AGRICULTURAL COMMODITY MARKETS: THE ROLE OF POLICY, INSTITUTIONS AND TRADE

• Sponsoring Institution: National Institute of Food and Agriculture
• Project Status: COMPLETE
• Funding Source: HATCH
• Reporting Frequency: Annual
• Accession No.: 1004156
• Project Start Date: Oct 1, 2014
• Project End Date: Sep 30, 2019
• Program Code: [(N/A)]- (N/A)

Recipient Organization
UNIVERSITY OF CALIFORNIA, DAVIS
410 MRAK HALL
DAVIS,CA 95616-8671

Performing Department
Agricultural and Resource Economics

Non Technical Summary
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.

Animal Health Component

100%

Research Effort Categories

Basic

(N/A)

Applied

100%

Developmental

(N/A)

Classification

Knowledge Area (KA)	Subject of Investigation (SOI)	Field of Science (FOS)	Percent
603	1510	3010	50%
606	1530	3010	50%

Knowledge Area
603 - Market Economics; 606 - International Trade and Development;

Subject Of Investigation
1510 - Corn; 1530 - Rice;

Field Of Science
3010 - Economics;

Keywords

commodity prices

futures markets

international commodity trade

commodity policy

Goals / Objectives
The recent sharp increase in agricultural commodity prices opens up the possibility of significant changes in government policies and institutions in both developed and developing countries. Increased attention to food security concerns raises new questions regarding domestic policy (e.g., corn based ethanol), institutions (e.g., role of futures markets), and trade policy (e.g., export quotas). Policies and institutions no doubt have a significant influence over agricultural commodity markets, with international trade as the key linkage. For instance, countries like Argentina, China, Russia, and Vietnam have recently imposed controls on agricultural exports, including tariffs and quotas, in order to constrain domestic price increases.These policies aimed at insulating domestic markets from world supply and demand forces have unintended impacts on world markets, such as raising prices and increasing price volatility. On the institutional side, the expanded volume of commodity futures trading and the role of hedge and index funds in these markets is another recent development that is potentially important for price formation in agricultural markets. Just in the past five years, commodity funds have increased the amount of money invested in commodity futures by 20- fold. Other important institutional changes include regional and multilateral trade agreements and economic reform in large countries like China.International markets drive the profitability of California agriculture. This project will strengthen the ability of California's agriculture to better understand commodity market forces, including the market effects of changes in domestic and international policy, and corresponding institutional reform. California has a comparative advantage in the production of high-valued agricultural commodities and in the absence of trade barriers, growth prospects are favorable for California agriculture. However, despite ideal growing conditions and the technical knowhow, the global markets, institutional developments, and policy will ultimately determine whether or not the California agricultural sector is profitable and internationally competitive.This project will help build an economics knowledge base of the importance of the main factors driving global agricultural commodity markets and the consequent implications for California agriculture.

Project Methods
The purpose of this project is to enable leaders in California agriculture to better understand how the global agricultural commodity markets are affected by changing market forces, policies, and institutions. Output from this research will ideally assist the California industry in devising optimal investment and policy strategies to maximize the state's economic returns from agricultural production. The various approaches to be taken include:• Evaluate WTO trade negotiations and regional trade agreements (e.g., the Trans Pacific Partnership) for likely impact on export markets for California products as a result of reduced trade distorting policies such as import tariff-rate quotas, export subsidies, export taxes, and phytosanitary measures.• Quantitative economic research will be conducted to measure the economic impact of farm subsidies and trade distorting policies, including the use of trade remedy laws.• Global assessment of agricultural trade issues with the aim of identifying key institutional and policy developments in important trading partners for California, including China, Japan, Canada, and Mexico. Such developments could include the adoption of biotechnology in food crops such as rice and wheat, the reduced role of state trading, and trade policy developments such as Argentina's export controls.• Evaluate price formation in agricultural markets and the role of policy and institutional change on price behavior. The role of futures and options markets will be a consideration, as that is the avenue being used by hedge and index funds to invest in agricultural commodities.

Progress 10/01/14 to 09/30/19

Outputs
Target Audience:My target audience is the domestic and international agricultural community, broadly defined. Changes/Problems: Nothing Reported What opportunities for training and professional development has the project provided? Nothing Reported How have the results been disseminated to communities of interest?These results have been transmitted through publications and presentations at conferences. What do you plan to do during the next reporting period to accomplish the goals? Nothing Reported

Impacts
What was accomplished under these goals? Mandatory labeling of foods containing genetically engineered (GE) ingredients is an important policy issue in the U.S. and impacts international trading relationships. The introduction of a 2016 Vermont law mandating GE labeling serves as a quasi-natural experiment on the economic effects of mandatory GE labeling. We investigate the market response in the U.S. sugar market. Almost all beet sugar is GE, while cane sugar is GE-free. Prior to 2016, cane and beet sugar were regarded as homogenous. However, in mid 2016, refined cane sugar began selling at a premium over refined beet sugar. We find the mandatory labeling initiative generated about a 13% price discount for beet sugar and a premium of about 1% for cane. Food manufacturers' concerns over mandatory labeling caused them to switch inputs. This resulted in a redistribution of welfare in the U.S. sugar industry. In another paper we study commodity price shocks. Recent booms and busts in commodity prices have generated concerns that financial speculation causes excessive commodity-price comovement, driving prices away from levels implied by supply and demand under rational expectations. We develop a structural vector autoregression model of a commodity futures market and use it to explain two recent spikes in cotton prices. In doing so, we make two contributions to the literature on commodity price dynamics. First, we estimate the extent to which cotton price booms and busts can be attributed to comovement with other commodities. Finding such comovement would be necessary but would not be sufficient evidence to establish that broad-based financial speculation drives commodity prices. Second, after controlling for aggregate demand and comovement, we develop a new method to point identify shocks to precautionary demand for cotton separately from shocks to current supply and demand. To do so, we use differences in volatility across time implied by the rational expectations competitive storage model. We find limited evidence that financial speculation caused cotton prices to spike in 2008 or 2011. We conclude that the 2008 price spike was driven mostly by precautionary demand for cotton, and the 2011 spike was caused by a net supply shortfall.

Publications

• Type: Journal Articles Status: Published Year Published: 2018 Citation: Carter C.A., and K. A. Schaefer Impacts of Mandatory GE Food Labeling: A Quasi-Natural Experiment" American Journal of Agricultural Economics 101 No.1. (2018): 58-73.
• Type: Book Chapters Status: Published Year Published: 2018 Citation: Carter, C.A. "International Trade and California's Agriculture" chapter in "California Agriculture: Dimensions and Issues: 3rd Edition, Giannini Foundation of Agricultural Economics, 2018. https://s. giannini.ucop.edu/uploads/giannini_public/83/a0/83a0a220-ecb3-45ca-83e3-69fdd8443a43/international_trade__california_agriculture.pdf
• Type: Journal Articles Status: Published Year Published: 2018 Citation: D. P. Scheitrum, C. A. Carter, and C. Revoredo-Giha WTI and Brent Futures Pricing Structure Energy Economics Vol 72, May 2018, Pages 462-469.
• Type: Journal Articles Status: Published Year Published: 2018 Citation: Carter, C., Cui, X., Ghanem, D., & M�rel, P. (2018). Identifying the Economic Impacts of Climate Change on Agriculture. Annual Review of Resource Economics, 10, 361-380.
• Type: Journal Articles Status: Published Year Published: 2018 Citation: Carter C.A., and K. A. Schaefer GM Food Standards and Labeling in the USA in G. Smithers (ed) Reference Module in Food Science, Elsevier, 2018. http://dx.doi.org/10.1016/B978-0-08-100596-5.22460-8.
• Type: Journal Articles Status: Submitted Year Published: 2018 Citation: Carter, C.A. and G. J. Power (eds.) Financialization of Commodities Journal of Commodity Markets. Vol. 10, Pages 1-104, June 2018.
• Type: Journal Articles Status: Published Year Published: 2018 Citation: Janzen J.P., A. Smith, and C.A. Carter Commodity Price Comovement and Financial Speculation: The Case of Cotton American Journal of Agricultural Economics, 100(1), 2018: 264285.

Progress 10/01/17 to 09/30/18

Outputs
Target Audience:My target audience is the domestic and international agricultural community, broadly defined. Changes/Problems: Nothing Reported What opportunities for training and professional development has the project provided? Nothing Reported How have the results been disseminated to communities of interest?I have had numerous contacts from the press and from industry stakeholders regarding my work on agricultural commodity markets and trade. The ongoing trade war with China has been the topic of numerous interviews, ranging from the Wall St Journal to National Public Radio. What do you plan to do during the next reporting period to accomplish the goals?Continue to work on these important issues.

Impacts
What was accomplished under these goals? Recent booms and busts in commodity prices have generated concerns that financial speculation causes excessive commodity-price comovement, driving prices away from levels implied by supply and demand under rational expectations. We develop a structural vector autoregression model of a commodity futures market and use it to explain two recent spikes in cotton prices. We find limited evidence that financial speculation caused cotton prices to spike in 2008 or 2011. We conclude that the 2008 price spike was driven mostly by precautionary demand for cotton, and the 2011 spike was caused by a net supply shortfall. In another publication we evaluate the deregulation of the Canadian Wheat Board (CWB), one of the world's largest export "single desk" state traders in agriculture. We estimate the impact of the removal of the CWB's single desk on the spatial pattern of malting barley production in Western Canada. We find that deregulation encouraged growers located closer to malt barley plants to increase production relative to growers located further from the plants. Additionally, malting barley production shifted to regions with more of a natural advantage arising from climatic conditions. In July 2016, Vermont became the first U.S. state to require mandatory labeling of foods containing genetically engineered (GE) ingredients. The introduction of the Vermont law serves as a quasi-natural experiment on the economic effects of mandatory GE labeling. We investigate the market response in the U.S. sugar market. Almost all beet sugar is GE, while cane sugar is GE-free. Prior to 2016, cane and beet sugar were regarded as homogenous. However, in mid 2016, refined cane sugar began selling at a premium over refined beet sugar. We find the mandatory labeling initiative generated about a 13% price discount for beet sugar and a premium of about 1% for cane. Food manufacturers' concerns over mandatory labeling caused them to switch inputs.

Publications

• Type: Journal Articles Status: Published Year Published: 2018 Citation: Janzen J.P., A. Smith, and C.A. Carter ⿿Commodity Price Comovement and Financial Speculation:The Case of Cotton⿝ American Journal of Agricultural Economics, 100(1), 2018: 264⿿285.
• Type: Journal Articles Status: Published Year Published: 2018 Citation: Carter C.A., and K. A. Schaefer ⿿GM Food Standards and Labeling in the USA⿝ in G. Smithers (ed) Reference Module in Food Science, Elsevier, 2018. http://dx.doi.org/10.1016/B978-0-08-100596-5.22460-8.
• Type: Journal Articles Status: Published Year Published: 2018 Citation: C. L. Carroll, C. A. Carter, R. E. Goodhue, and C.-Y. C. Lin Lawell. Crop disease and agricultural productivity. In Wolfram Schlenker (Ed.), Crop Disease and Agricultural Productivity: Evidence From a Dynamic Structural Model of Verticillium Wilt Management. Chicago: University of Chicago Press. 2018.
• Type: Journal Articles Status: Published Year Published: 2018 Citation: Carter C.A., and K. A. Schaefer ⿿Impacts of Mandatory GE Food Labeling: A Quasi-Natural Experiment" American Journal of Agricultural Economics 101 No.1. (2018): 58-73.
• Type: Book Chapters Status: Published Year Published: 2018 Citation: Carter, C.A. "International Trade and Californias Agriculture" chapter in "California Agriculture: Dimensions and Issues: 3rd Edition, Giannini Foundation of Agricultural Economics, 2018.https://s.giannini.ucop.edu/uploads/giannini_public/83/a0/83a0a220-ecb3-45ca-83e3-69fdd8443a43/international_trade__california_agriculture.pdf
• Type: Journal Articles Status: Published Year Published: 2018 Citation: Carter, C.A. ⿿China⿿s Retaliatory Tariffs and California Agriculture⿝ ARE Update Vol. 21, No. 4, Mar/Apr, 2018

Progress 10/01/16 to 09/30/17

Outputs
Target Audience:My target audience is the domestic and international agricultural community, broadly defined. Changes/Problems: Nothing Reported What opportunities for training and professional development has the project provided? Nothing Reported How have the results been disseminated to communities of interest?These results have been transmitted through publications and presentations at conferences. What do you plan to do during the next reporting period to accomplish the goals?Continue to work on these important issues.

Impacts
What was accomplished under these goals? We used observational longitudinal data to examine the relationship between rice yields and ground-level ozone pollution (O3) in Southeast China. We found that heightened O3 levels are associated with reductions in rice yields that are large enough to have an impact on the global rice market. This is due to a combination of factors. China is both the largest producer and importer of rice. Furthermore, only a minor share of global production is traded internationally. There are two main reasons that the results in this study are of interest to the scientific community as well as the general public. The first is that it shows how pollution abatement can impact global food security for a crop that is a main food staple for a significant portion of the world's poor, specifically in Asia. Food security is important for health reasons, but also for political reasons, since it can affect political stability, which is a primary target for a country like China. In another publication, we review the literature on the economics of managing crop disease; discuss the economics of managing Verticillium wilt; and review the recent research on the externalities that arise with short-term growers, and between seed companies and growers due to Verticillium wilt. Verticillium wilt first occurred on lettuce in California's Pajaro Valley in 1995. Since then, the disease has spread rapidly through the Salinas Valley. By 2010, more than 150 fields with Verticillium wilt on lettuce were identified, amounting to more than 1,620 ha. This review is of interest to policy-makers, the producers, marketers, seed companies, and researchers.

Publications

• Type: Journal Articles Status: Published Year Published: 2017 Citation: Colin A. Carter, Xiaomeng Cui, Aijun Ding, Dalia Ghanem, Fei Jiang, Fujin Yi, and Funing Zhong "Stage-specific, Nonlinear Surface Ozone Damage to Rice Production in China" Scientific Reports. 2017. http://rdcu.be/p2iF
• Type: Journal Articles Status: Published Year Published: 2017 Citation: C. Carroll, C.A. Carter, R.E. Goodhue, C.Y. Lin Lawell and K. V. Subbarao A Review of Control Options and Externalities for Verticillium Wilts Phytopathology. 2017. http://apsjournals.apsnet.org/toc/phyto/0/ja
• Type: Journal Articles Status: Published Year Published: 2017 Citation: Carroll, C., Carter, C., Goodhue, R., Lawell, C., & Subbarao, K. (2017). The economics of managing Verticillium wilt, an imported disease in California lettuce. California Agriculture, 71(3), 178-183.

Progress 10/01/15 to 09/30/16

Outputs
Target Audience:My target audience is the domestic and international agricultural community, broadly defined. Changes/Problems: Nothing Reported What opportunities for training and professional development has the project provided? Nothing Reported How have the results been disseminated to communities of interest?These results have been transmitted through publications and presentations at conferences. What do you plan to do during the next reporting period to accomplish the goals?Continue to work on these important issues.

Impacts
What was accomplished under these goals? We found that global corn prices were about 30% higher from 2006 to 2014 than they would have been without the U.S. mandate on biofuels. In another paper we show that once foregone export opportunities are accounted for, supply management may no longer be beneficial to domestic producers of the supply-managed commodities. This is important for World Trade Organization negotiations. In a study of the global orange juice market we find that significant transport costs for a relatively high quality product represent a natural trade barrier. In this case, transport costs may introduce product differentiation, protecting home-country production of the higher quality product and constraining the foreign exporter to shipping a lower quality substitute.

Publications

• Type: Journal Articles Status: Published Year Published: 2016 Citation: Carter, Colin A., Gordon C. Rausser, and Aaron Smith. "Commodity storage and the market effects of biofuel policies." American Journal of Agricultural Economics (2016): aaw010.
• Type: Journal Articles Status: Published Year Published: 2016 Citation: Carter, Colin A., and Pierre M�rel. "Hidden costs of supply management in a small market." Canadian Journal of Economics/Revue canadienne d'�conomique 49, no. 2 (2016): 555-588.
• Type: Journal Articles Status: Published Year Published: 2015 Citation: Scheitrum, Daniel Paul, Colin A. Carter, and Amy Myers Jaffe. "Testing substitution between private and public storage in the US oil market: A study on the US Strategic Petroleum Reserve." Energy Economics (2015).
• Type: Journal Articles Status: Published Year Published: 2016 Citation: Carter, Colin A., James A. Chalfant, Navin Yavapolkul, and Christine L. Carroll. "International commodity trade, transport costs, and product differentiation." Journal of Commodity Markets 1, no. 1 (2016): 65-76.

Progress 10/01/14 to 09/30/15

Outputs
Target Audience:My target audience is the domestic and international agricultural community, broadly defined. Changes/Problems: Nothing Reported What opportunities for training and professional development has the project provided? Nothing Reported How have the results been disseminated to communities of interest?I have had numerous contacts from the press and from industry stakeholders regarding my work on agricultural commodity markets. What do you plan to do during the next reporting period to accomplish the goals? Nothing Reported

Impacts
What was accomplished under these goals? International trade is extremely important for California agriculture and this project helped identify factors that drive trade and, at the same time, how trade impacts California agriculture. In several publications and invited talks, analyzed the implications of increased globalization on California agriculture, focusing on key aspects such as market, policy and institutional developments-including the role of futures markets, biotechnology, and emerging economies. Major benefits from this project included documenting the economic impact of agricultural subsidies, trade policies, and trade remedy law on agricultural markets and prices. Is important to California agriculture to understand the market impact of changes in underlying policy and institutions in global agriculture. As California agriculture moves forward, important economic drivers include domestic and international policy, biotechnology, trade agreements and disputes, institutions and institutional players, climate change, and the role of major trading partners. During the review period I gave invited talks on agricultural policy in China, New Zealand, and Norway.

Publications

• Type: Journal Articles Status: Published Year Published: 2014 Citation: Carter, C.A. Some Trade Implications of the 2014 Agricultural Act Choices. 3rd Quarter 2014. 29(3).
• Type: Journal Articles Status: Published Year Published: 2015 Citation: Aleks Schaefer and Colin A. Carter GMO trade in a world of fragmented consumer preferences and needs BIORES. Vol 9 - No 8. 14 October 2015.