ECONOMICS

Price Volatility in Agricultural Commodities

Price Volatility in Agricultural Commodities

Introduction

There has been a high prevalence of volatility in the prices of Agricultural commodities. Volatility pertains to uncertain and rapid fluctuations which greatly hampers the efficiency of Agricultural sector.

The threat of volatility in prices of Agricultural commodities creates uncertainty not only for the farmers but also for the policy makers as well. A closer look at the market fundamentals would unearth the major factors causing volatility in prices of Agricultural commodities. The major factors causing volatility in agricultural commodities are discussed below:

Discussion

Factors Associated with the Increased Volatility in Agricultural Commodities

The threat of natural climatic shocks constantly hampers the output of agricultural commodities. With increased climatic changes and natural disasters taking place, it becomes increasingly difficult for farmers to maintain the output level (Bourdon, 2011). There are various hurdles associated with the increased climatic changes.

The supply gets affected and with increased unavailability of raw material, farmers are not able to manufacture their products on the given time. The sudden climatic changes pose a big threat for farmers in their harvesting process.

Untimely rains can hamper the harvesting process and as a result the crop suffers massively. On the other hand pests also have to be dealt with effectively. They hamper the production of crops.

The variation in output due to natural shocks has a significant impact on output. Secondly the demand Elasticities and supply Elasticities are relatively low in the context of short run. Since the demand and price Elasticities are very low, these Elasticities have to be increased.

It is necessary that there should be a substantial variation in prices since we have to balance the supply and demand Elasticities. Since supply shock is massive, there has to be a balanced approach in order to deal with the inconsistencies pertaining to demand and supply Elasticities. Business Cycle fluctuations have been significantly impacting the prices of Agricultural commodities (Anon, 2011).

It has been observed that production takes considerable time in Agriculture that's why Supply cannot respond much to price changes. The inconsistencies in supply response can cause cyclical adjustments which require a comprehensive strategy.

Export Restrictions

Export restrictions in important food-producing countries also There has also been a great influence of Export restrictions in the price volatility of Agricultural commodities. Increased export restrictions discourage the farmers from getting higher returns.

The favorable outcomes associated with Export restrictions do not get accomplished in majority of the situations. Export restrictions form a deterrent for price stability in Agricultural commodities. Food Security is increasingly being threatened by the use of Export Restrictions (Gerard & Alpha, 2011).

Many countries are plagued with issues of volatility in prices of Agricultural commodities because of increased implementation of export restrictions. There are increased implications of Export restrictions on prices of Agricultural commodities.

Increase in Oil Prices

The rapid increase in Oil prices has a significant impact on the volatility of prices in agricultural commodities. Many countries are now directing their farmers to implement cultivation based on bio fuel crops (Bourdon, ...