Long‐Run Drift, Co‐Movement and Persistence in Real Wheat and Maize Prices

Trends in real prices for food commodities are both important and controversial. Paying particular attention to issues of methodology, this paper assesses the evidence for a downward drift in the real prices of wheat and maize. It is found that the apparent strength of that evidence depends substantially on whether the time series generating models are taken to be trend‐stationary or difference‐stationary, and on whether allowance is made, through incorporation of dummy variables in the models, for events in one or two extreme years. Once dummy variables are incorporated, we find little evidence against difference‐stationarity. The analysis then proceeds, through tests for cointegration, to the construction of error‐correction models linking the two prices and to the estimation of persistence of shocks in this bivariate framework. The paper presents modest evidence for downward drift in real grain prices of about 1 to 1.5 per cent per annum, shows that wheat and maize prices cointegrate and estimates that direct and cross‐persistence measures take values of less than unity.