Food Price Volatility

Source: Google

By Naveed Qazi | Editor, Globe Up Front

According to Food & Agricultural Organisation of United Nations Report (2009), 2008 witnessed the highest food price inflation in 30 years. Food prices were up from 40 percent to 76 percent. The role of food speculation in 2008 also played a part in the volatility of food prices.  

Price of rice increased upto 165 per cent. The speculative bubble in the financial market spilled over the commodity market, as people started searching alternatives in commodity sector and bubble started to form. World Bank & UNCTAD also acknowledged speculation as a factor behind the volatility in food prices. Commodity markets are seen as a source of wealth monetary accumulation. Thus, the food prices have always become a target of speculation.

Depreciation of US Dollar has played a role in rising food prices which has direct implications on the world consumer. Countries whose currencies are weaker than US Dollar have to procure more costs for procuring food, thereby increasing the volatility in prices. Some other important factors like infrastructure and market conditions also likely tend to determine food prices in commodity markets. Cereals, vegetable oils, livestock and oil seeds sectors have also made greater uncertainty in markets.

High oil price also has a direct impact on food prices. Due to an increasing demand for food, especially for livestock products in developing nations like China and India, has generated an increase in food production thereby increasing food price inflation. Rising incomes, rise of fertiliser prices have also contributed towards volatility of food prices. Food with high protein content has also created a need for more cattle breeding. Weather conditions and non-abundant buffer stocks have also contributed to food price volatility. Therefore, extreme price movements of agricultural commodities pose a threat to world food security which can have harmful consequences on the society.

The other reason for food price volatility is that there are geographical limits for crop cultivation. Farmers need to decide upon which crop they need to grow. As the demand of food is growing, the amount of land area under cultivation also tends to increase. This whole phenomena increases the price of food worldwide. The other reason given for extreme price movements is that the food is not traded readily due to protectionist policies which soars food inflation. Low yields also increase production which leads to demand for more land, reflecting price increase of food.  Therefore, the demand and supply of food is unstable which does not have positive implications on the world price movements.

Last year only, there was a poor harvest in Canada, Russia, and Kazakhstan leading to reduction on exports. Over $700 million were needed for adequate supply of food resources by UN World Food Program. There has created a need by United States and European Union to revisit policies for biofuel in order to diversify and harmonise energy supply to ease food volatility. Under investment in agriculture also been seen as a likely indicator for rising food prices.

Many measures should be initiated to curb the policy measures against food volatility taking place in the world. It can have national wide as well as international consequences. Chances of famine and political crises may also happen. National governments should sharply reduce subsidies to wealthy country farmers which drive poor farmers in developing countries into poverty. 'Special protective mechanisms’ such as shielding atleast twenty percent of tariff lines from reductions as ‘special products’ can generate higher production and can likely protect households with lower incomes. 

Agricultural policies around the world need reform. Domestic governments also need to provide cash vouchers so that poor people can buy essential food commodities. Genetic modification is suggested as an area to be exploited. Government policy measures play an important part in harmonising the prices because increased production mechanism of food will balance the supply and demand of commodities, thereby easing price volatility around the world.

The best policy depends upon a variety of considerations including the price increase, the severity of the impact, the population size, the  budgetary situation, administrative & institutional infrastructure. ‘Safety net’ programmes assist specialised population which include targeted food distribution, targeted cash transfer schemes, feeding programmes and employment schemes. 

Compensatory Financing Facility and Exogenous Shock Facility of the IMF could help vulnerable countries to cope during the time of imbalances in order to curb foreign exchange constraints. An employee scheme may be also available which can be backed by legislation. 'The Doha Round' has been trying to implement food security measures to improve agricultural markets. Many institutional changes need to be undertaken so that food crises get curbed.

G20 governments have stressed the need to invest public money in agriculture, sustainable resource use and strong development of agricultural institutions. Providing an environment of private sector investment for sustainable civil society partnerships is very important. Market information and transparency also plays a crucial role. 

Proper transportation also carries significance at the times of crises. World food programme has achieved Forward Purchasing to achieve more rapid and cost effective food delivery to beneficiaries across countries in various regions. Governments, corporates, food related industries and international watchdogs have to implement positive decision making that can hopefully solve or restrict the crises in the long term.

Businesses related to farming can increase core competency through proper use of technology and increased use of research and development , which can enhance productivity of their harvest. Innovation in this regard also carries utmost importance. 

Supply chain management issues also need to be dealt with. Companies and organisations related to farm industry should try to put every effort in reducing cost, so that it doesn’t have negative implications on the market prices, thereby further increasing the woes of consumers. International food traders should unify themselves regarding buffer stock level reduction, or the situation of speculation on food related commodities. It can help in better management during price volatility and can stabalise the situation. 


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