Trends and volatility in primary commodity prices present policy makers in developing countries with problems of both macroeconomic and microeconomic management, problems that will not be resolved until there exists a coherent and empirically supported theory of the determination of the prices of primary commodities. The leading theoretical explanation of agricultural crop prices rests on a combination of supply and demand together with storage and profit-maximizing speculators. This story is consistent with several stylized facts, but formal empirical analysis has only become possible with recent advances in the econometric analysis of nonlinear dynamic programs. Results have been less than encouraging, at least for simple versions of the theory. This research builds on previous analysis by the investigators and will enrich the basic model to the point where it is either consistent with the evidence, or is clearly rejected. The theory will be extended to accommodate growth in output, more complex supply patterns, and the flow of information between crop years. Empirical work will extend pervious analysis to higher frequency data and will use extensive historical data on production, stocks, and future markets to test fuller versions of the theory.
