Modeling U.S. Soy-Based Markets with Directed Acyclic Graphs and Bernanke Structural VAR Me.pdf

Modeling U.S. Soy-Based Markets with Directed Acyclic Graphs and Bernanke Structural VAR Methods: The Impacts of High Soy Meal and Soybean Prices Ronald A. Babula, David A. Bessler, John Reeder, and Agapi Somwaru Advanced methods that combine directed acyclic graphs with Bernanke structural vector autoregression models are applied to a monthly system of three U.S. soy-based markets: for soybeans upstream and for the two soybean co-prod- ucts soy meal and soy oil further downstream. Analyses of the impulse-response function and forecast error variance decompositions provide updated estimates of market-elasticity parameters that drive these markets and updated policy- relevant information on how these monthly markets run and dynamically interact. Results characterize impacts on the three U.S. soy-based markets of increases in U.S. prices of soy meal and soybeans. Prices of soy meal and of soy meal’s prime in- gredient, soybeans, were until recently at record high levels not seen since the 1970s. Since the brief “grain/oilseed crisis” of high prices and low supplies during 1994–1996, world grain and oilseed markets have been mostly quiet with low and declining prices. However, in the 2003/2004 marketing year1 price volatility returned swiftly, primarily because of three powerful influences: unfavorable weather, plant disease that stunted 2002 and 2003 crops in both the Northern and Southern hemispheres, and ever-escalating Chinese demand for grain and oilseed for use as raw materials. Another significant but often overlooked factor in 2002/2003 was the emergence of several serious livestock diseases that paralyzed production or trade in meat and related meat byproducts. And although prices have declined recently (August 2004), both the grain and oilseed markets have been noticeably affected, with the price volatility having been most pronounced in the oilseed market.2 Such effects of oilseed-product price spikes were widely watched and are of