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International concern has been increasing about the levels and volatility of food commodity prices. High and volatile prices attract the most attention but low prices and volatility are also problematic.
Volatile prices create uncertainty and risk for producers, traders, consumers and governments and can have extensive negative impacts on the agriculture sector, food security and the wider economy in both developed and developing countries.
>> What is driving food price volatility?
>> What are the policy challenges for governments? |
Sources : maize (US No. 2, yellow, US Gulf); rice (white rice, Thai 100% B second grade, f.o.b. Bangkok); soybeans (US No. 1, yellow, US Gulf); Wheat (US No. 2, soft red winter wheat, US Gulf);
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What is driving price volatility?
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The key factors driving price volatility include:
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Weather and climate change - The most frequent and significant factor causing volatility is unpredictable weather conditions. Climate change is altering weather patterns, but its impact on extreme weather events is not clear.
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Stock levels - Stocks have long played a role in mitigating discrepancies in short term demand and supply of commodities. When accessible stocks are low relative to use, as they currently are for coarse grains, price volatility may be high.
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Energy prices - Increasing links to energy markets through both inputs such as fertilizer and transportation, and through biofuel feedstock demand, are transmitting price volatility from energy to agricultural markets.
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Exchange rates - By affecting domestic commodity prices, currency movements have the potential to impact food security and competitiveness around the world.
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Increasing demand – If supply does not keep pace with demand, there will be upward pressure on commodity prices. With per capita incomes rising globally and in many poor countries expected to increase by as much as 50%, food demand will become more inelastic such that larger price swings would be necessary to affect demand.
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Resource pressures - Higher input costs, slower technology application, expansion into more marginal lands, and limits to double-cropping and water for irrigation, are limiting production growth rates.
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Trade restrictions – Both export and import restrictions amplify price volatility in international markets.
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Speculation - Most researchers agree that high levels of speculative activity in futures markets may amplify price movements in the short term although there is no conclusive evidence of longer term systemic effects on volatility.
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What are the policy challenges for governments?
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The main policy challenge for governments is to promote productivity growth, particularly for small producers, that improves market resilience to external shocks, reduces waste and increases supplies to local markets at affordable prices.
Public sector investments are required in agricultural research and development, institutions and infrastructure to increase sector productivity and resilience towards weather/climate change and resource scarcity. Investments are required to reduce post harvest losses.
Recognising that volatility will remain a feature of agricultural markets, coherent policies are required to both reduce volatility where possible and to limit its negative impacts.
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Mitigating volatility – Enhanced market transparency can reduce price volatility. Greater efforts are required to improve global and national information and surveillance systems on market prospects, including better data on production, stocks and trade in sensitive food security commodities. Removal or reduction of policy distortions such as restrictions on imports and exports or biofuel subsidies and mandates can also reduce price volatility.
Information and transparency in futures markets should be improved, recognizing the importance of harmonizing measures across exchanges.
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Managing volatility – Social safety nets can assist the most vulnerable consumers when food prices rise while producer safety-nets can offset low incomes, thereby maintaining their ability to purchase inputs and maintain production. Emergency food reserves for targeted assistance to poor people are useful to lessen the impact of high prices. Greater efforts are required to make market-based risk management schemes, including the use of forward contracting and commodity futures exchanges, available to smaller producers.
Governments can also adopt such risk management strategies such as insurance to finance food imports when poor weather reduces domestic production or option contracts to lock in future food import purchases.
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