Commodity Price Cycles: Commonalities, Heterogeneities, and Drivers

Abstract

This paper studies commodity price cycles and their underlying drivers using a dynamic factor model. The study employs a sample of 39 monthly commodity prices over 1970:01 to 2019:12. The analysis identifies global and group–specific cycles in commodity markets and includes them in a structural vector autoregressive model together with measures of global economic activity and global inflation, to disentangle their response to global demand, global supply, and commodity market-specific shocks. The findings reveal the following main results. (i) There exists a global cycle in commodity markets that accounts for an increasing fraction of co-movement in commodity prices over the past two decades, particularly for energy, metals, and precious metals. (ii) The results are heterogeneous across groups of commodities, with group-specific commodity cycles existing for grains and precious metals over the full sample period, 1970–2019. Metal and energy prices exhibit within-group synchronization over 1970–99; however, in recent years, their movements have become increasingly aligned with the global business cycle. (iii) Since 2000, the global commodity cycle is largely driven by global supply shocks, such as rapid productivity growth in emerging markets and developing economies, which increase demand for commodities. (iv) The large price spikes observed during the two most prominent commodity market boom-bust episodes of the past half-century (1972–74 and 2006–08) are driven additionally by shocks that are orthogonal to global economic activity such as shifts in speculative demand for commodities.