Introduction

Understanding agricultural prices is a complex and highly evolutionary process. In most countries, agricultural prices are more highly regulated than other prices. Thus, understanding the effects of domestic agricultural policy is crucial. This problem is complicated by frequent revisions not only in the levels of policy instruments but also by changes in the active set of instruments. Moreover, each major new agricultural price swing over the last several decades has drawn attention to an additional set of policy instruments that has important spillover effects on domestic agriculture. These sets of policy instruments include domestic macroeconomic policy, foreign agricultural policy, and foreign macroeconomic policy as well as domestic regulation of other sectors.

This paper discusses the role of alternative sets of policy instruments in determining agricultural commodity prices, evaluates alternative approaches for modelling agricultural commodity prices, and briefly discusses some empirical experience. Some of the points in the paper are substantiated by specific examples while others are offered simply as a summary of intuition and experience. The two main messages of the paper are (1) that increasing volatility in the agricultural economy calls for imposing more structure in estimation in order to capture the global properties of important relationships and (2) that increased volatility has revealed many important international, intersectoral and macroeconomic linkages that necessitate an ever broadening scope in agricultural modelling.

Domestic agricultural policy instability

The most important variable on the supply side that drives agricultural crop prices is acreage planted. Acreage of some of the most important crops depends heavily on government policy.