Boundedly rational exuberance on commodity markets

Abstract

Recent discussions on the volatility of agricultural prices have been drawing on factors as low short-term elasticities of supply and demand, climatic risk, market uncertainty, central banks monetary policies, trade barriers, biofuel development and, finally, speculation. Much debate has aroused about the role of such or such factor. The Momagri 2 model has been de- signed as a system of modules, characterizing agricultural sectors and the volatility of their prices, around a macroeconomic computable general equilibrium model, which, by itself, would not generate much price volatility. In this paper, we focus on the specific micro-module of agricultural activity under uncertainty. We characterize the market for agricultural commodities as a market. The emphasis is laid on market micro-structure, heterogeneity of boundedly rational agents and the specific uncertainty of agricultural markets. Preliminary simulations show that under conservative parametric values, the integrated model produces strong price volatility of the type experienced in the 2001-2009 decade. A scenario of extreme markets liberalization show that such a policy increases, if anything, the volatility of agricultural prices. We argue that producers' boundedly rational expectations on such volatile markets, as well as the large increase of short-term investors in options of commodities, together with interest rate policies and financialized market's micro-structures, account for the largest part of this volatility. Exuberance does not require irrationality to emerge. Bounded rationality is a sufficient condition for financialized markets to develop exuberance.