Observations on the relationship between agricultural commodity prices and real interest rates

✍ Scribed by Bruce A. Scherr; Howard C. Madsen

• Publisher: John Wiley and Sons
• Year: 1983
• Tongue: English
• Weight: 380 KB
• Volume: 3
• Category: Article
• ISSN: 0270-7314
• DOI: 10.1002/fut.3990030105

✦ Synopsis

his article provides observations describing the relationship between agricul-T tural commodity prices and real interest rates. The traditional view of this relationship has centered around the influence of the cost of money in the determination of carrying costs and, to a lesser extent, on the influence of interest rates on general economic activity. In any event, real interest rates which began a steep upward trend in 1978 have served as the precursor to a major structural economic adjustment in the U.S. economy and they have provided some new influences for agricultural commodity price determination.

This article provides an overview of economic activity in the last five years and focuses on the impact of high real interest rates on agricultural commodity prices and futures market open interest. The article does not provide new insights into interest rate forecasting or behavior, but it describes observations concerning the dominance of monetary factors in the fundamental supplylutilization determination of agricultural commodity prices in recent years and discusses this impact over the near-term future.

DEMAND ADJUSTMENTS: AN END TO "HEDGE BUYING'

The period of 1979 through mid-1982 can be characterized by a number of general economic observations (Table I): declining rates of price inflation, dramatically higher rates of interest, mitigating rates of domestic consumption,