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Food price volatility

Food price volatility. Survey of theoretical proposals. Issue and relevance. Food price volatility Why did the 2008 price spikes happen? Theoretical proposals Implications for policy. Understanding how global demand and markets for staples work

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Food price volatility

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  1. Food price volatility Survey of theoretical proposals

  2. Issue and relevance • Food price volatility • Why did the 2008 price spikes happen? • Theoretical proposals • Implications for policy • Understanding how global demand and markets for staples work • Meeting future demand for grains: the elements of grain demand and interactions • Social effects

  3. Reviewed literature • Wright, B. D. (March 18, 2011). The economics of grain price volatility. Applied Economic Perspectives and Policy, 33, 1, 32-58. • Chen, S. T., Kuo, H. I., & Chen, C. C. (August 01, 2010). Modeling the relationship between the oil price and global food prices. Applied Energy, 87, 8,

  4. Wright’s proposal • Study focuses on the short-run price behavior of corn, wheat and rice. • Relation between price spikes in storable grains and stocks level. • Spikes occur only in times were grain stocks are at minimal levels.

  5. Inter temporal arbitrage • Grain is storable – Role of stocks • Bad harvest happens • Expected price increases • Stock consumption reduces current price • Great harvest happens • Supply increases • Expected returns decrease • Incentive for storage • Prices levelled

  6. Elements • Market demand Current consumption demand + grain stocks demand • Supply Harvest + stocks from the previous year. • Consumption The difference between available supply and stocks from previous year. • Price of stored unit Expected to increase by the sum of storage cost and the interest rate.

  7. Market Demand

  8. Chen, Kuo, & Chen • Food prices increase due to 3 factors: oil price increase, increased demand, and climate change. • There has been a significant relationship between global grain prices and oil price. • Model includes oil price, bio-fuel production, cross-price elasticity, and own-price elasticity of soybean, corn and wheat.

  9. Proposal • The price of a single grain commodity can be affected by the prices of oil and other grains. • Effects of oil price on agricultural supply curve • Effects of oil price on food demand • Planted acreage, supply and food prices

  10. Model • The general objective is to compare crude oil and global grain prices and to assess their interactions. • Crops in study are corn, soybean and wheat • Examination of weekly data for futures prices of oil and the three grains • Time frame: twelfth week of 1983 - fifth week of 2010.

  11. Elements • Cultivation acreage • Food versus energy • Yield • Crude oil price and global grain prices; • Components of supply and demand • Food and bio-fuel production • Production costs

  12. Bio-fuel demand • Wright: “most obvious shock to current demand.” • Diversion of grain production is substantial. • Via government mandates • No time for production to keep up with the increased demand. • Chen et al. • Subsidies on ethanol and bio-fuels are great incentives • Food crops and energy crops • Use of land influences food supply

  13. Results • Wright • Price spikes in 2007/08 caused by minimal stock levels carried from the previous year • Bio-fuel mandates have created a shock in demand that will exceed yield increases for years. • Chen et al. • Changes in oil price have remarkable effects over grain prices. • Highly linked when oil price is at a higher level. • Grain price varies significantly with price variation in the other crops.

  14. Conclusions • Wright • The poorest will suffer from price increase • Higher proportion of income to buy food • If bio-fuels keep dragging grain supply, food availability will deteriorate along with the improved living of the poor. • Chen et al. • Increased demand for energy crops and a steady high oil price will affect the poorest countries • Governments should eliminate subsidies to bio-fuel industries, as they may increase hunger.

  15. Personal remarks • Supply for energy crops must increase to a higher level to sustain both food demand and bio-fuel demand. • Supply for bio-fuels must find non-edible crops to sustain a shift to a higher level. • There is then a strong demand for non-edible oilseeds as raw materials for bio-fuels. • By decreasing demand for oil, grain price sensitivity will diminish. Thus, switching to alternatives sources of energy could be an improving measure to price volatility.

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