Multi-markets analysis of cereals prices and price volatility transmission and implication for food security

We examine the dynamic inter-dependencies between soybean and majors cereal prices. The importance of this analysis is justified by the high volatility in grain prices and the need to understand how shocks are diffused across markets. We use monthly prices on the international markets of the different grain for a relatively long period from January 1960 to December 2013. The preliminaries analysis of the series show that they are stationary in first difference even in presence of two structural upward shifts in their trend explain the observed persistence of shock in grain markets. Using Johansen cointegration test, we formally test for the co-movement hypothesis and find strong evidence that the grain prices move together pair by pair and as a group. The test confirms the existence of the long run equilibrium relationship among the prices. We find that deviations from the long run equilibrium are large and the corrective adjustment are slow. We also run a causality analysis with an innovation accounting exercise and estimated a dynamic conditional variance and correlation model to understand how and to what extent shocks on one market diffuse to the other markets. We find that there is rich and complex causality links among the grain prices and they volatility. Soybean and wheat as well as maize, individually and together, play a central role in causing the other grain prices. In overall the results show that the grain markets are highly integrated and shocks, on one market, not only accumulate but also diffuse largely and persistently to the other markets. The central role of soybean, wheat and maize suggests that policy to stabilize food prices should focus on these key cereals with the understanding that this may varies according to different country or region.