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Abstract
A panel of annual information between 1960 and 2006 for approximately 50 different commodity prices and some other variables and sources is used to tests the determinants of commodity prices. According to the evidence, interest rates seem to maintain a negative relationship with commodity prices.
Acknowledgements
The opinions expressed here do not necessarily correspond either to the Banco de la República or its Board of Directors. We thank the Editor and an anonymous referee for useful suggestions. We also thank the seminar participants at FENADECO hosted at Universidad Libre in Pereira, Banco de la República in Medellín and Bogotá, CEMLA in México, D.F. and the Workshop of Eurosystem and Latin American Central Banks, The global and regional impact of financial and commodity price developments, European Central Bank, Paris. Usual disclaimers apply.
Notes
1 New oil wells and mines take between 7 and 10 years to come on stream. This might suggest that commodity prices may remain persistently high.
2 Ocampo and Parra (Citation2008) add some other factors ‘…that influence recent prices, including the demand for bio fuels, subsidies and protection measures, droughts (particularly in Australia) and a few export restrictions (particularly for rice) or taxes (such as in Argentina)’. However, these explanations will not be considered here explicitly regardless of their notable importance.
3 However, the more recent statistics of oil prices would be over their historical maximum.
4 In this case, prices are viewed as a bubble, driven by hedge funds and other speculators characterized as having extrapolative expectations. Société Générale (2006) [cited by International Monetary Fund, Citation2006 states that ‘… speculative forces have largely decoupled metal prices from market fundamentals’.
5 However, Frankel maintains that real interest rate is not the only determinant (Frankel, Citation2006, p. 5 and p. 9).
6 They suggest that the slowdown in commodity prices observed from 1984 up to the beginning of 1990s was not determined by the dynamics of economic activity and the real exchange rate of the US dollar. Instead, the boom of exports of primary products and the change in the net international demand for commodities of the former Soviet Union appeared as plausible determinants of commodity prices.
7 In the sense that, as we stated in the Introduction, higher interest rates will expand the supply of commodities since the incentive for extraction will also be higher.
8 Where I is the identity matrix and M a matrix with ones in the diagonal and ones just at the right side of the diagonal.
9 The list is as follows: aluminium, bananas, barley, beef, coal, cocoa beans, coconut oil, coffee, copper, copra, cotton, fish meal, gasoline, gold, groundnuts, groundnut oil, iron ore, jute, lamb, lead, linseed oil, maize, natural gas, nickel, olive oil, oranges, palm kernels, palm oil, pepper, petroleum, plywood, phosphate rock, potash, poultry, rice, rubber, shrimp, silver, sisal, sorghum, soybeans, soybean oil, sugar, sunflower oil, swine, tea, tin, tobacco, wheat and zinc. See the Appendix for data sources.
10 Which is equal to the demand for commodity i under the assumption that the commodities market clears.
11 A cobweb-type model might be more appropriate.