Understanding the role of supply and demand factors in the global wheat market

Abstract

We develop a novel Bayesian SVAR model to analyse the impact of supply and demand shocks on the real price of wheat. This is the first SVAR model of the global wheat market to comprehensively account for the endogenous interactions between producers, inventory holders and consumers. Our results show that the real price of wheat responds differently to global wheat market shocks, depending on the economic motivations underlying each shock. Specifically, consumption demand shocks explain nearly 70 per cent of price fluctuations, while supply shocks account for 20 per cent and the remaining 10 per cent is attributed to shocks in economic activity, inventory demand and fertilizer prices.