The Economics of Food Price Volatility

Jean-Paul Chavas, David Hummels, Brian D. Wright, Jean-Paul Chavas, David Hummels, Brian D. Wright

• Publisher: University of Chicago Press
• Year: 2014
• Print ISBN: 9780226128924
• eBook ISBN: 9780226129082
• Topic: Business
• Subtopic: Agribusiness
• Index: Business

There has been an increase in food price instability in recent years, with varied consequences for farmers, market participants, and consumers. Before policy makers can design schemes to reduce food price uncertainty or ameliorate its effects, they must first understand the factors that have contributed to recent price instability. Does it arise primarily from technological or weather-related supply shocks, or from changes in demand like those induced by the growing use of biofuel? Does financial speculation affect food price volatility?

The researchers who contributed to The Economics of Food Price Volatility address these and other questions. They examine the forces driving both recent and historical patterns in food price volatility, as well as the effects of various public policies in affecting this volatility. The chapters include studies of the links between food and energy markets, the impact of biofuel policy on the level and variability of food prices, and the effects of weather-related disruptions in supply. The findings shed light on the way price volatility affects the welfare of farmers, traders, and consumers.

1

Influences of Agricultural Technology on the Size and Importance of Food Price Variability

Julian M. Alston, William J. Martin, and Philip G. Pardey*

1.1 Introduction

Innovation and technological change in agriculture have contributed to profound changes in the structure of agricultural production, markets, and trade. Significant technological changes have been made both on farms and in the industries that store, transport, process, distribute, and market farm products and supply inputs used by farmers (e.g., see Pardey, Alston, and Ruttan 2010).

These changes have affected the size and importance of food price variability in three main ways. First, innovations can change the sensitivity of aggregate farm supply to external shocks—for instance, if farmers adopt improved crop varieties that have higher expected yields but more-or less-variable yields, if individual farmers are induced through innovation to become more specialized in particular outputs, or if the adoption of innovations results in less variation among farmers in the timing of farm operations (e.g., the date of planting of crops) or an increase in the geographical concentration of production. Second, technological innovations on or off farms can result in changes in the price elasticity of supply or demand (of both farm inputs and outputs), changing the sensitivity of prices to a given extent of underlying variability of supply or demand or both. This can happen both directly, as a consequence of particular innovations, or indirectly because of the broader economic implications of technological changes—for example, by increasing incomes. Third, food price volatility is less important to richer people and, by increasing the general abundance of food and reducing the share of income spent on food, agricultural innovation has made a given extent of volatility less important.

The recent evidence of a slowdown in agricultural productivity growth in many parts of the world, combined with the rise of biofuels, has coincided with a reversal of the trend of rising abundance of food, and a corresponding increase in vulnerability of a greater number of poor people to food price volatility.¹ Moreover, as poor farmers respond to food scarcity by increasing the intensity of production practices and moving farther into marginal areas, we may see an increase in vulnerability of their production to weather and other shocks for some farmers. This chapter explores these different dimensions of the role of agricultural technology in contributing to or mitigating the consequences of variability in agricultural production, both in the past and looking forward.

1.2 A Simple Model of Technology and Prices

A simple supply and demand model can be used to illustrate the various ways in which changes in technology influence food price variability.² In the following model of the farm-level market for a staple food commodity, subscripts s and d refer to supply and demand respectively, Q represents quantity, P represents price, and η represents the absolute value of the elasticity of supply or demand.³ In each equation, α, the “in...

Table of contents

• Cover
• Copyright
• Title Page
• Series Page
• National Bureau of Economic Research
• Relation of the Directors to the Work and Publications of the National Bureau of Economic Research
• Contents
• Preface
• Introduction
• 1. Influences of Agricultural Technology on the Size and Importance of Food Price Variability
• 2. Corn Production Shocks in 2012 and Beyond: Implications for Harvest Volatility
• 3. Biofuels, Binding Constraints, and Agricultural Commodity Price Volatility
• 4. The Evolving Relationships between Agricultural and Energy Commodity Prices: A Shifting-Mean Vector Autoregressive Analysis
• 5. Bubble Troubles? Rational Storage, Mean Reversion, and Runs in Commodity Prices
• 6. Bubbles, Food Prices, and Speculation: Evidence from the CFTC’s Daily Large Trader Data Files
• 7. Food Price Volatility and Domestic Stabilization Policies in Developing Countries
• 8. Food Price Spikes, Price Insulation, and Poverty
• 9. Trade Insulation as Social Protection
• Notes
• Contributors
• Author Index
• Subject Index