Long-run drift, co-movement and persistence in real wheat and maize prices

Trends in real prices for food commodities are both important and controver sial. Paying particular attention to issues of methodology, this paper asse sses the evidence for a downward drift in the real prices of wheat and maiz e. It is found that the apparent strength of that evidence depends substant ially on whether the time series generating models are taken to be trend-st ationary or difference-stationary, and on whether allowance is made, throug h incorporation of dummy variables in the models, for events in one or two extreme years. Once dummy variables are incorporated we find little evidenc e against difference-stationarity. The analysis then proceeds, through test s for cointegration, to the construction of error-correction models linking the two prices and to the estimation of persistence of shocks in this biva riate framework. The paper presents modest evidence for downward drift in r eal grain prices of about 1 to 1.5 per. cent per annum, shows that wheat an d maize prices cointegrate and estimates that direct and cross-persistence measures take values of less than unity.