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Abstract
We examine the dynamic inter-dependencies between soybean and majors cereal
prices. The importance of this analysis is justified by the high volatility
in grain prices and the need to understand how shocks are diffused across
markets. We use monthly prices on the international markets of the
different grain for a relatively long period from January 1960 to December
2013. The preliminaries analysis of the series show that they are
stationary in first difference even in presence of two structural upward
shifts in their trend explain the observed persistence of shock in grain
markets. Using Johansen cointegration test, we formally test for the
co-movement hypothesis and find strong evidence that the grain prices move
together pair by pair and as a group. The test confirms the existence of
the long run equilibrium relationship among the prices. We find that
deviations from the long run equilibrium are large and the corrective
adjustment are slow. We also run a causality analysis with an innovation
accounting exercise and estimated a dynamic conditional variance and
correlation model to understand how and to what extent shocks on one market
diffuse to the other markets. We find that there is rich and complex
causality links among the grain prices and they volatility. Soybean and
wheat as well as maize, individually and together, play a central role in
causing the other grain prices. In overall the results show that the grain
markets are highly integrated and shocks, on one market, not only
accumulate but also diffuse largely and persistently to the other markets.
The central role of soybean, wheat and maize suggests that policy to
stabilize food prices should focus on these key cereals with the
understanding that this may varies according to different country or region.