Food price volatility

Survey of theoretical proposals

Issue and relevance

Food price volatility

Why did the 2008 price spikes happen? Theoretical proposals

Implications for policy

Understanding how global demand and markets for staples work

Meeting future demand for grains: the elements of grain demand and interactions

Social effects

Reviewed literature

Wright, B. D. (March 18, 2011). The economics of grain price volatility. Applied

Economic Perspectives and Policy, 33, 1, 32-58.

Chen, S. T., Kuo, H. I., & Chen, C. C. (August 01, 2010).

Modeling the relationship between the oil price and global food prices. Applied Energy, 87, 8,

Wright’s proposal

Study focuses on the short-run price behavior of corn, wheat and rice.

Relation between price spikes in storable grains and stocks level.

Spikes occur only in times were grain stocks are at minimal levels.

Inter temporal arbitrage

Grain is storable – Role of stocks

Bad harvest happens Expected price increases Stock consumption reduces current price

Great harvest happens Supply increases Expected returns decrease Incentive for storage Prices levelled

Elements

Market demand Current consumption demand + grain stocks

demand Supply Harvest + stocks from the previous year. ConsumptionThe difference between available supply and

stocks from previous year. Price of stored unit Expected to increase by the sum of storage cost

and the interest rate.

Market Demand

Chen, Kuo, & Chen

Food prices increase due to 3 factors: oil price increase, increased demand, and climate change.

There has been a significant relationship between global grain prices and oil price.

Model includes oil price, bio-fuel production, cross-price elasticity, and own-price elasticity of soybean, corn and wheat.

Proposal

The price of a single grain commodity can be affected by the prices of oil and other grains.

Effects of oil price on agricultural supply curve

Effects of oil price on food demand

Planted acreage, supply and food prices

Model

The general objective is to compare crude oil and global grain prices and to assess their interactions.

Crops in study are corn, soybean and wheat

Examination of weekly data for futures prices of oil and the three grains

Time frame: twelfth week of 1983 - fifth week of 2010.

Elements

Cultivation acreage Food versus energy Yield

Crude oil price and global grain prices;

Components of supply and demand Food and bio-fuel production

Production costs

Bio-fuel demand

Wright: “most obvious shock to current demand.”

Diversion of grain production is substantial.

Via government mandates

No time for production to keep up with the increased demand.

Chen et al.

Subsidies on ethanol and bio-fuels are great incentives

Food crops and energy crops

Use of land influences food supply

Results Wright

Price spikes in 2007/08 caused by minimal stock levels carried from the previous year

Bio-fuel mandates have created a shock in demand that will exceed yield increases for years.

Chen et al.

Changes in oil price have remarkable effects over grain prices. Highly linked when oil

price is at a higher level.

Grain price varies significantly with price variation in the other crops.

Conclusions

Wright The poorest will suffer

from price increase Higher proportion of

income to buy food

If bio-fuels keep dragging grain supply, food availability will deteriorate along with the improved living of the poor.

Chen et al.

Increased demand for energy crops and a steady high oil price will affect the poorest countries

Governments should eliminate subsidies to bio-fuel industries, as they may increase hunger.

Personal remarks Supply for energy crops must increase to a higher level

to sustain both food demand and bio-fuel demand.

Supply for bio-fuels must find non-edible crops to sustain a shift to a higher level.

There is then a strong demand for non-edible oilseeds as raw materials for bio-fuels.

By decreasing demand for oil, grain price sensitivity will diminish. Thus, switching to alternatives sources of energy could be an improving measure to price volatility.