The Effects of Private Stocks versus Public Stocks on Food Price Volatility

Abstract

This paper investigates the role of storage and its effects on price dynamics and volatility with an application to food markets. It investigates the differences between private stock and public stock as they affect the distribution of market price. Based on a reduced-form approach, the analysis relies on quantile autoregression (QAR) as a flexible representation of price dynamics. Applied to US wheat and corn markets, the paper documents how storage affects commodity price dynamics and price volatility. Stocks have statistically significant price effects but these effects vary in different parts of the price distribution (e.g., lower tail versus upper tail of the distribution). We find strong statistical evidence that private stock and public stock have different effects on price dynamics and price volatility (including variance, skewness and kurtosis). For wheat, increasing private stock shifts the price distribution to the left, while increasing public stock shifts the price distribution to the right. Studying the effects of storage on price dynamics, we uncover evidence of local dynamic instability in the upper tail of the price distribution. We evaluate how the private/public stock portfolio affects the odds of facing price crashes and spikes.