Breaks, trends and correlations in commodity prices in the very long-run

We present evidence on breaks, stationarity, trends, dynamic correlations, and cycles in prices for eight agricultural and industrial commodities over seven centuries. We utilise a sequential testing procedure that endogenously determines structural changes in the trend and level of each series. We find that breaks in the slope and the trend function can be attributed to major historical events such as the linking of the ‘Old’ and ‘New’ Worlds during the sixteenth century, the early free trade agreements in the nineteenth century and World War I, World War II and the Depression in the twentieth century. Give the importance of crude oil and its impact on agricultural and industrial commodities, we find a time-varying correlation structure which has intensified in the post-World War II period. We also find that three quarters of the commodity prices contain a unit root and that mean periodicity of cycles range between 30 and 35 years, depending on the commodity. These results suggest that during periods of rising or falling commodity prices, prices may not return to the long-run trend for extended periods. Consequently, there is a need for long-term planning initiatives that smooth commodity prices around the trend, with particular attention given during oil price shock.