THE GLOBAL ECONOMY

The Global Economy



The Global Economy

Critically examine the reasons behind the volatility of agricultural product prices, the measures governments can take to reduce volatility and the measures that businesses can take to manage it

Introduction

The last episodes of extreme price volatility in world agricultural markets portend greater and more frequent threats to global food security. To reduce the vulnerability of countries, policies should equip them to cope with the adverse effects of extreme volatility, and improve the functioning of the market. Volatility describes how a value changes over time and how fast, for example, the price of a commodity. Although this concept may seem obvious, it is difficult to define accurately and objectively. In economic theory, volatility implies two fundamental concepts: variability and uncertainty. The first describes the total variation while the second refers to unpredictable fluctuations.

Price fluctuations are a common feature and a necessary precondition for the functioning of competitive markets. The essence of the price system is that the scarcity of a commodity encourages an increase in price, while leading to reduced consumption and increased investment. However, the efficiency of the price system begins to be affected when changes in prices are increasingly uncertain and subject to extreme fluctuations over a period of time. Historically, episodes of extreme volatility in the markets of agricultural products have been rare. Establishing an analogy with natural disasters, they are unlikely to occur but involve risks and potential costs extremely high for society.

Global food system becomes vulnerable

There is a growing consensus that the global food system becomes more vulnerable, and that is more susceptible to extremes of price volatility. Since markets are increasingly integrated into the global economy, disruptions in the international arena can occur and spread to domestic markets much more quickly than before.

The growing vulnerability is being caused by an apparent increase in extreme weather events and a greater reliance on new export zones where crops depend on the vagaries of time, greater reliance on international trade to meet food needs at the expense of stockpiling, a growing demand for food from other sectors, especially energy, and greater influence of macroeconomic factors, including the volatility of exchange rates and monetary policy changes. Moreover, financial firms are increasingly investing in commodity derivatives markets, in their portfolio risk, since the benefits of this sector appear to be related to other assets. While generally not considered this "financialisation of commodities" as the source of fluctuations in prices, the data suggest that transactions in the future markets have been able to increase short-term volatility (Audrey 2007, 269).

The Low income countries suffer the most

The extreme price volatility has a cost, as market players will struggle to plan and adapt to fluctuating signals. As unpredictable changes or "shocks", above a certain critical size and are maintained at these levels, it is likely that policies and traditional coping mechanisms fail. Episodes of extreme volatility, particularly high price increases and unexpected, are a major threat to food security in developing ...