ce oe ARKES ‘Topics in Money and Securities Markets duly, 1993 No. 113 CHARACTERISTICS OF FLUCTUATIONS IN WHEAT PRICES Kenneth C. Abbott Vice President This paper examines the characteristics of uctuationsin the prices of the major types of wheat grown inthe United States. It focuses primarily on seasonal price variation and the behavior of the spreads between the prices of different wheat types and between wheat and corn, Section | pro vides a description ofthe data and some observations about the movement of wheat prices in general. Section | discusses demand subsitution of diferent wheats. Section ill estimates the seasonal factors associated with the prices Cf wheat and com. Section IV provides an analysis of the price spreads between the types of wheat grown in the US. and an assessment of relative substitutabiiy, The appendix Contains a brief discussion ofthe effects of US. government agricultural policies on the price of wheat. The paper assumes the reader is familiar with wheat and wheat flour miling as described in Topics in Money and Securities Markets, “Wheat: Product Descriptions and Ming Processes," September 1992, 1. THE DATA The data consists of spot cash market commodity prices prevailing on Thursdays between January 5, 1978 and December 26, 1991 from the United States Department of Agriculture, and, for hard red spring wheat, the Minneapolis, Grain Exchange. The commodity prices are fully identified as: hard red winter wheat terminal elevator bids. for No. 1 hard red winter wheat of “ordinary protein’ delivered by rail to Kansas City, hard red spring wheat cash transaction prices for No. 1 hard red spring wheat of 12% protein delivered by il to Minneapolis, soft red winter wheat terminal elevator bids for No, 2 soft red winter wheat for delivery within 30 days to Chicago by rail or truck, durum terminal elevator bids tor No.1 hard amber durum delivered by rail to Minne- apolis, and corn terminal elevator bids for No.2 yellow corn to arrive within 30 days to Chicago, rail and truck delivery These prices are recorded primarily by the US.DA. through daily canvassing of market participants. They are usually reported the following weekin the US.O.A. publication Grain and Feed Market News. ‘The panels of Figure 1 show the evolution of the prices of the four wheats and corn over the sample interval. The Panels of Figure 2 show pairwise scatterplois of wheat prices over the same interval, and Figure 3 shows similar scat- terplots of wheat prices versus corn. itis immediately obvious {rom these graphs that wheat prices vary considerably over time and often exhibit sharp movements. Itis also apparent that hard red winter (HRW), hard red spring (HRS) and soft red winter (SAW) prices are closely linked to each other, while corn and durum wheat prices are not as closely inked to other prices. N. SUBSTITUTABILITY Itis possible that the degree of linkage among wheat prices results from demand substitution among different wheat types. This substitutability stems from the fact that some wheats have more than one primary use. oS Bankers Trust Company, P.O. Box 318, Church Street Station, New York, New York 10015 (212) 250-7934 Liability Management + Government Securities « Municipal Securities * Foreign ExchangeFigure 1. Wheat and Corn Prices Hard Red Spring’, $/bu Durum, Sibu : 5.0 IM ef V 20 80 70 60 5.0 40 30 20 1978 1980 1982 1984 1966 1988 1990 1992 1978 1980 1982 1984 1986 1988 1990 1992 so oF ; 45 38 | 3 35 Naat 25 a0 20 20] 1.0 Soft Reo Winter, $/bu 50 45 Py 1978 1980 1982 1984 1986 1988 1990 1992 Ce 1978 1980 1982 1984 1986 1988 1990 1992 1978 1980 1982 1984 1986 1988 1990 1992 “gaps due to missing price observationsFigure 2. Scatterplots of Wheat Prices, 1978-1991 (dollars per bushel) 6 8 Bs : é ‘ o 2 , g Bs “ 2 é 5 S 3 3 2 2 2 3 4 8 8 2 8 Hard Red Winter 6 8 5? . 3 8 = € 34 5 é 6 5 4 & 3 2 2 2 3 4 5 6 2 6 Hard Red Winter 6 8 a) 2 6 s is : = a 3 4 3 2 2 2 3 4 5 8 2 3 4 5 6 Hard Red Spring Soft Red Winter