converters (World Bank 2020b). Not surprisingly, these commodities experienced steep price declines during the first half 2020, following the mobility restrictions (in response to the COVID-19 pandemic.

# 6.2. Shape of permanent shocks

The analysis of the permanent shock components revealed some important characteristics in terms of trends and variability. The permanent component has trended upwards for energy commodities, downwards for both agricultural groups and fertilizers, and has been nearly trendless for most base metals (Figure 6). The upward trend in energy prices, which is consistent with Hotelling’s pricing rule, may reflect resource depletion (Hamilton 2009) while the trendless nature of long-term price movements of some metals could be the outcome of the opposing forces of technological innovation and resource depletion (Marañon and Kumral 2019). Agriculture’s downward trend along with the large share of permanent component confirms the declining terms-of-trade hypothesis.

Although the contribution of various shocks differed across- and within-groups, the contribution of permanent shocks to annual agricultural price variability is remarkably similar across the six commodities. This similarity reflects three forces. First, most annual agricultural commodities can be grown with the same inputs, including land, labor force, machinery, and other inputs such as chemicals and fertilizers. Such flexibility allows reallocation among crops from one year to another, in turn preventing sustained price gaps among these commodities. Indeed, despite the large increase of maize and edible oil demand due to biofuels over the past two decades, the prices of these commodities moved in tandem with other grains and oilseeds.<sup>**12**</sup> Similarly, the impact on soybean prices of the restrictions in soybean imports by China from the United States in 2018 was short-lived due to land reallocation (from soybeans to maize in the U.S. and maize to soybeans in South America). Second, because some annual crops have overlapping uses, substitution in consumption further dampens price disparities. In the case of soybean import restrictions by China, soybean meal was substituted by maize for animal use while soybean oil was substituted by palm oil for human consumption (World Bank 2019).<sup>**13**</sup> Third, agricultural policy interventions often apply to many commodities and change infrequently. For example, policies in the United States and the European Union, the world’s largest players in several agricultural commodity markets, for the most part apply to the same crops. And, when policy reforms are introduced (such as the 1985 Farm

> **12** Global demand for maize doubled during 2000-20, compared to the 26-28 percent increases in global demand for rice and wheat (in line with the 27 percent world’s population growth over this period). The price increases of all three grains, however, moved in a similar manner.

> **13** The imposition of tariffs by China on U.S. soybean imports resulted in trade diversion. As China’s soybean imports from the U.S. declined and increased from Brazil, the EU began importing more from the U.S. and less from Brazil.

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