chapter 4
commodity Price swinGs and commodity exPorters
appendix 4.2. Statistical properties of commodity price cycles We adopt the Harding and Pagan (2002) methodology used for dating business cycles to identify turning points (peaks and troughs) in the time path of real commodity prices.47 A full cycle in real commodity prices comprises one upswing phase—the period from trough to peak—and one downswing phase—the period from peak to trough. Drawing on Cashin, McDermott, and Scott (2002), a candidate turning point is identified as a local maximum or minimum if the price in that month is either greater or less than the price in the two months before and the two months after. The set of resulting candidates is then required to alternate peaks and troughs. Furthermore, each phase defined by the turning points (either upswing or downswing) must be at least 12 months long, and thus a complete cycle must be at least 24 months. This exercise gives us over 300 completed cycles for 46 commodities with an average duration of five years (Table 4.8). Among upswings and downswings, the average (median) duration of the former is about 2½ (2) years, and of the latter about 3 (2½) years (Figure 4.12). However, there are significant variations in the distribution within and across commodity groups. For instance, an average downswing in crude oil lasted 31 months compared with upswings of 33 months. Among nonfuel commodities, downswings typically lasted longer than upswings, especially for food and raw material prices. The latter could be affected by some persistent negative factors, related to weather, plant disease, and so forth, that do not generally affect the prices of energy and metals. With the exception of crude oil and a few metals’ prices, the amplitude 47The
business cycle literature has traditionally distinguished between classical cycles and growth cycles. In the former case, variables of interest are not pretreated or transformed before turning points are identified. In the latter case, variables are filtered prior to the dating analysis—for example, turning points are chosen to capture periods of above- or below-trend growth. Since we are agnostic about the presence of any trend in commodity prices, we focus on commodity prices in levels, distinguishing between periods of expansion and contraction. Even more important, this classical cycle approach avoids the need to choose between alternative filtering or detrending methods, which are known to introduce potentially spurious phase shifts, confounding the turning points algorithm.
Figure 4.12. Duration of Commodity Price Upswings and Downswings (Months)
Downswings last somewhat longer than upswings for most commodity groups except energy. Energy
Metals
Food
Raw materials
1. Trough-to-Peak Length (upswing)
Energy
Metals
Food Raw materials 0
20
40
60
80
100
80
100
2. Peak-to-Trough Length (downswing)
Energy
Metals
Food Raw materials 0
20
40
60
Source: IMF staff calculations. Note: The vertical line inside each box is the median duration within the group; the left and right edges of each box show the top and bottom quartiles. The distance from the black squares (adjacent values) on either side of the box indicates the range of the distribution within that commodity group, excluding outliers. See Appendix 4.2 for a description of the algorithm used to identify peaks and troughs.
International Monetary Fund | april 2012
155