Volatility of International Food Prices : Impacts on Resource Allocation and on Food Supply Response

Uncertainty is a quintessential feature of agricultural commodity prices. After about three decades of low and relatively stable price levels, we have experienced a dramatic rise and volatility in international food prices since 2005. Besides the traditional causes of price fluctuations, agricultural commodities are increasingly connected to energy and financial markets, with potentially destabilizing impacts on prices. The study focuses on the global supply response of the world’s key staple crops, namely wheat, corn, soybeans, and rice, to changes in international food prices and volatility. By applying the details of the crop calendar to derive monthly global acreage and production time series data for the period 1961–2010, we explicitly consider the role of seasonality in global agricultural supply response. Depending on the respective crop, the time series econometric results indicate that short-run elasticities are about 0.05 to 0.40; and price volatility tends to reduce acreage for most of the crops. Comparison of annual and monthly acreage response elasticities suggests that global acreage adjusts to new information and expectations seasonally. The analysis also indicates that acreage allocation is more sensitive to prices during spring than in winter, with varying responses across months. Furthermore, the study estimates global acreage, yield and production response of these key agricultural commodities by employing a multi–country, crop– and calendar–specific, seasonally disaggregated panel dataset, with price changes and price volatility applied accordingly. Besides confirming the time series econometric results, the dynamic panel supply response model results show that output price volatility has negative correlations with globally aggregated crop supply, implying that farmers shift land, other inputs, and yield-improving investments to crops with less volatile prices. In addition, we use the estimated coefficients to analyze whether the recent increase in prices and price volatility is an opportunity or a challenge for world food supply. Simulating the impact of the price dynamics since 2006, we find that price risk has reduced the production response of wheat in particular—and to a lesser extent, rice—thus dampening price incentive effects. The net-impact on production of the 2006–2010 price dynamics is an increase of about 3% for corn, 2% for soybeans, 1% for rice, and a decrease of about 1% for wheat. The study further develops country-specific acreage response models, which enable forecasting of planted acreages in large producer countries of major staple crops 2–3 months before planting. Every supply response study requires some form of price expectation modelling, so do the supply response models of the present study. Using primary data from rural Ethiopia, we investigate price expectation formation of farmers. The empirical results show that information regarding current and past output prices in nearby markets, central wholesale prices and seasonal rainfall shape farmers’ price expectations. Furthermore, the results indicate that farmers who invest in acquiring better price information are more likely to have smaller price prediction errors. This calls for public investments to provide smallholders with reliable market information.Die Volatilität von internationalen Nahrungsmittelpreisen: Auswirkungen auf die Ressourcenallokation und das Nahrungsmittelangebot Unsicherheit ist eine wesentliche Eigenschaft von Agrarpreisen. Nach rund drei Jahrzehnten mit niedrigen und relativ stabilen Weltmarktpreisen, sind die Nahrungsmittelpreise seit 2005 stark gestiegen und volatil. Neben den traditionellen Ursachen von Preisschwankungen, kann die zunehmende Vernetzung von Agrarprodukten mit Energie- und Finanzmärkten möglicherweise einen destabilisierenden Einfluss auf Preise haben. Diese Studie untersucht die Anpassung des weltweiten Angebots von Grundnahrungsmitteln, wie Weizen, Mais, Soja und Reis, an die Veränderungen von internationalen Nahrungsmittelpreisen und deren Volatilität. Dabei wird die Saisonabhängigkeit des globalen landwirtschaftlichen Angebots durch das Ableiten von Zeitreihendaten der monatlichen, globalen Anbaufläche und Produktion, für die Jahre 1961-2010, untersucht. Je nach Nutzpflanze zeigt die Zeitreihenanalyse kurzfristige Elastizitäten von 0,05 bis 0,40, während die Preisvolatilität die Anbaufläche für die meisten Pflanzen zu verringern scheint. Der Vergleich der jährlichen und monatlichen Anbauflächenelastizitäten zeigt, dass sich die weltweite Anbaufläche saisonal an neue Informationen und Erwartungen anpasst. Zudem schwankt die Allokation der Anbauflächen zwischen den Monaten und reagiert generell sensibler auf Preise während des Frühlings als im Winter. Desweitern schätzen wir die Reaktion der globalen Anbauflächen, des Ertrags und der Produktion der wichtigsten landwirtschaftlichen Güter. Dies geschieht anhand eines neu entwickelten internationalen, Pflanzen- und Kalender-spezifischen, saisonal desaggregierten Paneldatensatz, entsprechend den jeweiligen Preisänderungen und der Preisvolatilität. Die Ergebnisse des dynamischen Panelmodells der Angebotsreaktion bestätigen die Resultate der ökonometrischen Zeitreihenanalyse, und zeigen zudem, dass die Unbeständigkeit der landwirtschaftlichen Güterpreise negativ mit dem global aggregierten Angebot korreliert. Dies impliziert, dass Bauern Land, weitere Inputs und erntesteigernde Investitionen auf Anbaupflanzen mit geringerer Preisvolatilität konzentrieren. Die Koeffizienten der ökonometrischen Analyse zeigen, inwiefern Preissteigerungen und Preisschwankungen das weltweite Nahrungsmittelangebot beeinflussen. Durch die Simulation des Einflusses der Preisschwankungen seit 2006, konnten wir anhand der Weizenproduktion feststellen, dass das Preisrisiko einen durch die Preise generierten Produktionsanreiz dämpft. Der netto Einfluss der Preisschwankungen in den Jahren 2006-2010, führte zu einem Anstieg von 3% für Mais, 2% für Sojabohnen, 1% für Reis und einer Reduktion von rund 1% für Weizen. Diese Studie entwickelt des Weiteren ein länder-spezifisches Reaktionsmodel für Anbauflächen, welches diese in den größeren Produzentenländern, für die wichtigsten Grundnahrungsmittel und für einen Zeitraum von 2-3 Monaten vor der Aussaat, vorhersagt. Eine Analyse der Angebotsanpassung benötigt komplementär immer auch ein Preiserwartungsmodel. Anhand von Primärdaten evaluieren wir daher die Preiserwartungen von Kleinbauern im ländlichen Äthiopien. Die empirischen Ergebnisse zeigen, dass Informationen über aktuelle und vergangene Preise auf nahen Getreidemärkten, zentrale Großhandelspreise und saisonale Niederschlagsmengen die Preiserwartung entscheidend formen. Zudem können Kleinbauern, die in die Beschaffung besserer Informationen investieren, die Preise nach einer Ernte besser antizipieren. Folglich wäre es sinnvoll Institutionen zu schaffen, die Marktinformationen als öffentliches Gut bereitstellen

Rising global food prices and price variability: A blessing or a curse for global food supply?

This study examines the response of global aggregate acreage of selected crops to international prices and price variability. Applying up-to-date panel data econometric techniques, the study addresses whether the recent rise in international food prices is a blessing or a curse to the global supply of four key staple crops: wheat, corn, soybeans, and rice. The results reveal that rising own crop prices spur an increase in the worldwide aggregate acreage of these crops, whereas higher competing crop prices have the opposite effect. These results are robust across different types of panel data econometric estimators as well as the use of either future or spot prices. Our preferred acreage supply model specification further shows that fluctuations of own crop prices have a statistically significant negative (positive) effect on acreages of wheat (soybeans), but insignificant effects on acreages of corn and rice.Non-PRIFPRI1; AGRODEPMTI

The response of global agricultural supply to prices and price variability: a panel data analysis

This study investigates the responsiveness of global cropland to changes in output prices and the uncertainty therein. The study provides a global short- and long-term acreage and yield elasticity which hints at how major agricultural commodity producers respond to the recent high food prices and volatility. Using cross-country panel data for the period 1961-2010, this paper investigates the global supply impacts of output prices and their volatility. Besides providing updated estimates of supply responses to own and competing price expectations, it also estimates growth trends that are informative to policy in understanding the likely extensive and intensive margin changes because of crop price changes. Estimation of acreage response to input and output prices as well as output price volatilities is a necessary step but not sufficient to predict the global food supply effect of possible developments in output prices and their volatility. In addition to the acreage allocation response that agricultural producers make towards price changes, they also react to expected changes in terms of yield response. While acreage as well as yield responses to own output prices are positive, the response towards output price volatilities is modest. Thus, besides via acreage changes, the global food supply response to expected prices comes from yield changes, both affecting global food supply and food security

Impacts of climate and price changes on global food production

Agriculture is one of the key drivers and victims of climate change. Climate-resilient agriculture is therefore vital for achieving enhanced food security—which is a crucial component of the sustainable development goals (SDGs). This paper provides answers to questions that are prerequisite for policies that address agriculture and climate change. We analyze the determinants of global average crop production for maize, wheat, rice, and soybeans over the period 1961–2013. We find strong and statistically significant supply elasticities for all four crops with respect to own crop prices. Our results also underscore the relevance of output price volatility for the supply of these key global agricultural staple crops—especially on production of wheat and maize. Comparing the standardized effect sizes of own price and price volatility estimates, the effects are on par for wheat production while the price volatility effect is only a fifth of the own price effect on maize production. In agreement with previous studies, we also find that climate change has significant adverse effects on production of the world’s key staple crops. More importantly, this study finds that weather extremes—both in terms of temperature and precipitation shocks— during the growing months have significant adverse impacts on the production of the abovementioned food crops. Price and weather extremes do not only adversely affect average global food production, they also positively contribute to the year-to-year fluctuations of food availability. Thus, combating climate change using both mitigation and adaptation technologies is crucial for global production and hence food security

Volatility in the international food markets: implications for global agricultural supply and for market and price policy

Agricultural countries usually produce multiple crops, but a particular area of land is allocated to the production of a certain crop. Understanding how producers make decision to allot acreage among crops and how decisions about land use are affected by changes in prices and their volatility is fundamental for both policy design and for estimation models of the behavior of agricultural producers. The profitability of a land allocated to a certain crop is affected by the volatility of the crop’s price that in turn affects the acreage allocation decision of the producer. To address this, the present paper estimates global acreage response equations for major agricultural commodities (wheat, maize, soybeans and rice) using two related databases: globally aggregated time series and cross-country panel databases. The paper addresses the debate of agricultural market regulation from the perspective of agricultural producers. The findings of this study reveal that, while higher output prices are incentives to improvements in the global crop supply, output price volatility, on the other hand, discourages agricultural investment in terms of cropland expansion. Depending on respective crop, short-run acreage elasticities range between 0.05 and 0.25 whereas price volatility tends to reduce acreage response of all crops except of soybeans. Thus, price volatility management tools, which could include market regulation but also other market based tools like futures contracts or contract farming, need to be customized to specific crops and countries