This study aims to investigate the role of international price volatility and inventories on domestic market price dynamics in the case of agricultural commodities.
A structural model is employed to uncover relationships among commodity price, price volatility, inventories and convenience yield. Monthly producer price data along with annual data on trade, consumption, inventories and tariffs for 71 countries and 13 commodities covering 2010–2019 are assembled to estimate the model. With a first-stage Least Absolute Shrinkage and Selection Operator (LASSO) estimator to identify the best instrument set, a nonlinear approach is used to estimate the model.
Results show that international market information plays a critical role in domestic market price dynamics. International price volatility has a stronger effect on domestic prices than that of international inventories.
Current upheaval in commodity markets requires an understanding of how prices move together and inventories affect that movement. A country's internal price is not independent of the effects of global market events.
Although hypotheses exist that global market information (volatility and inventories) helps countries manage domestic commodity prices, there have been limited studies on this relationship, especially with a structured model and cross-country data.
