The Impact of Weather on Commodity Prices: A Warning for the Future

Drawing on the most recent advances of the panel VAR literature, we investigate the impact of weather on commodity prices. We first test our model against alternative models. Then, we use it to simulate scenarios to study the impact of weather on commodity price transmission. We propose a framework that can be generalized to assess the impact of weather on a variety of commodity markets. The results show that (i) while shocks to temperatures affect commodity prices, precipitations are less relevant; (ii) an increase in temperatures is likely to increase prices; (iii) the impact on prices is not only direct but it spills over to other exporting countries; (iv) simulating a scenario compatible with global warming we find that it is likely to lead to a substantial increase in commodity prices and spillover effects; (v) these effects are amplified if we account for a contemporaneous shock to the economy. We discuss implications for the future, which can be useful for policy implementation.