Wednesday, 8 February 2012

What is the main problem - price volatility or high food prices?

By Xavier Cirera

On Monday I attended a very interesting IDS workshop on agricultural price volatility.

Colleagues from the UK's HM Treasury, Oxfam, UNCTAD, IFPRI, WDM and SOAS gave fascinating presentations, especially on the role of speculators in increasing volatility. The evidence presented was mixed, showing how difficult it is to clearly disentangle the effect of financial agents from other sources of volatility, in a period where fundamental determinants of prices, such as demand, have also been very volatile.

What’s the problem – volatility or high price levels?

Prior to the workshop I was not convinced that volatility was the primary problem in agricultural markets. It seems to me that there is a lot of confusion between the impact of high food prices and the impact of volatile prices. Some of the evidence presented seemed to mix both effects:
  • with high prices, net-producers should benefit, and net-consumers should lose out; 
  • with volatile prices, the impact on net-producers is clearly negative, but the impact on net-consumers is unclear.
There were some interesting discussions on other specific volatility impacts on poor people in developing countries that deserve further research. For example, large price fluctuations can have long-term effects on a variety of factors; the irreversible sale of assets; removing children from school and impact on women who buffer the nutrition intake of the household. These effects can be directly linked to volatility.

How much does volatility really matter?

While the discussion on financial speculation and volatility is fascinating, I wonder how important this is in relative terms with the challenges ahead in agricultural markets.

International prices only matter as long as they are transmitted to domestic prices. IFPRI presented evidence that on average around 40 per cent of international price changes was transmitted to domestic prices in a sample of developing countries. We can combine this figure with other IFPRI simulations which suggest that national prices (tariffs, subsidies, export bans etc) were responsible for doubling the impact on prices and amplifying the external shock. This leads me to conclude that if we want to reduce the impact of volatility, eliminating some of these national distortionary polices should be top of the list.

Structural supply issues

One presenter provocatively suggested that the focus on financial speculation and price volatility was distraction from the more important existing structural problems in the agricultural sector, such as supply response in developing countries. I agree with this. For example, after decades of national policies and billions of dollars in donor support in the agriculture sector in Africa, farm productivity and household incomes have not been encouraging.

However, for many years we argued that a critical supply constraint (in addition to a long list of other issues) was that prices were too low. This has changed and in recent years prices remain at significantly high levels. If agricultural supply, especially in the poorer countries, is incapable of responding to these price rises, poverty and hardship will continue to increase. It is in this context, looking at the impact on producers in the poorer countries and on long-term impact on households, where I think it is critical to assess the impact of price volatility.