Influential Factors in the Econometric Modeling of the Price of Wheat in the United States of America

Abstract

Wheat is a staple agricultural grain commodity used within the United States and is grown in nearly every state. Modeling the price of Hard Winter Red wheat (the most common type of wheat) is of extreme economic and social importance. The 2008 financial crisis had a drastic effect on the price of food in real terms, tightening household budgets and increasing the US percentage of citizen classed below the poverty line. Understanding the influential factors in the econometric modeling of the price of wheat allows for more effective governmental intervention and price stabilization. Results indicate that the price of wheat is influenced by a combination of 5 separate functions: “supply”, “demand”, “macroeconomic”, “climate” and “natural resource” related functions. These functions derive from a wide variety of different data sources. The functions were determined and then incorporated into an Ordinary Least Squares (OLS) regression model taking into account variable interaction, variable transformation and time. This regression exercise resulted in a good model, explaining just over 90% of the variation in the price of wheat. Yet, results indicate that the model though sensitive to sharp decreases in the price of wheat is insensitive to sharp increases in the price of wheat. Ideas are discussed of ways of improving the price model. These include the addition of other variables, such as financial speculation/increased use of climate related variables and the idea of using alternative statistical modeling techniques in place of robust OLS regression modeling, such as SVAR models and Spline GARCH models. This research implies that further research into the modeling of the price of wheat within the US has useful potential for a more productive outcome.