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Food price volatility Survey of theoretical proposals.

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Presentation on theme: "Food price volatility Survey of theoretical proposals."— Presentation transcript:

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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