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Market News in Commodity Price Theory: Application to the Ethiopian Grain Market

Theresa Osborne
The Review of Economic Studies
Vol. 71, No. 1 (Jan., 2004), pp. 133-164
Published by: Oxford University Press
Stable URL: http://www.jstor.org/stable/3700714
Page Count: 32
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Market News in Commodity Price Theory: Application to the Ethiopian Grain Market
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Abstract

This paper examines the effect of "news" or advance information about future production on competitive storage behaviour and prices using a structural model of commodity markets. In particular, it generalizes the neoclassical storage model to incorporate information on future harvests, while allowing for seasonal production, two features important to African and other developing country grain markets. The model is first developed to suit the case of the Ethiopian grain markets, and a general model is then stated. The effects on welfare and price variability of the addition of news are discussed, as well as changes in key demand and uncertainty parameters. The model is shown to replicate some features of the data better than the model without news, particularly the high autocorrelation in price, and performs better in formal estimation. However, it appears that the incorporation of news still fails to explain the extreme seasonal price movements observed.

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