompson (2010) also argue that the net eect of crude oil
price on the commodity price volatility depends on the market context.
Obviously, common factors are at play as the commodity markets of energy, metal
and agriculture simultaneously experience a new regime of high volatility. The rapid
economic growth in the emerging economies, particularly China, feeds rapidly grow-
ing consumption of energy, metal and agricultural commodities which generates
simultaneous stress in most commodity markets, as explained in Gilbert and Morgan
(2010, 2011). Regarding the grain market, Wright (2011) argues that volatility
increase is primarily attributable to the historic low levels of world grain stocks
(including China) from 2007 onward. Wright (2011) asserts that the strong Chinese
consumption was o-set by the run-down in Chinese stocks until 2007, which conse-
quently shielded world markets from the demand pressure. From 2007 on, Chinese
grain stocks have reached a very low level, and the rest of the world has been unable
to meet the Chinese demand due to the biofuel mandates in western countries. When
an adverse weather event harms production, as has been the case since the mid-2000s,
price peaks are the logical consequence and prices fall again when the production out-
look improves. Wright (2011) also blames non-western governments for exacerbating
the volatility issue by trying to insulate their local markets following the commodity
price shock with misguided trade measures, i.e. export bans and discontinuance of
import taxes. The consumption habits of both poor and wealthy households appear
to be very inelastic to prices and to the government interventions that have reduced
supply and demand elasticities, the combination of which can explain the volatility
increase since 2007, according to Wright (2011). Serra and Gil (2013) show that low
stock levels signicantly increase volatility.
Other common macro-factors such as the interest rate and the US dollar exchange
rate may impinge on the volatility of agricultural commodities. First, Frankel (2006)

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560 Herve Ott

argues that the real interest rate inuences the incentive to store commodities. For
instance, monetary contraction (higher real interest rate) implies higher real cost of
storage and reduces the incentive to hold stocks. Thus, interest rate shocks can propa-
gate variability in the demand for stocks. Serra and Gil (2013) nd some evidence that
the interest rate volatility has signicantly impacted maize price volatility. Second, the
value of the US dollar has a real eect on the price of commodities, as explained in
Gilbert (1989), essentially because most of the international trade in agricultural com-
modities is denominated in US dollars, and accordingly, depreciating US dollars will
fuel higher international demand and lower the stock-to-use ratio, which under the
condition of low stocks impinge on volatility. In a similar manner, exchange rate
uncertainty may impinge on the volume traded. According to the empirical estimates
of Kandilov (2008), exchange rate volatility on trade has disruptive eects on the vol-
ume traded in agricultural commodities, which in turn may fuel the price volatility of
the given commodity.
Serra and Gil (2013) assess the factors that inuence the volatility of maize by
means of a multivariate generalised autoregressive conditional heteroskedastic speci-
cation. Balcombe (2011), on the other hand, uses time series and panel regressions,
while Roache (2010) employs the new Spline-GARCH methodology. However, the
specications of their models may be questioned. First, the autoregressive term may
not be justied in the specication of a model analysing factors driving volatility.
Moreover, numerous potential factors are not included in the specication, among
them the thinness of the trade of the international commodity market, the possible
inuence of the derivatives market (Balcombe, 2011; Serra and Gil, 2013) or the
behaviour of the exchange rate (Serra and Gil, 2013). Additionally, Roache (2010)
does not consider stock levels in his multifactor model, while Ott (2014) attempts to
ll the gap by investigating a large set of variables.
This study focuses on the cereal sector as a whole. In contrast, Ott (2014) derives
commodity-specic conclusions, for wheat, maize, rice, soybeans, coee and cotton.
Rather than using time series econometrics, this study employs panel econometrics.
The pooled sections include all cereals (wheat, maize, rice, barley, oats and rye).
The consequent homogeneity assumption across the cereals allows rst, the cereal
sector as a whole to be analysed, and second, stable and reliable coecients to be
estimated. In this paper, the extent of volatility increase and the evolution of the
driving factors over time are not investigated. Additionally, the analysis is based on
real data rather than on nominal data. More importantly, however, this study
informs on the controversies regarding factors driving volatility by proposing to
measure intra-annual volatility (within crop year) vs. inter-annual volatility
(between crop years). Indeed, depending on whether inter- or intra-annual volatility
is investigated as the explained variable, the driving factors may dier. As a result,
this study proposes to ll the gap by (i) measuring intra- and inter-annual volatility,
and (ii) nding empirical evidence on the quantitative importance of each type of
volatility.
The remainder of the paper is organised as follows. Section 2 discusses the vari-
able-series: measuring volatility, building of the proxies, and the stationary properties
of the proxies. Section 3 presents the empirical estimation method and an empirical
interpretation of the results. Finally, section 4 summarises the results and presents the
conclusions.

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 Volatility in Cereal Prices 561

2. Data and Model Specification

2.1. The international crop year
The sources for the data are shown in Table 1. Wheat, maize and rice provide two-
thirds of human food consumption according to FAO (2014). Barley, rye and oats are
also included as data are available, and the increased number of observations improves
the estimates. Oats and rye are hardly major international grains and the international
rice market is noticeably dierent from the other cereals. However, in the empirical
estimates the idiosyncrasies of specic markets are controlled for by including cereal
market conditions (scarcity indicator, stock-to-use ratio, thinness of the international
trade, and Herndahl index), see section 3. The rst diculty with this approach is to
dene an international crop year since the production of cereals occurs in both the
southern and northern hemispheres. The major producers of cereals for the last
50 years were identied by calculating their share of production relative to the total
production of cereals over the last 50 years. The major producers include the USA, the
EU-27 (the 27 Member States of the European Union), the FSU (Former Soviet
Union), Canada, Australia, India, China, and for rice also Indonesia, Vietnam and
Bangladesh. The starting month of the crop year for each country producer is reported
by the USDA FAS (US Department of Agriculture, Foreign Agricultural Service).
Each rst month of the crop year was assigned its share in world production for the ve
most important producers. To calculate the barycentre, the reference month was April.
For instance, a barycentre of 1 (3) refers to May (July) of the international crop year.
The summary of the results are given in Table 2, and the barycentres of 3.09, 3.16, 3.06
and 2.98 for wheat, barley, oats and rye, respectively, show that the international crop
year, dened as the barycentre, begins in July for these four cereals. For maize, the
international crop year begins in August and nally for rice the barycentre is closest to
December. Instead of calculating the barycentre relative to the share of the world pro-
duction, it was also calculated with respect to the total exports (results not reported).
For all cereals the beginning of the crop year was unchanged except for rice. Thailand
was clearly the dominant exporter in a relatively small international market, which
moves the barycentre to January. As a result, for rice the crop year January to Decem-
ber was used, although this is very similar to a December to November crop year.

2.2. Measurement of volatility

Using a sample of more than 50 years requires that all prices should be deated to a
common measure. Svedberg and Tilton (2006) and Cuddington (2010) argue that
deating with the CPI (consumer price index) leads to biased real commodity prices.
Here, monthly cereal prices are deated by the US PPI (producer price index) as in
Gilbert and Morgan (2010, 2011) prior to the calculation of the intra-annual and
inter-annual volatility. Intra-annual volatility measures the dispersion of cereal prices
within the crop year. The typical measure is the standard deviation (r) of log changes
in monthly prices within the crop year, i.e.:
v
u
u1 X 12    2
ry t ln Py;m =Py;m1  ly ;
10 m2

where ly = 1/11 ln(Py,12/Py,1) and Py,m is the price in month m of crop year y. This mea-
sure indicates the uncertainty that farmers face in their planting decisions. Typically,

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 Table 1
562

Source of data

Series Description Sample Freq. Unit Source

Price by commodity
Wheat CBOT1 Soft red winter #1, Front contract (W1), USA 19602013 Month US$/month Open Financial Data Project2
Maize CBOT Corn yellow #1, Front contract (ZC), USA 19602013 Month US$/month Open Financial Data Project
Rice Survey export Bangkok White milled 5% broken, Thailand 19602013 Month US$/month World Bank (Pink sheet)
Barley WCE3 ICE4 Feed western #1 (BW), farmer price, Canada 19602013 Month US$/month World Bank (Pink sheet)
Oats CBOT Oats #1, Front contract (01), USA 19602013 Month US$/month Open Financial Data Project
Rye Average farmer price, Germany 19602013 Month /month Statistiches

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Bundesamt (Pendelliste)
Total open interest (all maturities)
Wheat CBOT Soft red winter #1, USA, 1st ? 6th expiration 19602013 Month Contract Open Financial Data Project
Production, Area harvested, Exports, Ending stock, Beginning Stock,
Total distribution, Feed domestic consumption, Consumption FSI
(feed, seed, industrial), Domestic consumption, for each country,
world and by commodity
Wheat, maize, rice, barley, oats, rye quantity in weight 19602013 an. crop 1000 mt USDA FAS5
Herve Ott

Common series and macro variables

US PPI Producer price index nished goods (total) 1980 = 100 19602013 Month Index US BLS6
US CPI Consumer price index all urban consumers all items 1980 = 100 19602013 Month Index US BLS
Deator US implicit price deator: gross domestic product 1980 = 100 19602013 Month Index US BEA7
GDP World gross domestic product, current prices 19602013 An. Index World Bank
calendar
GDP pc World GDP per capita GDP divided by mid-year population 19602013 An. Index World Bank
calendar
Crude oil Brent, Dubai, West Texas Intermediate (average spot 19602013 Month US$/bbl World Bank (Pink Sheet)
price equally weight)
Exch. FX Trade weighted US$ index: broad 1980 = 100 19602013 Month Index BGFRS8
Interest 1 year US Govt Treasury bill: secondary market rate 19602013 Month % BGFRS

Notes: Abbreviation and source: 1Chicago Board of Trade; 2http://www.quandl.com; 3Winnipeg Commodity Exchange; 4Intercontinental Exchange;
5
US Department of Agriculture: Foreign Agricultural Service; 6US Department of Labor: Bureau of Labor Statistics; 7US Department of Commerce:
Bureau of Economic Analysis; 8Board of Governors of the Federal Reserve System.
 Table 2
Crop year and barycentre with weightings relative to world production (19602012)

starng crop year April May June July August September October November December January

WHEAT countri e s Indi a USA EU-27 Canada Chi na

FSU
weight 5.6% 14.1% 46.7% 5.5% 10.9%
barycentre
3.09

MAIZE countries Brazil USA, EU-27

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China FSU
weight 23.7% 54.1%
barycentre
4.17

RICE countri e s Bangl ade sh Indi a Chi na, V i e tnam

Indonesia
weight 5.7% 20.8% 46.3%
barycentre
7.67

BARLEY countri e s USA EU-27 Canada Austral i a

FSU
Volatility in Cereal Prices

weight 5.7% 69.8% 7.7% 3.1%

barycentre
3.16

OATS countri e s USA EU-27 Canada Austral i a

FSU
weight 18.3% 60.1% 10.1% 3.3%
barycentre
3.06

RYE countri e s USA EU-27 Canada

Turkey FSU
weight 4.0% 91.9% 1.8%
barycentre
2.98
563
564 Herve Ott

farmers can substitute dierent grains relatively easily, especially between cereals. The
higher the intra-annual volatility, the more dicult the optimal planting choice will be.
Inter-annual volatility, in contrast, measures the dispersion of cereal prices between
crop years. Following Sarris (2000), the monthly prices were averaged over the respec-
tive crop year of each cereal. However, using the same formulae of volatility as for
intra-annual volatility would cause problems. First, measuring inter-annual volatility
in a rolling-window framework would break an important assumption of regression
econometrics: the independence of the observations. Second, calculating a standard
deviation every 5 years (the smallest possible time span) gives only 10 independent
observations for each cereal, for a total of 60 observations which would be restrictive
for reliable multivariate regression estimates, especially where IV (instrument vari-
able) techniques are needed to treat endogeneity. Moreover, the explanatory factors
(regressors) would also need to be averaged over ve crop years. A lot of information
would have been lost, and comparing the two regressions with dierent frequencies in
the explanatory factors would have been another challenge. As a consequence, inter-
annual volatility is measured as the price deviation (DEV) between crop years, that is,
q
DEVy Py  MA5y 2 ;
where Py is the crop year price and MA5y is the 5 year moving average. By dening
inter-annual volatility as the deviation of the price level relative to the 5 year moving
average generates independent observations and almost as many observations as for
intra-annual volatility. The standard deviation of the log change over ve crop years
was also calculated every 5 years and compared to the volatility DEVy every ve crop
years, which clearly shows that DEVy tracks relatively faithfully the standard devia-
tion of the log change (result available on request). This measure (DEVy) supposes
that agents can correctly forecast the long-term price trend, here assumed as the
5 year moving average, but not the deviation around this moving trend. Thus, it indi-
cates the risk borne in storage over crop years, for instance, or the risk borne by farm-
ers in their long-term investment decisions such as the purchases of machinery and
equipment. As both farmers and storers revenues depend on the crop price level,
large deviations around the forecast trend price implies greater uncertainty.
Figure 1 shows the intra- and inter-annual volatility for wheat, maize, rice, barley,
oats and rye. The chronology of the inter-annual volatilities of all six cereals appears
to show two distinct periods of high volatility the beginning of the 1970s and the late
2000s. With respect to intra-annual volatility, these two periods are less pronounced,
especially for rye where the beginning of the 1970s high volatility period does not
appear at all. Wheat, maize and barley experienced, in addition, a period of high
intra-annual volatility in the late 1980s, beginning of the 1990s and in the mid-1990s,
respectively. Volatility (intra- and inter-) has apparently been high since the
mid-2000s, especially for rye, though in contrast has been low for rice. Finally, periods
of high intra-annual volatility seem to be longer lasting than periods of high inter--
annual volatility. Notice that the indicated years are crop years, meaning that, for
example, 2012 refers to the crop year July 2012 to June 2013 for wheat, barley, oats
and rye, crop year August 2012 to July 2013 for maize, and crop year January 2012 to
December 2012 for rice in all gures and in the remainder of this paper.
Table 3 summarises the basic statistics of the two volatilities. Inter-annual volatility
is, on average, higher than intra-annual volatility. Rye exhibits the lowest intra-
annual volatility among the cereals. Both volatilities are far from normally

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 Volatility in Cereal Prices 565

Wheat Maize
0.16 1.2 0.18 0.4

scale intra-annual scale inter-annual volatility scale intra-annual intra-annual inter-annual scale inter-annual volatility
volatility volatility
0.16
0.14 0.35
1
intra-annual inter-annual
0.14
0.12 0.3

0.8 0.12
0.1 0.25

0.1

0.08 0.6 0.2

0.08

0.06 0.15
0.4 0.06

0.04 0.1
0.04

0.2
0.02 0.05
0.02

0 0 0 0

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Rice Barley
0.35 4 0.16 0.3
scale inter-annual volatility
scale intra-annual scale inter-annual volatility scale intra-annual intra-annual inter-annual
volatility volatility
3.5 0.14
0.3
0.25

3 0.12
0.25

0.2
intra-annual inter-annual 2.5 0.1

0.2

2 0.08 0.15

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0 0 0 0
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Oats Rye
0.2 0.2 0.16 0.4

scale inter-annual volatility scale inter-annual volatility

scale intra-annual
scale intra-annual
0.18 0.18 volatility
volatility 0.14 0.35

0.16 0.16 intra-annual inter-annual

intra-annual inter-annual 0.12 0.3

0.14 0.14

0.1 0.25
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0.1 0.1 0.08 0.2

0.08 0.08
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0 0 0 0
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Figure 1. Intra- and inter-annual volatility from crop year 1959 to 2012

distributed, though individually inter-annual volatility of oats nears normal distribu-

tion. Intra-annual volatility is moderately right skewed while inter-annual volatility is
even more so, meaning that most observed volatilities are concentrated to the left of
the mean, with extreme values to the right. Furthermore, both volatilities are lep-
tokurtic with observed volatilities concentrated around the mean and displaying
thicker tails than normal, reecting a higher probability for extreme values. As a con-
sequence, the regression analysis in the next section is undertaken with logarithmic
volatilities.

2.3. Model and explanatory variable specication

Production shocks are proxied by the volatility of yields, which in turn are typically
inuenced by weather shocks. Weather shocks occur within the crop year and in the

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566 Herve Ott

Table 3
Characteristics of the intra- and inter-annual volatility

Volatility Cereal Obs. Min Max Mean Std. dev. Skewness Kurtosis

Intra-annual All 323 3.77E-5 0.295 0.042 0.041 1.78 7.92

Wheat 54 7.38E-4 0.150 0.043 0.035 1.10 3.95
Maize 54 2.96E-4 0.171 0.048 0.043 1.33 3.92
Rice 53 1.72E-4 0.295 0.049 0.048 2.71 14.31
Barley 54 3.77E-5 0.138 0.042 0.038 1.03 3.08
Oats 54 3.50E-4 0.178 0.047 0.043 1.30 4.42
Rye 54 1.11E-4 0.150 0.023 0.030 2.67 10.31
Inter-annual All 318 9.54E-5 3.606 0.142 0.276 7.78 85.87
Wheat 53 0.014 1.017 0.151 0.167 3.07 15.24
Maize 53 2.22E-3 0.377 0.097 0.086 1.33 4.20
Rice 53 9.54E-4 3.606 0.398 0.576 3.76 19.95
Barley 53 1.85E-3 0.283 0.068 0.064 1.31 4.53
Oats 53 2.29E-3 0.174 0.061 0.039 0.52 2.99
Rye 53 3.69E-3 0.368 0.078 0.078 1.94 6.74

case of cereals should not normally aect the following crop year harvest. For illustra-
tion, suppose that in a given crop year t the annual price equals a normal average
price. In the next crop year t + 1 a negative weather shock (optimal weather condi-
tions) will drive the cereal price to a peak (low level). Typically, the inter-annual vola-
tility of the cereal price considered will surge. Thus, supply shocks are crucial drivers
of inter-annual volatility. The dataset includes variations in the area harvested, which
depends partly on weather shocks and also reects changes in farmers planting deci-
sions. As with the yield shock, this variable should drive mostly inter-annual volatility
because it is typically conned to the crop year. Overshooting of supply from one
crop-year to the next proxied by the variability in the area harvested increases the
inter-annual volatility.
In contrast, demand shocks (cereal demand, global commodity demand) and stock
demand shocks (interest rate) propagate into higher volatility within the crop year. A
short-lived demand shock which ceases before the start of the following crop year can
aect the intra-annual volatility. A longer-term shock which spreads beyond the crop
year is also likely to aect intra-annual volatility but for more than 1 year. Crude oil
price shocks and exchange rate shocks can both aect intra-annual volatility and can
be linked to demand side shocks as well as to supply side shocks. However, medium
and longer-term movements (and not shocks) of crude oil price and exchange rates
may also have an impact on the oscillation of the average crop year price from one
crop year to the next. Typically the average crop year price is aected by the cost of
energy (crude oil) because producers are conned in the crop year cycle production
(planting, harvesting and selling). By the same token, the international marketing
chain of agricultural commodities relies on the crop year. Thus, medium and long-
term exchange rate appreciation (depreciation) is integrated into the crop year price,
which in turn might aect inter-annual volatility.
Finally, some conditions prevailing in the cereal market might be a catalyst to these
shocks. First, the state of the stock in the cereal market might be the prerequisite con-
dition for a shock to materialise into cereal price volatility. In particular, an empty
stockpile cannot act as a buer to supply or demand shocks in the event of a low

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harvest so the transmission shock to cereal price volatility might be real. In contrast,
large stocks allow mitigating supply or demand shocks and so the transmission to vol-
atility may not happen. Second, a deep and well functioning international market with
large trade volumes, smooths spatial re-allocations and can reduce the consequence of
shocks on cereal price volatility, though whether this aects inter- or intra-annual vol-
atility is an empirical question. Third, the highly liquid derivative market and the
numerous traders and their High Frequency Trading may cause larger short-term
price swings and so aect intra-annual volatility. However, the derivative market may
also reduce price swings due to its price discovery function, and so stabilise price over
crop years (inter-annual volatility) or even within crop years (intra-annual volatility).
Shocks are dened here as volatilities (as opposed to movements in the raw vari-
able). The volatility of the explanatory variable-series (e.g. yield shock, consumption
shock) was determined by calculating their volatility using the methods explained in
section 2.2. When the variable-series were monthly (respectively annual), the intra-
annual volatility (respectively inter-annual volatility) was chosen to proxy the shock.
The frequency of the raw variable-series is given in Table 1. All other variable-series
were transformed to crop years by averaging the appropriate 12 monthly data. The
data on production, consumption, and stocks were already by crop year. GDP, which
in its raw form is by calendar year was unchanged for rice but transformed articially
to crop year by summing 7/12 of current calendar year t with 5/12 of the next calendar
year t + 1 for crop year July to June (crop year August to July).
The proxies chosen as the potential explanatory variables are:
1 Yield shock should reect weather shocks (and thus climate change eects) of each
cereal (wheat, maize, rice, barley, oats, rye). Another proxy, area harvested shocks,
is included (historical series for area planted were not available), to reect changes
in producers decisions.
2 Demand shocks of the six cereals are proxied by the following: (i) domestic feed
consumption shock; (ii) consumption FSI (feed, seed and industrial) shock; and
(iii) domestic consumption (total use) shock.
3 Stock demand shock is supposed to be driven by interest rate shocks. Following
Frankel (2006), the real interest rate is dened as the 1 year Treasury bill interest
rate minus the previous years US CPI ination rate.
4 Shocks occurring in the overall world commodity market due to emerging econo-
mies like China and India are proxied by world GDP2 shock. In addition, the inu-
ence of neighbouring markets connected to commodities like energy and currency
markets were also investigated in terms of shocks and price movements, i.e. the
price in its raw form. Thus, the proxies are: crude oil price3 and US eective
exchange rate expressed in terms of shocks and price movements. Regarding the
eect of bio-fuel mandates, as shown in Meyer and Thompson (2010), the demand
for feedstock to produce ethanol does not drive the volatility of food commodities,
but rather the price of crude oil (threshold eect).
5 Finally, following Gilbert (2010b), the inuence of the derivatives market is proxied
by open interest of all market participants. Soft red winter wheat and yellow maize
CBOT contracts were considered. The Dow Jones-UBS and the Goldman Sachs
S&P GSCI commodities indexes do not contain rice, barley or oats because they

2
The world GDP was deated by the US GDP deator.
3
The price of crude oil was deated by the US CPI (consumer price index).

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are not liquid enough, and there is no derivative contract for rye. Consequently, a
weighted open interest of soft red winter and corn contract was constructed with
equal weight for each contract. This 50% weight replicates approximately the rela-
tive weight of maize and wheat (including hard red winter) within the S&P GSCI
commodity index.
Shocks might only materialise into higher cereal price volatility in an unfavourable
cereal market environment such as: low stocks, low stock-to-use ratio, dysfunctional
and thin international cereal market. Consequently, the proxies above were multiplied
by: (i) a scarcity indicator, i.e. the inverse of the ending stock level of each cereal, as in
Geman and Ohana (2009), or the stock-to-use ratio to also take into account the even-
tual pressure of the demand, (ii) the thinness of the international cereal trade volume,
i.e. the inverse of the export share (total export volume divided by world production)
which should take into account trade restriction policies (export bans) or structurally
thin international markets, (iii) the Herndahl index, i.e. market concentration indica-
tor based on the number of exporting countries.

2.4. Unit root tests

Unit root tests were performed to assess the stationarity of the variables. The Breitung
panel unit root test (Breitung, 2000; Breitung and Das, 2005) was used as it shows
substantially more power than other panel unit root tests. In the null hypothesis all
cereals contain a unit root. The test also allows the inclusion of a xed eect and a
time trend. When a deterministic time trend is included, the alternative hypothesis
supposes that the series is stationary around a trend. When no time trend is included,
the alternative hypothesis supposes that the series is stationary around a mean. The
results are reported in Table 4, and the p-values show that all variable-series are sta-
tionary or trend stationary at the 10% condence level at least.

3. Empirical Results
The purpose of this analysis is to derive an overall conclusion for the cereal sector and
not for each cereal specically. Two possible alternatives were considered. The rst
would have been to estimate each cereal separately in a time-series framework (hetero-
geneous setting) and then to average the coecient estimates as suggested in Pesaran
and Smith (1995): the so-called mean group estimator (MGE).4 The second was to use
pooled estimators (homogeneous setting). However, neglecting slope heterogeneity
can lead to inconsistency as shown in Robertson and Symons (1992). The primary
source of the inconsistency is due to the autoregressive term (lagged dependent vari-
able) as shown by Pesaran and Smith (1995). In the static case, assuming a common
slope coecient does not lead to major inconsistency. This study shows that using an
autoregressive model to analyse the factors driving commodity price volatility is not
justied (see Table 5, Wooldridge Wald test). Furthermore, the lack of robustness of

4
Credit used to be given to this option at the beginning of the empirical investigation because
the null hypothesis of coecient equality among cereals was rejected at 5% for both intra and
inter regressions; the Roy-Zellener test for poolability as suggested by Baltagi (2001) was per-
formed. The heterogeneous setting was eventually abandoned due to the unreliability and insta-
bility of the dierent coecient estimates.

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Table 4
Breitung panel unit root tests

Variable-series Time trend Statistics: k* P-value

Intra-annual volatility (log) No 3.94 0.00

Yes 5.98 0.00
Inter-annual volatility (log) No 11.30 0.00
Yes 10.20 0.00
IV1: cereal price: forward minus current No 6.87 0.00
Yes 6.77 0.00
IV2: cereal price: forward over current No 9.97 0.00
Yes 8.46 0.00
IV3: cereal price: forward over current (log) No 7.17 0.00
Yes 3.11 0.00
IV4: level of beginning stock (log) No 1.67 0.04
Yes 1.61 0.05
Scarcity indicator 9 yield shock (log) No 1.44 0.07
Yes 1.63 0.05
Scarcity indicator 9 domestic feed No 1.24 0.10
consumption shock (log) Yes 1.63 0.05
Scarcity indicator 9 real interest rate shock (log) No 4.52 0.00
Yes 4.44 0.00
Thin international cereal trade 9 US exchange No 5.99 0.00
rate shock (log) Yes 6.08 0.00
Stock-to-use ratio 9 US exchange rate (growth rate) No 0.61 0.27
Yes 1.31 0.09
Scarcity indicator 9 crude oil price shock (log) No 0.62 0.27
Yes 1.35 0.09
Thin international cereal trade 9 crude oil No 2.69 0.00
price shock (log) Yes 3.23 0.00
Thin international cereal trade 9 crude oil No 1.34 0.09
price in level (log) Yes 3.14 0.00
Wheat and corn open interest volatility (log) No 6.15 0.00
Yes 3.37 0.00

Note: *Lambda robust to cross-sectional correlation.

the parameter estimates in time series estimators (heterogeneous setting) has been
observed in numerous applied studies (e.g. Baltagi and Grin, 1997). Even in a
dynamic setting the pooled estimators outperform their heterogeneous counterparts
(e.g. MGE) in terms of stability, reliability and out-of-sample forecasting properties
as shown in Baltagi et al. (2000).5 Highly unstable and unreliable cereal coecient
estimates would have been a major drawback as the purpose of the study is to come
to a robust conclusion for the cereal sector as a whole. All these elements support the
use of panel econometrics for this case.
Cereal idiosyncrasies are controlled including the specic market environment,
namely: the scarcity indicator, the stock-to-use ratio, the thinness of the international

5
Baltagi et al. (2000, p. 125) argue, even with a relatively long time series, heterogeneous mod-
els [. . .] tend to produce implausible estimates with inferior forecasting properties. The eciency
gains from pooling appear to more than oset the biases due to neglected heterogeneity.

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Table 5
Inference tests of the two regressions

Regression Test d.&d.f. Stat. H0 hypothesis P-val.

Intra-annual Wooldridge Wald test F(1,5) 0.10 Errors: no serial 0.77

correlation
Kleibergen-Paap rank LM v2(3) 117.6 IV set 0.00
under-identied
Hansen J over-identication v2(2) 0.18 IV set valid 0.91
(orthogonal errors)
Inter-annual Wooldridge Wald test F(1,5) 0.06 Errors: no 0.82
serial correlation
Kleibergen-Paap rank LM v2(4) 18.72 IV set under-identied 0.00
Hansen J over-identication v2(3) 1.00 IV set valid 0.80
(orthogonal errors)

cereal trade, and the Herndahl index. For instance, oats, rye and even rice are hardly
major international grains, though rice is a major cereal but its international market is
noticeably dierent to the other major cereal markets. However, excluding them
because their production is low and the volume traded on the international market is
modest does not seem justied. The low export share (thinness of the international
rice market) should pick up this idiosyncrasy. Other aspects of the idiosyncrasies of
wheat, maize, rice, barley, oats and rye are picked up by the xed eect and the cer-
eal-specic time trend. Finally, intra-annual volatility and inter-annual volatility were
regressed against all potential explanatory variable-series. Initially, the regression was
specied in its most heterogeneous form (cereal-specic time trend and xed eects),
and the time trend was only removed under the condition that it was statistically insig-
nicant at any conventional level and did not alter the coecient estimates.
The two-step GMM (generalised method of moment) estimator (Hansen, 1982) was
used by pooling the dierent cereals. The performance of the pooled estimator
depends crucially on the treatment of the endogeneity issue, as argued in Baltagi et al.
(2000). Indeed, greater price volatility (i.e. more risk) leads rational agents (e.g. agro-
industrialists) to increase stocks to be able to meet their needs without fearing the risk
of disruption (convenience yield) (see for instance Pindyck, 2004). Thus, the stock is
endogeneous to volatility. The endogeneity of the scarcity indicator (inverse of stock
level) multiplied by the supply or demand shocks and the volatility of the open interest
(derivatives market) was treated by means of IV techniques. The set of IVs chosen is
basis prices (forward price minus current price) in dierent forms to gain more IVs
and so avoid the under-identication problem. The full set of IVs is reported in
Table 4 under the heading variable-series. The quality of the IVs set depends on its
relevance and validity. First, regarding the relevance of the IVs. The price basis is a
trigger for storers to change stock levels. If the price basis is high (normally associated
with a sharp contango situation), then there is an incentive for hoarder (or specula-
tors) to stockpile, and vice versa. Thus the chosen IVs and the level stored (stocks) are
correlated. Second, valid IVs are orthogonal with the explained variable-series (vola-
tility of the cereals prices). Pindyck (2004) shows a relationship between volatility and
price level (when the stocks increase due to increased volatility, the spot price
increases as well), but not with the price basis. So there is no reason to suppose that
the price basis will be systematically correlated with price volatility.

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In the intra-annual regression, the IV non log of forward minus spot price did
not add any information and was therefore dropped to improve the quality of the IV
set. The relevance and validity of the IV set was conrmed. As reported in Table 5,
the null hypothesis of under-identication of the Kleibergen and Paap (2006) rank
LM test is rejected at 5% for both regressions. The orthogonality of the errors cannot
be rejected at any conventional level according to the Hansen (1982) J over-identica-
tion test. Although the standard errors are consistent, the absence of serial correlation
was checked by means of the Wooldridge (2002) Wald test to show that an autore-
gressive term in the specication is not justied, contrary to Balcombe (2011) and
Serra and Gil (2013). The post-regression tests reported in Table 5 imply that the
regression is well specied, and the case of endogeneity was well addressed, suggesting
that the coecient estimates are reliable.
The results of the intra-annual and inter-annual volatility specications are
reported in Table 6 and the gures in parentheses are the respective P-values under
the assumption that the coecient estimate equals zero. The centred6 R2 equals
0.21 and 0.25 for the intra-annual and inter-annual volatility, respectively, which
implies a relatively good degree of explanatory power for a panel with six sections
(cereals). The signs of the coecient estimates are consistent with expectations, with
the exception of the open interest rate (derivative market) volatility, which is nega-
tive for intra-annual volatility and positive for inter-annual but statistically insignif-
icant at any conventional level in either regression. Shocks in world raw material
demand, proxied by the volatility of the GDP, are not signicant in either regres-
sion. Finally, the dierent factors multiplied by the Herndahl index are also not
signicant.
The empirical results show clearly that the conditions faced by the cereal market
when a shock occurs play a major role. Large stocks (low scarcity indicator) as well as
a deep and well-functioning international trade market (large export shares relative to
production) have a stabilising eect on both within- and between-crop year prices.
First, large stocks can absorb both demand and supply shocks, acting as a buer to
weaken price movements. This conforms to the theory of storage pioneered by Work-
ing (1949) and applies to both intra- and inter-volatilities. Price dispersions within a
crop year are less frequent when stocks are abundant since larger stocks moderate
traders expectations of the consequences of news on supply or demand shocks. Fur-
thermore, the large grain reserve carried from the current to the new crop year
smoothes the price and thus lowers the inter-annual volatility. Similarly, as stocks
smooth inter-temporal allocations of cereals, so does trade smooth spatial re-alloca-
tions. This, in turn, mitigates international price movements and thus volatility, as
argued by Jacks et al. (2011). International trade lowers volatility of international cer-
eal prices whatever the time horizon (within or between crop years), and thin trade
exchanges render the market vulnerable to any kind of shock. The inverse of the
export share proxies structural thinness of a given cereal market and its possible
change to a more international and integrated market over time. It also proxies the
short-term disruption of markets due to sporadic policy intervention such as export
bans or other temporary distortive measures that impede the ow of international
trade movements. Thus, the signicance of some factors when multiplied by the
export share in both regressions (intra- and inter-annual volatility) is not unexpected.

6
The centered R2 is relevant as constants (xed eects) are included in the regression.

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Table 6
GMM panel coecient estimates

INTRA annual INTER annual

volatility volatility

Cereal supply shock (volatility)

Scarcity indicator 9 yield shock _(a) 0.19
(log) (0.00)(b)
Scarcity indicator 9 area _ _
harvested shock (log)

Cereal demand shock (volatility)

Scarcity indicator 9 domestic 0.23 _
feed consumption shock (log) (0.00)
Scarcity indicator 9 FSI (feed, _ _
seed, industrial) consumption
(log)
Scarcity indicator 9 total _ _
domestic consumption (log)

Cereal stock demand shock (volatility)

Scarcity indicator 9 real 0.08 _
interest rate shock (log) (0.04)

Macro, petrol and exchange rate shocks

Scarcity indicator 9 GDP _ _
shock (log)
Scarcity indicator 9 US _ _
exchange rate shock (log)
Thin international cereal 0.13 _
trade 9 US exchange rate (0.05)
shock (log)
Stock-to-use ratio 9 US _ 0.17
exchange rate in growth rate (0.00)
Scarcity indicator 9 crude oil 0.22 _
price shock (log) (0.00)
Thin international cereal _ 0.03
trade 9 crude oil price shock (0.32)
(log)
Scarcity indicator 9 crude oil _ _
price in level (log)
Thin international cereal _ 0.26
trade 9 crude oil price in level (0.00)
(log)
Derivative market information ow
Weighted wheat and corn open 0.07 0.30
interest (volatility) (log) (0.22) (0.32)
Fixed eects
Wheat Constant 1.14 0.59
(0.52) (0.29)
Time _ _

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Table 6
(Continued)
INTRA annual INTER annual
volatility volatility

Maize Constant 0.64 1.03

(0.13) (0.00)
Time 0.01 _
(0.22)
Rice Constant 0.49 1.08
(0.26) (0.01)
Time 0.04 0.04
(0.00) (0.00)
Barley Constant 1.45 2.20
(0.00) (0.00)
Time trend 0.02 0.02
(0.29) (0.09)
Oats Constant 1.49 1.97
(0.00) (0.00)
Time trend _ _

Rye Constant 2.96 1.55

(0.00) (0.00)
Time trend 0.01 0.02
(0.36) (0.19)
Regression statistics
Uncentered R2 0.91 0.86
Centered R2 0.21 0.25
Root MSE 1.223 1.119
P-value of F test 0.00 0.00
Number of observations 312 312

Notes: (a) _ means not signicant at any conventional level and the omission does not alter the
other coecient estimates; (b) in parentheses are the P-values under the assumption that the
true estimated coecient estimate equals zero.

The empirical results also show that when the level of cereal stock is low supply
(yield) shocks propagate into higher volatility between crop years but have no eect
within the crop year. This is explained by the fact that weather shocks are conned to
the crop year and only occur once during the crop year. In contrast, the estimates
show that cereal demand (feed) shocks and cereal stock demand shocks (interest rate)
are signicant drivers of intra-annual volatility but not for inter-annual volatility.
These types of shocks typically aect the monthly price oscillation within the crop
year.
Interestingly, in a cereal market under stress (low stock-to-use ratio) exchange rate
movements inuence the inter-annual volatility, while exchange rate shocks amplied
by dysfunctional international trades (like export bans) aect intra-annual volatility.
First, sharp short-term exchange rate uctuations of the US dollar against other cur-
rencies almost instantaneously harm trade ows and drive up volatility within the
crop year but to a lesser extent beyond. Second, as most of the international trade in

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agricultural commodities is denominated in US dollars, depreciation of the US dollar

against other currencies reduces import prices and thus fuels demand, which, in turn,
reduces the stock-to-use ratio. Exchange rate movements (depreciation/appreciation)
exhibit long-term cycles over several years. For instance, the US eective exchange
rate had been appreciating from 1973 to 2000 without interruption, and has since
depreciated to date with an interruption in 2009. This pattern suggests that the US
eective exchange rate cycles are long lasting, and as a consequence, their impact is
mainly on inter-annual volatility.
The same holds for the crude oil price shocks, which inuence the intra-annual
volatility while crude oil price movements inuence the inter-annual volatility. It is
acknowledged that crude oil price shocks amid cereal penury (high scarcity indica-
tor) are statistically signicant in explaining intra-annual volatility. Volatility spill-
over from the typically volatile fossil fuel market to the cereal market via the
ethanol market is realistic as crude oil prices can change quite markedly in 1 month.
Although the GDP volatility is not signicant, the emerging economies might cause
larger crude oil price volatility and so drive up intra-annual volatility when stocks
are low. The estimates also show that the movements of the price level of crude oil
inuences inter-annual volatility. The coecient was signicant when multiplying
the level of crude oil price by the thin international cereal trade at 5% (Table 6), but
was also signicant when multiplied by the stock-to-use ratio at 10% (not reported).
A strong demand in fossil fuel by the emerging economies can directly drive up the
crude oil price, which in turn will induce an increase in the demand of bioethanol
and so of the cereal consumption leading to larger inter-annual volatility. However,
crude oil price movements not only induce new demand to produce bioethanol but
also impact the input cost in cereal production. Thus, the increase in cereal demand
and the increased production costs tighten the market clearing conditions between
supply and demand, which, in turn lowers the stock-to-use and increases the scarcity
indicator provoking more frequent peaks and, consequently, reinforcing higher
inter-annual volatility.
The dispersion importance, i.e. the contribution of each factor to R2 was also
measured. As explained in Gr omping (2006), the factors are typically correlated,
and depending on the order of the explanatory factors in the regression, the rela-
tive importance of the factors diers. The method of Lindeman et al. (1980) pro-
vides meaningful results by averaging over orderings (sequential R2s), and so the
measured relative importance is ordering independent. Furthermore this method
considers both the unique contribution of the factor and its contribution when
combined with other factors. The proportionate contribution of each stochastic
explanatory factor is shown in Figure 2 for the intra- and inter-annual volatility
regressions. The sum of the contribution of each explanatory factor equals the R2
of the respective regression.
First, Figure 2 shows that the major drivers of inter-annual volatility are supply
(yield) shocks (essentially due to extreme weather events) amplied by low cereal
stocks. The other factors, by level of importance, that explain inter-annual volatil-
ity are crude oil and exchange rate movements. When the cereal market is under
stress from a low stock-to-use ratio and is characterised by a thin international cer-
eal trade, exchange rate movements and crude oil price movements explain propor-
tionally more than half of the R2 among the stochastic factors. Thus, the increase
in global international demand of crude oil (including ethanol demand) and the
depreciation of the US exchange rate are quantitatively substantial factors. Second,

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 Volatility in Cereal Prices 575

Intra-annual volatility Inter-annual volatility

Scarcity indicator x Yield shock

Scarcity indicator x Domesc feed consumpon shock

Scarcity indicator x Real interest rate shock

Thin internaonal cereal trade x US exchange rate shock

Stock to use rao x US exchange rate

Scarcity indicator x Crude oil price shock

Thin internaonal cereal trade x Crude oil price shock(*)

Thin internaonal cereal trade x Crude oil price in level

Weighted wheat and corn open interest volality(*) Weighted wheat and corn open interest volality(*)

0 2 4 6 8 10 12 0 1 2 3 4 5 6 7 8

Figure 2. Proportionate relative importance of the stochastic factors (% contribution to R2) of

intra- and inter-annual volatility based on the regressions in Table 6.
Note: *Coecient estimate (Table 6) not signicant at conventional level.

intra-annual volatility depends overwhelmingly on crude oil price shocks, while cer-
eal demand shocks and real interest rates are quantitatively secondary factors.
These shocks propagate into higher intra-annual volatility when the level of stock
is too low to act as a buer in mitigating price swings within crop years. The other
quantitatively secondary factors explaining intra-annual volatility are the exchange
rate shocks combined with disruptive trade measures of policy intervention, e.g.
export bans or import subsidies. Finally, activity in the derivatives market appears
to have no eect either on price dispersions within a crop year or between crop
years according to these estimates as it is statistically insignicant. Even if it were
signicant, quantitatively it explains a very minor part of R2 in both intra-annual
and inter-annual regressions. While the proxy for volatility as weighted open inter-
est of soft red winter wheat and corn at the CBOT (Chicago Board of Trade) can
be challenged, substitution of the scalping index7 and the trading volume did not
change the results.

4. Summary and Conclusions

Intra-annual volatility (within crop year) and inter-annual (between crop years) vola-
tility are measured and regressed against a set of potential explanatory variables in a
panel consisting of data for six cereals: wheat, maize, rice, barley, oats and rye. Using
a crop year sample from 1960 to 2012, GMM estimators are employed and the endo-
geneity issue is addressed with a valid and relevant IV set. This panel analysis gives an
overall picture of the cereal sector and does not pretend to generate particular conclu-
sions for each specic cereal.
The empirical results show clearly that large cereal stocks act as a buer against
adverse (demand or supply) shocks and thereby mitigate price dispersion within and
between crop years. By the same token, a structurally deep and integrated interna-
tional cereal market absorbs exchange rate shocks and crude oil price movements and
so reduces signicant swings in cereal prices within and between crop years. The

7
Scalping index is the trading volume to open interest and proxies the opportunities of prot
making on small price changes.

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576 Herve Ott

available historical records from the dataset show that the scarcity ratio reached a
peak in 2007 and seems to be a major reason for the volatility increase observed since
the mid-2000s while the sporadic trade restriction policies (e.g. export bans) amplied
the volatility surge within and between the crop years.
The estimates also show that cereal demand shocks and stock demand (interest
rate) shocks primarily inuence the intra-annual volatility but quantitatively are not
the most important factors. The shocks in the currency market (exchange rate) and
particularly the fossil fuel market shocks translate into intra-annual volatility when
the cereal market is under stress (low cereal stocks, dysfunctional international
trades). In contrast, supply (yield) shocks primarily inuence inter-annual volatility.
Thus, yield shocks primarily due to extreme weather events propagate into larger
price dispersions between crop years. As the production shocks occur typically
between crop years, they logically impact inter-annual volatility. If climate change
means that the frequency of extreme weather events will increase in the future, then it
is to be expected that inter-annual volatility will increase signicantly.
Exchange rate shocks and crude oil price shocks propagate into the cereal market
by inating the price swings within the crop year when the scarcity of the cereal stock
level is high and disruption of international cereal trades occurs. Historically,
exchange rate shocks are a common feature, the last occurring in 2008. Regarding the
fossil fuel market, the volatility of crude oil price experienced two peaks in the begin-
ning of the 1970s and also in the mid-1980s. The following peaks (e.g. 2008) are much
more moderate (half of the previous ones) but their occurrences have increased since
the mid-2000s. These elements help to understand the increase of the intra-annual vol-
atility in the cereal sector over the last 10 years.
The empirical results also show that the US exchange rate depreciation and peaks
in the level of crude oil price drive up the inter-annual volatility when the cereal mar-
ket is under stress (low stock-to-use ratio, thin volume in international cereal trades).
Also it is realistic to assume that longer-term growth in crude oil prices will fuel the
demand for ethanol and agricultural commodities. Moreover, the trade weighted US
dollar index has continuously depreciated without interruption from 2000 onwards
(with the exception of 2008). Thus, over the last 10 years the increase in cereal
demand amplied by a declining US eective exchange rate lowered the stock-to-use
ratio and propagated into higher between crop year price dispersion in the cereal
market.
Finally, activity in the derivative market appears to have no eect either on price
dispersions within or between crop years.
To conclude, recent history shows that intra- and inter-annual volatilities have
increased since the mid-2000s. This is explained by a combination of the strong
demand for cereals due to the biofuel mandate and the world consumption of raw
materials in the emerging economies as well as the decrease in cereal production (e.g.
production of wheat decreased from 1997 to 2006). As a result, the low level of stock
could not act as a buer against the weather shocks occurring in the mid-2000s. Inter-
annual volatility was also aected by the depreciation of the US dollar from 1998 to
2008 and the increase in crude oil price from 1998 until today. In contrast, intra-
annual volatility was more aected by short-term shocks (crude oil, exchange rate,
demand) that occurred especially after the mid-2000s. All these elements imply that
the current debate on factors causing increased volatility should rst focus on the type
of dispersion (within- vs. between-crop years) being considered.

2014 The Agricultural Economics Society

 Volatility in Cereal Prices 577

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