Transcript Food price volatility

Food price volatility
Survey of theoretical proposals
Issue and relevance
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Food price volatility
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Why did the 2008 price
spikes happen?
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Theoretical proposals
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Understanding how global
demand and markets for
staples work
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Meeting future demand
for grains: the elements of
grain demand and
interactions
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Social effects
Implications for policy
Reviewed literature
Wright, B. D. (March 18, 2011).
The economics of grain price volatility. Applied Economic
Perspectives and Policy, 33, 1, 32-58.
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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,
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Wright’s proposal
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Study focuses on the short-run price behavior of corn,
wheat and rice.
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Relation between price spikes in storable grains and
stocks level.
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Spikes occur only in times were grain stocks are at
minimal levels.
Inter temporal arbitrage
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Grain is storable – Role of stocks
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Bad harvest happens
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Expected price increases
Stock consumption reduces current price
Great harvest happens
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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.
 Consumption
The 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.
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Market Demand
Chen, Kuo, & Chen
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Food prices increase due to 3 factors: oil price increase,
increased demand, and climate change.
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There has been a significant relationship between global
grain prices and oil price.
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Model includes oil price, bio-fuel production, cross-price
elasticity, and own-price elasticity of soybean, corn and
wheat.
Proposal
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The price of a single grain commodity can be affected by
the prices of oil and other grains.
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Effects of oil price on agricultural supply curve
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Effects of oil price on food demand
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Planted acreage, supply and food prices
Model
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The general objective is to compare crude oil and global
grain prices and to assess their interactions.
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Crops in study are corn, soybean and wheat
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Examination of weekly data for futures prices of oil and
the three grains
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Time frame: twelfth week of 1983 - fifth week of 2010.
Elements
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Cultivation acreage
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Food versus energy
Yield
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Crude oil price and global grain prices;
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Components of supply and demand
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Food and bio-fuel production
Production costs
Bio-fuel demand
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Wright: “most obvious
shock to current demand.”
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Chen et al.
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Subsidies on ethanol and
bio-fuels are great
incentives
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Diversion of grain
production is substantial.
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Via government mandates
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Food crops and energy
crops
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No time for production to
keep up with the
increased demand.
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Use of land influences
food supply
Results
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Wright
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Chen et al.
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Price spikes in 2007/08
caused by minimal stock
levels carried from the
previous year
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Changes in oil price have
remarkable effects over
grain prices.
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Bio-fuel mandates have
created a shock in
demand that will exceed
yield increases for years.
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Highly linked when oil price
is at a higher level.
Grain price varies
significantly with price
variation in the other
crops.
Conclusions
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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.
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Chen et al.
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Increased demand for
energy crops and a steady
high oil price will affect
the poorest countries
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Governments should
eliminate subsidies to biofuel industries, as they may
increase hunger.
Personal remarks
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Supply for energy crops must increase to a higher level to
sustain both food demand and bio-fuel demand.
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Supply for bio-fuels must find non-edible crops to sustain
a shift to a higher level.
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There is then a strong demand for non-edible oilseeds as
raw materials for bio-fuels.
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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.