The latest in the excellent two pagers from the FAO’s ‘Economic and Social Perspectives’ series looks at price volatility in agricultural markets. It finds that over recent decades, staple food prices have indeed become more volatile. The graph shows a measure of volatility – the market’s expectation of how much the price of a commodity might move in future. The two pager doesn’t say where the data comes from (and the paper on which it is based isn’t out yet), but it seems to measure subjective expectations, a bit like business confidence indices.
As the paper points out, a bit of price volatility is a good thing – it’s part of ensuring that supply shifts in response to changing demand, but excessive, or excessively short-term price swings deters farmers or companies from investing – especially given the timelag between investing in a new crop, and harvesting it.
Why has volatility increased?
“Increased vulnerability is being triggered by an apparent increase in extreme weather events and a dependence on new exporting zones, where harvest outcomes are prone to weather vagaries; a greater reliance on international trade to meet food needs at the expense of stock holding; a growing demand for food commodities from other sectors, especially energy; and a faster transmission of macroeconomic factors onto commodity markets, including exchange rate volatility and monetary policy shifts, such as changing interest rate regimes.
What is more, financial firms are progressively investing in commodity derivatives as a portfolio hedge since returns in the commodity sector seem uncorrelated with returns to other assets. While this ‘financialisation of commodities’ is generally not viewed as the source of price turbulence, evidence suggests that trading in futures markets may have amplified volatility in the short term.”
Alas the ‘so what’ section of the paper does not live up to the diagnosis, merely calling for better coherence and coordination between different institutions (governments, multilaterals etc), transparency and monitoring, safety nets and faster disbursing funding during price shocks – an even more restricted menu than Robert Zoellick’s recent FT piece. The FAO seems to be accepting growing volatility as inevitable and merely trying to cushion the impact a bit.