Abstract
This paper examines the relative importance of key variables for the prediction of international sugar prices. Understanding movements in world sugar prices helps policy-makers and participants in the sugar value chain to formulate effective investment strategies and forecast the effects of market shocks more accurately. We combine a Bayesian model averaging (BMA) technique to address specification uncertainty with an out-of-sample analysis to evaluate price predictability. Results show that world sugar quotations are mostly influenced by their own dynamics, changes in international staple food prices, sugar production costs, and macroeconomic variables. The predictability of the BMA is found to be generally high, compared with a sample of benchmark time series approaches.
Highlights
International sugar prices are commonly recognized for being highly volatile (FAO 2016)
This paper examines the relative importance of key variables for the prediction of international sugar prices
The ranking is based on the posterior inclusion probability (PIP) shown in the second column
Summary
International sugar prices are commonly recognized for being highly volatile (FAO 2016). This volatility stems from the economic and physical characteristics of the sugar. The volatile nature of the sugar market is further exacerbated by the effects of various support measures that benefit the subsector (Mensbrugghe and Mitchell 2003). Sugar is known for being one of the most protected commodities, as governments seek to safeguard producers from low prices through the implementation of various policy instruments such as border measures, minimum price level, and subsidies (FAO 2016). A number of major sugar producers, noticeably the European Union (EU), have introduced important legislative changes to their domestic sugar market, with the objective of reducing the level of public support (OECD/FAO 2017)
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