UC Davis Agricultural and Resource Economics

David Ubilava, University of Sydney

The Role of El Niño Southern Oscillation in Commodity Price Movement and Predictability

Date and Location

Thursday, March 9, 2017, 4:10 PM - 5:30 PM
ARE Library, 4101 Social Sciences and Humanities


How are commodity prices related to the El Niño Southern Oscillation (ENSO) cycle, and has this relationship altered over time? Despite overwhelming evidence suggesting an important role played by the ENSO in global commodity production, the relationship between this climate anomaly and prices is not a trivial corollary, and requires careful investigation. To account for potentially complex dynamics in the ENSO–price relationship, this study applies a time– varying smooth transition autoregressive (TV–STAR) modeling framework to monthly series of the sea surface temperature anomalies in the Niño3.4 region and 46 primary commodity prices spanning the January 1982 – December 2015 period. The findings suggest apparent linkages between ENSO shocks and a set of agricultural commodities, as well as forestry commodities and metals. An unexpected deviation in ENSO results in two-to-five percentage point change in prices, while up to 30 percent of price variation in the selected commodities can be attributed to ENSO shocks in the intermediate and long run. Importantly, there are benefits to regime– dependent modeling, which in some instances facilitates unveiling causal linkages that may have been camouflaged in a linear setting. Several commodity prices also reveal evidence of structural change, and in those instances, the ENSO effect appears to have been mitigated over time, suggesting some adaptive response to the known economic consequences of this climate anomaly.

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