The Impact of Weather on Commodity Prices: A Warning for the Future

Marini, Annalisa (2020): The Impact of Weather on Commodity Prices: A Warning for the Future.

Abstract

Drawing on the most recent advances of the panel VAR literature, we apply a framework to investigate the impact of weather on banana export prices towards the United Kingdom. This methodology can address some of the limitations of alternative approaches and it can also be generalized to assess the impact of weather on a variety of commodity markets characterized by a network structure. The results show that (i) while shocks to temperatures affect commodity prices, precipitations are less relevant; (ii) an increase in temperatures is likely to increase prices; (iii) the impact on prices is not only direct but it spills over to other exporting countries; (iv) simulating a scenario compatible with global warming we fi�nd that it is likely to lead to a substantial increase in commodity prices and spillover effects; (v) these effects are ampli�ed if we account for a contemporaneous shock to the economy. We discuss implications for global food security, which can be useful for policy implementation.

• Item Type: MPRA Paper
• Language: English
• Keywords: PVAR, Commodity Price Transmission, Spillovers, Cli- mate Change
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables; F - International Economics > F1 - Trade; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q1 - Agriculture > Q17 - Agriculture in International Trade

References

Acemoglu, Daron, Akcigit, Ufuk, and Kerr, William (2015). Networks and the macroeconomy: An empirical exploration. NBER Macroeconomics Annual, 30(1):273-335.

Adams, Richard M. (1989). Global climate change and agriculture: An economic perspective. American Journal of Agricultural Economics, 71(5):1272-1279.

Adams, Richard M., Fleming, Ronald A., Chang, Ching-Chang, McCarl, Bruce A., and Rosenzweig, Cynthia (1995). A reassessment of the economic effects of global climate change on u.s. agriculture. Climatic Change, 30(2):147-167.

Anselin, L (1988). Spatial Econometrics: Methods and Models. Springer Science and Business Media.

BananaLink (2019). Tr4 co�rmed in colombia s country declares `national emergency'. http://bananalink.org.uk/tr4-con�rmed-colombia countrydeclares-national-emergency. August 9, last access: 2019-11-03.

BBC (2017). The health bene�ts of bananas. https://www.bbcgoodfood.com/howto/guide/health-bene�ts-bananas. September 25, last access: 2019-06-02.

Blanc, Elodie and Reilly, John (2017). Approaches to assessing climate change impacts on agriculture: An overview of the debate. Review of Environmental Economics and Policy, 11(2):247-257.

Blanc, Elodie and Schlenker, Wolfram (2017). The use of panel models in assessments of climate impacts on agriculture. Review of Environmental Economics and Policy, 11(2):258-279.

Brown, Molly E. and Funk, Cristopher C. (2008). Food security under climate change. Science, 319(5863):580-581.

Burgess, Robin, Deschenes, Olivier, Donaldson, Dave, and Greenestone, Michael (2017). Weather, climate change and death in india. Energy Policy Institute, University of Chicago.

Canova, Fabio and Ciccarelli, Matteo (2004). Forecasting and turning point prediction in a bayesian panel var model. Journal of Econometrics, 120(2):327-359.

Canova, Fabio and Ciccarelli, Matteo (2009). Estimating multicountry var models. International Economic Review, 50(3):929-959.

Cashin, Paul, Liang, Hong, and McDermott, C. John (2000). How persistent are shocks to world commodity prices? IMF Staff Papers, 47(2):177-217.

Cashin, P, Mohaddes, K., and Raissi, M (2017). Fair weather or foul? the macroeconomic effects of el niño. Journal of International Economics, 106(1):37-54.

Chib, S. (1995). Marginal likelihood from the gibbs output. Journal of the American Statistical Association, 90(432):1313-1321.

Chudik, Alexander and Pesaran, M. Hashem (2011). In�finite-dimensional vars and factor models. Journal of Econometrics, 163(1):4-22.

Chudik, Alexander and Pesaran, M. Hashem (2014). Theory and practice of gvar modelling. Journal of Economic Surveys, 30(1):165-197.

Compean, Roberto Guerrero (2013). Weather and welfare: Health and agricultural impacts of climate extremes, evidence from mexico. IDB Working Paper Series No. 391.

Dell, Melissa, Jones, Benjamin F., and Olken, Benjamin A. (2012a). Temperature shocks and economic growth: Evidence from the last halfcentury. American Economic Journal: Macroeconomics, 4(3):66-95.

Dell, Melissa, Jones, Benjamin F., and Olken, Benjamin A. (2014). What do we learn from the weather? the new climate-economy literature. Journal of Economic Literature, 52(3):740-798.

Dell, Melissa, Olken, Ben, Banerjee, Abhijit, and Du-

o, Esther (2012b). Insurgency and long-run development: Lessons from the mexican revolution. http://citeseerx.ist.psu.edu/viewdoc/summary? doi=10.1.1.232.557. last access: 2019-06-02.

Deschenes, Oliver and Greenstone, Michael (2007). The economic impacts of climate change: Evidence from agricultural output and random fluctuations in weather. American Economic Review, 102(7):3761-3773.

FAO (2018). Banana market review. last access: 2019-05-27.

FAO (2019). Banana facts and fi�gures. http://www.fao.org/economic/est/est-commodities/bananas/bananafacts/it/#.XOq8wf5ry1s. last access: 2019-05-27.

Feng, Shuaizang, Krueger, Alan B., and Oppenheimer, Michael (2010). Linkages among climate change, crop yields, and mexico-us cros-border migration. PNAS, 107(32):14257-14262.

Fisher, Anthony C., Hanemann, Michael W., Roberts, Michael J, and Schlenker, Wolfram (2012). The economic impacts of climate change: Evidence from agricultural output and random fluctuations in weather: Comment. American Economic Review, 102(7):3749-3760.

Georgiadis, Georgios (2017). To bi, or not to bi? differences between spillover estimates from bilateral and multilateral multi-country models. Journal of International Economics, 107:1-18.

Guiteras, Raymond (2009). The impact of climate change on indian agriculture. http://econdse.org/wpcontent/ uploads/2014/04/guiterasclimatechangeindianagriculturesep2009:pdf:

Hidalgo, Daniel F, Naidu, Suresh, Nitcher, Simeon, and Richardson, Neal (2010). Economic determinants of land invasions. Review of Economics and Statistics, 92(3):505-523.

Hsiang, S., Burke, M., and Miguel, E. (2013). Quantifying the influence of climate on human conflict. Science, 341(6151):1235367.

Hsiang, S.M., Meng, K.C., and Cane, M.A. (2011). Civic conflicts are associated with the global climate. Nature, 476(7361):438-441.

Jayachandran, Seema (2006). Selling labor low: Wage responses to productivity shocks in developing countries. Journal of Political Economy, 114(3):538-575.

Jayachandran, Seema (2007). Are remittances insurance? evidence from rainfall shocks in the philippines. World Bank Economic Review, 21(2):219-248.

Jessoe, Katrina, Manning, Dale, and Taylor, J. Edward (2018). Climate change and labour allocation in rural mexico: Evidence from annual fluctuations in mexico. The Economic Journal, 128(608):230-261.

Jones, Benjamin F. and Olken, Benjamin A. (2010). Climate shocks and exports. American Economic Review, 100(2):454-459.

Kaiser, Harry M., Riha, Susan J., Wilks, Daniel S., Rossiter, David G., and Sampath, Radah (1993). A farm-level analysis of economic and agronomic impacts of gradual climate warming. American Journal of Agricultural Economics, 75(2):387-398.

Koop, Gary and Korobilis, Dimitris (2016). Model uncertainty in panel vector autoregressive models. European Economic Review, 81(C):115-131.

Lobell, David B., Burke, Marshall B., Tebaldi, Claudia, Mastandrea, Michael D., Falcon, Walter P., and Naylor, Rosamond L. (2008). Prioritizing climate change adaptation needs for food security in 2030. Science, 319(5863):607-610.

Lobell, David B., Schlenker, Wolfram, and Costa-Roberts, Justin (2011). Climate trends and global crop production since 1980. Science, 333(6042):616-620.

Mendelshon, Robert O. and Massetti, Emanuele (2017). The use of crosssectional analysis to measure climate impacts on agriculture: Theory and evidence. Review of Environmental Economics and Policy, 11(2):280-298.

Mendelsohn, Robert, Northause, William D., and Shaw, Daigee (1994). The impact of global warming on agriculture: A ricardian analysis. American Economic Review, 89(4):1046-1048.

Newton, M.A. and Raftery, A.E. (1994). Approximate bayesian inference by the weighted likelihood bootsrap. Journal of the Royal Statistical Society, Series B, 56(1):3-48.

Charles de Montesquieu (1748). The Spirit of the Laws. London, Nourse and Vaillant.

National Geographic (2017). The surprising science behind the world's most popular fruit. https://www.nationalgeographic.com/environment/urbanexpeditions/food/food-journeys-graphic/. October 24, last access: 2018-06-02.

NSW (2003). Bananas - response to temperature. NSW Agriculture.

Pesaran, M.H., Schuermann, T., and Weiner, S.M. (2004). Modelling regional interdependences using a global error-correcting macroeconometric model. Journal of Business and Economics Statistics, 22(2):165-169.

Roberts, Michael J. and Schlenker, Wolfram (2013). Identifying supply and demand elasticities of agricultural commodities: Implications for the us ethanol mandate. American Economic Review, 103(6):2265-2295.

Schlenker, Wolfram, Hanemann, Michael W., and Fisher, Anthony C. (2005). Will u.s. agriculture really bene�t from global warming? accounting for irrigation in the hedonic approach. American Economic Review, 95(1):395-406.

Schlenker, Wolfram, Hanemann, Michael W., and Fisher, Anthony C. (2006). The impact of global warming on u.s. agriculture: An econometric analysis of optimal growing conditions. Review of Economics and Statistics, 88(1):113-125.

Schlenker, Wolfram and Lobell, David B. (2010). Robust negative impacts of climate change on african agriculture. Environmental Research Letters, 5(1):1-8.

Solomon, S (2007). Climate Change 2007the Physical Science Basis: Working Group I Contribution to the Fourth Assessment Report of the IPCC. Cambridge University Press, Cambridge.

Swinnen, Johan (2007). Global Supply Chains, Standards and the Poor. CAB International Publications, Oxford.

Swinnen, Johan, Deconink, Koen, Vandermootele, Thijs, and Vandenplas, Anneleen (2015). Quality Standards, Value Chains and International Development. Cambridge University Press.

UNCTAD (2016). United nations conference on trade and development, banana-an infocomm commodity pro�le. UNCTAD.

Welch, Jarrod, Vincent, Jeffrey R., Auffhammer, Maximillian, Moya, Piedad F., Dobermann, Achim, and Dawe, David (2010). Rice yields in tropical/subtropical asia exhibit large but opposing sensitivities to minimum and maximum temperatures. PNAS, 107(33):14562-1457.