Development Economics

A Review – Food Price Increases: Causes, Impacts and Responses – Part III: Food Price Volatility

Increasing Food Price Volatility

We know that climate change is coming, but the local details remain clouded: we are not sure yet which areas will be dryer and which prone to more flooding, for example. But as it is all but certain that volatility will increase. As Dr. Maximo Torero, an economist and division chief at International Food Policy Research Institute pointed out, in a hotter world, weather will be significantly more variable, which means that agricultural output will be more volatile also. Even if some aspects of today’s price volatility is a passing phase due to unregulated financial markets and other bad policies, volatility in some form will be with us. So we have to take it seriously, and plan to cushion people living in poverty from its harmful effects.

Torero, and Professor Carlos Martins-Filho of the University of Colorado, showed that excessive food price volatility has greatly increased. Torero also showed that most of the factors pushing up food prices are also worsening the volatility of those prices. For example, just a few countries account for the majority of exports of most staples – a monopolistic power or reliance on just a few sellers that can also increase volatility. In addition, he noted that government mandates to use ethanol also increases volatility as well as price. And as volume in futures markets has increased, this also makes the price of food vulnerable to volatility; high volatility attracts more financial market participants, who learn that they can make money on trading – which can amplify instability. Finally, high futures market prices lead also to high spot market prices, a consequence of speculation.

About

Stephen C. Smith is a Professor of Economics and International Affairs and Chair of the Department of Economics at the George Washington University. He received his PhD in economics from Cornell University and has been a Fulbright Research Scholar, a Jean Monnet Research Fellow, a Brookings Visiting and Non-Resident Fellow, as well as an IZA Research Fellow. Professor Smith is the author of Ending Global Poverty: A Guide to What Works (Palgrave Macmillan, 2005); co-author with Michael Todaro of Economic Development (12th Ed., Addison-Wesley, 2014); and co-editor with Jennifer Brinkerhoff and Hildy Teegen of NGOs and the Millennium Development Goals (Palgrave Macmillan, June 2007). He is also author or coauthor of approximately fifty journal articles, and numerous other publications. (Further details at https://www.gwu.edu/~iiep/ssmith/).

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