On the joint volatility dynamics in dairy markets

TL;DR

This paper models the dynamic co-volatility of major dairy commodities across global markets using a multivariate factor stochastic volatility model, revealing increased dependence and volatility following major policy and economic events.

Contribution

It introduces a multivariate factor stochastic volatility model to analyze dairy market co-volatility, capturing regional influences and policy impacts on price dynamics.

Findings

Volatility increased after the 2006/07 global food crisis.

Dependence among dairy commodities grew during specific periods.

Policy changes influenced the correlation and volatility patterns.

Abstract

The present study investigates the price (co)volatility of four dairy commodities -- skim milk powder, whole milk powder, butter and cheddar cheese -- in three major dairy markets. It uses a multivariate factor stochastic volatility model for estimating the time-varying covariance and correlation matrices by imposing a low-dimensional latent dynamic factor structure. The empirical results support four factors representing the European Union and Oceania dairy sectors as well as the milk powder markets. Factor volatilities and marginal posterior volatilities of each dairy commodity increase after the 2006/07 global (food) crisis, which also coincides with the free trade agreements enacted from 2007 onwards and EU and US liberalization policy changes. The model-implied correlation matrices show increasing dependence during the second half of 2006, throughout the first half of 2007, as well as during 2008 and 2014, which can be attributed to various regional agricultural dairy policies. Furthermore, in-sample value at risk measures (VaRs and CoVaRs) are provided for each dairy commodity under consideration.