Drivers and triggers of international food price spikes and volatility
Getaw Tadesse, Bernardina Algieri, Matthias Kalkuhl, Joachim von Braun1,
It is becoming frequently more obvious: the effects of price fluctuations and volatility are particularly devastating for global food security.
As a result, three researchers recently examined the drivers and triggers of intrinsic instability in agricultural markets; we have published an extract of their report here3.
Agricultural price volatility is explained by the unique combination of exogenous and endogenous risks. This means that excessive speculation in futures markets, the growing disconnection in economic fundamentals and the structural price hypervolatility observed on agricultural markets since 2008 facilitate the formation of agricultural bubbles and threaten not only agriculture but also food security.
Since 2008, reducing price hypervolatility and addressing food insecurity have been priorities for the international community and in particular, food stocks a strategic variable. However, any efforts are still insufficient. The difficulty in combating price volatility can also be explained by a lack of international cooperation, even though some initiatives are particularly commendable as pointed out by the experts in the report.
This call for greater international cooperation can only be welcomed, because the real challenge is to comprehensively address the various issues related to agriculture, and thus to establish a global agricultural governance able to effectively combat the natural and endogenous risks that threaten our food security.
momagri Editorial Board
This study has investigated the main drivers of food price spikes and volatility for wheat, maize, and soybeans, and shown how these factors trigger crisis at extreme price changes. The analysis has indicated that exogenous shocks as well as the linkages between food, energy, and financial markets play a significant role in explaining food price volatility and spikes.
In addition to demand and supply shocks, speculation is an important factor in explaining and triggering extreme price spikes.
Excessive speculation is more strongly associated with price spikesat extreme positive price changes than with negative price changes, implying that the stabilizing effect of speculation through price discovery is smaller than its destabilizing effect through creating market bubbles.
The results also confirm that supply shocks are reflected in price spikes and that the effect of oil price shocks is greater for price risk than for food crisis. The effect of oil prices on food price spikes has emerged as significant only in recent years. Financial crisis exerts a strong impact on food price volatility, which confirms the increasing link between financial and commodity markets.
On the basis of the empirical results, it seems opportune for policy makers to prevent excessive speculative behaviors in the commodity market in order to reduce price spikes and prevent short-term food crises. In this context, caps on trading under extreme market situations, or taxation of food commodity futures trading along the lines of the Tobin tax, could be framed. Designing flexible biofuel policies that are responsive to the food supply situation can also help stabilize prices and reduce volatility spillovers from oil markets in times of food crisis. Recent changes in the US biofuel mandate, for example, include flexibility mechanisms that allow for relaxing the blending requirement in one year if compensated in another year.
Improving the market information base would further help all market actors to form expectations based on fundamentals and to detect shortages early. While the Agricultural Market Information System (AMIS) initiative of the G20 strives for higher transparency, sufficient contributions from some member states are still lacking.
Recent developments in many countries to increase national grain stocks to reduce volatility and import dependency lead to increased grain scarcity and thus higher prices in the short run. International levels of storage are, however, only one option to reduce volatility, which turned out to be mostly insignificant in our analyses.
One reason might be lack of cooperation: governments building stocks only for their citizens tend to complement storage policies with trade restrictions, which effectively withdraw their stocks from the global grain market. Such collective action failure needs to be addressed in regional and global trade talks that should also consider the international consequences of national stockholding policies.
Besides policies to reduce volatility and extreme price spikes, governments can increase resilience of producers and consumers to deal with price changes. This can be done by supporting contract farming and price insurance mechanisms on the production side and by enhancing safety nets and access to financial services on the consumer side.
Governments and their international associations such as the G20 should therefore carefully analyze all available options for preventing food price spikes and volatility—from interventions in financial markets to biofuel policies—and they should also facilitate market information.
1 Respectively researchers at IFPRI, Universita della Calabria, and Center for Development Research (ZEF)
2 Review published by Elseiver
3 The full report is available from this link http://ac.els-cdn.com/S0306919213001188/1-s2.0-S0306919213001188-main.pdf?_tid=6440e3ca-f185-11e3-ae1a-00000aab0f6b&acdnat=1402504276_664cda99b7fbcaea86b7c8f1b15bc555