International Wheat Price Responses to ENSO Shocks: Modelling Transmissions Using Smooth Transitions

Abstract

Climate anomalies affect agricultural production in different parts of the world and can impact price behavior of internationally traded commodities. This research examines the effect of a particular climate phenomenon, El Nino Southern Oscillation (ENSO), on wheat prices from the major exporting regions. The study adopts a smooth transition modelling framework to addresses nonlinear dynamics and asymmetric price transmissions in response to the climate anomalies. Results suggest that a positive ENSO shock, i.e. El Nino, reduces wheat prices, while a negative ENSO shock, i.e. La Nina, increases wheat prices. The price changes vary across the export regions, but on average are within the three percent magnitude. The price increase due to La Nina is of a larger magnitude as compared to the price decrease due to El Nino. Moreover, price responses to ENSO shocks are more amplified (up to seven percent) during the La Nina regime, as compared to the El Nino regime. These findings are indicative of and consistent with the economics of grain price volatility and the theory of storage.