On Price Dynamics in International Wheat Markets
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Extending the previous work by Bessler et. al. (2003), this paper examines dynamic
relationships in the international wheat markets by employing five different base
(country) currencies and a basket of currency. The stable aggregate currency (SAC) is
proposed as the basket currency to be used in examining wheat price dynamics as
opposed to individual base currencies or other possible baskets. Employing directed
acyclic graphs and standard moving average representations, we compare the results from
the SAC currency to those from prices converted in five base currencies. The findings are
dependent upon the base currency choice; however, in all cases Canada is the dominant
power in affecting world wheat price, whereas, the price innovations pass through the
U.S. and Australia to the rest of the world. Furthermore, Europe and Argentina are
information “sinks” as they receive but do not transmit new information. A possible
latent variable associated with wheat pricing in the European Union appears to mediate
information flows between Europe and Argentina and between Europe and Australia.
Given the stability and low correlation properties of SAC, it is proposed to use SAC
when studying price dynamics across countries.