1. AGRICULTURAL PRICE
VOLATILITY: CAUSES, IMPACTS
& POLICY IMPLICATIONS
John STAATZ, Michigan State University
4th International Disaster and Risk Conference IDRC Davos 2012
26 -30 August 2012 – Davos, Switzerland

2. Outline of presentation
 What is agricultural price volatility and why is it a
concern?
 Overview of current situation
 Causes of price volatility
 The theory
 The current situation
 Actions to reduce and manage price volatility

3. What is agricultural price volatility &
why is it a concern?
 Volatility = high Farm and Retail Maize Prices in Mali
variability in prices, both
on the high-side and on Evolution des prix du maïs à MPessoba et Bamako
the low-side 270
 Most serious when the 220
F CFA/Kg
changes are not fully 170
predictable. 120
Impacts:
70

20
 On consumers, especially 1994 1995 1996 1997 1998 1999 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
the poor Années
 On farmers PC MAIS BKO PP MAIS MPESSOBA
 On political stability Source: Diarra and Traoré (2010)
 On pace and pattern of
economic growth

4. The current situation: real food prices
are hitting all-time highs…or are they?
350
Indices of Real Food Prices
300
250.0
250
200.0
200
150.0 150
100
100.0
50
50.0
0
0.0
1/2000
1/1990
1/1991
1/1992
1/1993
1/1994
1/1995
1/1996
1/1997
1/1998
1/1999
1/2001
1/2002
1/2003
1/2004
1/2005
1/2006
1/2007
1/2008
1/2009
1/2010
1/2011
1/2012
Food Grains
MONTHLY REAL FOOD PRICE INDICES (2002-2004=100)
Cereals Price Index
Food Price Index
Sources: FAO and World Bank

5. Causes of volatility
 In the simplest sense, price changes result from shifts in
supply and demand
 These price changes will be most severe & erratic when:
 Shock to demand or supply is large
 There is little scope in the short-run of adjusting to the shocks
through:
 Augmenting supply through drawing on or adding to carryover stocks,
increasing production, or adjusting trade
 Adjusting consumption (“inelastic demand”)
 There is uncertainty with respect to:
 The magnitude of the shocks
 The size of the carryover stocks
 How governments will react

6. Causes of recent global price volatility:
What’s been happening on the supply side?
 Weather shocks
 Climate change –
models predict more
extreme events
 Energy shocks
 Exchange rate
fluctuations
 Concerns about
slowing agricultural
productivity growth,
especially in
developing countries

7. Supply side: critical role of carryover stocks
Total world grain & oilseeds1
Stocks-to-use ratio
Stocks / Use
35% Maize: Real prices v Stock-to-
30% use ratios w/o China
25% 3.00 45%
Stock-to-use
20%
2.00 35%
US$/bu
15% 25%
10%
1.00 15%
Total world grain & oilseeds1
5% Stocks-to-use ratio 0.00 1970 1975 1980 1985 1990 1995 2000 2005 2010
5%
0%
1970/71 1975 1980 1985 1990 1995 2000 2005 2010/11
Maize price (real) S-U ex China
Source: USDA/ERS calculations based on USDA WASDE Source: Schmidhuber (2012)/FAO
and PS&D Database: Feb 2012

8. Supply side: Trade disruptions and the
“thinning” of the international market
 Government actions have exacerbated the global price
volatility through their trade policies:
 When prices are high: exporters tax/restrict exports and
importers subsidize imports.
 When prices are low: Exporters subsidize exports and importers
tax/restrict imports
 These opposite actions (“globalization in reverse”):
 Make international prices more volatile by moving supply and
demand in opposite directions and reducing the volume in
international markets
 Tend to offset each other in terms of domestic prices
 Reduce incentives to farmers to produce more when prices are
high
 Reduce government revenues in periods of high prices that could
finance agricultural expansion.

9. Supply-side conclusions
 Annual supply shocks are necessary but not
sufficient conditions for price volatility
 Level of carryover stocks are critical. Crop shortfall
+ low stocks = high prices
 Trade policy reactions of both importing and
exporting countries have exacerbated the situation

10. Demand side: Impact of Elasticity of Demand on
Price Volatility
Inelastic demand Elastic demand
Price S- Price S-
S S+ S
S
+
P1
p1
P0
p2
P2
D
D
Q1 Q0 Q2 Q1 Q0 Q2 Quantity
Quantity

11. What’s been happening on the
demand side?
 Demand becoming more inelastic because of:
 Higher incomes in Asia and Latin America
 Biofuels mandate; Linking energy and food markets
 What about speculation?
 Economists’ traditional view: speculation has a stabilizing effect
 More recent concerns about “financialization” of market:
 Greater integration of commodity and financial markets can lead to
spillover of instability in one market to another, especially in
conditions of poor information and loose regulation of other markets
 Mixed empirical evidence about possible impact of financial
speculation on food prices.
 Question for the future: What if China enters the world
maize market in a big way?

12. Actions to reduce and manage
volatility
 Reducing volatility
 Reducing barriers to trade  Strengthen WTO disciplines on
export restrictions
 More flexible biofuels mandates
 Better information on production and stocks
 More “weather-proofing” of production
 Regulatory oversight on speculation?
 Stocks?
 Managing volatility
 Weather-based insurance
 Financial reserves and lending facilities
 More targeted, market-compatible social safety nets rather than
using trade policy as a social safety net

13. Thank you!

14. 0
100
150
200
250
50
1992M01
1992M06
1992M11
1993M04
1993M09
1994M02
1994M07
1994M12
1995M05
1995M10
1996M03
1996M08
1997M01
1997M06
1997M11
1998M04
1998M09
1999M02
1999M07
1999M12
2000M05
2000M10
2001M03
2001M08
2002M01
and energy markets
2002M06
2002M11
2003M04
2003M09
2004M02
Food Price Index (2005 = 100)
2004M07
2004M12
2005M05
2005M10
2006M03
2006M08
2007M01
2007M06
Food Price Index (2005 = 100) – Source: IMF
2007M11
2008M04
2008M09
2009M02
2009M07
2009M12
2010M05
2010M10
2011M03
Strengthening the links between food
2011M08
2012M01
2012M06

15. Strengthening the links between food
and energy markets
Fuel Price Index (2005 = 100) – Source: IMF
300
250
200
150
100
50
0
11
46
81
116
151
186
221
1
6
16
21
26
31
36
41
51
56
61
66
71
76
86
91
96
101
106
111
121
126
131
136
141
146
156
161
166
171
176
181
191
196
201
206
211
216
226
231
236
241
246
Fuel Price Index (2005 = 100)

16. 0
50
100
200
250
300
150
1992M01
1992M06
1992M11
1993M04
1993M09
1994M02
1994M07
1994M12
1995M05
1995M10
1996M03
1996M08
1997M01
1997M06
1997M11
1998M04
1998M09
1999M02
1999M07
1999M12
2000M05
2000M10
2001M03
Food Price Index (2005 = 100)
2001M08
2002M01
and energy markets
2002M06
2002M11
2003M04
2003M09
2004M02
2004M07
2004M12
2005M05
2005M10
2006M03
2006M08
2007M01
Fuel Price Index (2005 = 100)
2007M06
2007M11
2008M04
2008M09
2009M02
2009M07
2009M12
2010M05
2010M10
2011M03
Strengthening the links between food
2011M08
2012M01
2012M06