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Organization of the
United Nations
Economic and
Social Perspectives
December 2010
Policy
Brief 12
Price Volatility in ●● Volatility in agricultural markets seems to have
increased
Agricultural Markets ●● Extreme price movements of agricultural
Evidence, impact on food security and policy responses commodities pose a threat to world food
security
Recent bouts of extreme price volatility in global
agricultural markets portend rising and more frequent ●● Policy measures should improve market
threats to world food security. To reduce countries’ functioning and increase countries’ resilience
vulnerability, policies should improve market to shocks
functioning and equip countries to better cope with
the adverse effects of extreme volatility.
1985 1990 1995 2000 2005 2010 Low income countries suffer most
Soybeans Maize
Extreme price volatility comes at a cost, since
Wheat
market actors will have difficulty planning ahead
Source: FAO (2010)
Note: Implied volatility represents the market’s expectation of and adjusting to the fluctuating market signals. As
how much the price of a commodity might move in the future. unpredictable changes, or “shocks”, surpass a certain
This Policy Brief was produced by the Economic and Social Development Department of the Food and Agriculture Organization of the United Nations (FAO).
The opinions expressed therein do not necessarily reflect those of the FAO or its member countries. Readers are encouraged to quote or reproduce
material from this Policy Brief. In return, FAO requests due acknowledgement and a copy of the publication.
Food and Agriculture
Organization of the
United Nations
Economic and
Social Perspectives
December 2010
Policy
Brief 12
critical size and persist at those levels, traditional Instead of engaging in isolated measures, authorities
policy prescriptions and coping mechanisms are likely should seek better coherence and coordination in
to fail. their policy responses. These must yield both greater
assurances of unimpeded access to global supplies,
Episodes of extreme volatility—especially large,
and improved confidence and transparency in market
unexpected price upswings—are a major threat to
functioning, especially in the major commodity
food security in developing countries. Their impact
exchanges. An improved public global surveillance
falls heaviest on the poor, who may spend as much
system on export availabilities and import demands
as 70 percent of their income on food. The lack of
would help temper uncertainty and enable countries
dietary diversification aggravates the problem,
to equip themselves better before the full impacts
as price increases in one staple cannot easily be
of crises transpire. Such measures would also help
compensated by switching to other foods.
stabilise the market.
As for farmers who are highly dependent on
In addition, more reforms of existing instruments,
commodities for their livelihoods, extreme volatility
such as the Compensatory Financing Facility and
can result in large income fluctuations for which
the Exogenous Shock Facility of the International
they have little or no recourse, such as savings and
Monetary Fund, could help vulnerable countries cope
insurance. The delay between production decisions
during times of crisis by providing global safety nets.
and actual production creates additional risks, as
These instruments need to act ex ante by providing
farmers base their investment and planning on
import financing or guarantees with minimal or no
expected future prices.
conditionality to alleviate the burden of credit and
foreign exchange constraints, which have afflicted
Coherence and coordination are key countries’ ability to meet food needs in past crises.
In past episodes of extreme volatility, policy Safety nets at the international level are not the
interventions have frequently failed, since budgetary only option. Countries themselves need to explore or
constraints and the sheer scale of price increases reinforce measures to protect the most vulnerable,
have generally precluded any meaningful success at including through emergency food reserves. Such
stabilisation. Accordingly, interventions have been reserves should not try to fight volatility, but to
short term, limited to the micro level such as targeted mitigate its consequences by providing poor people
consumer subsidies and safety net programmes, or direct access to food. In the long run, countries
even counterproductive, such as export restrictions can lower their vulnerability by raising agricultural
which compounded uncertainty and undermined the productivity for a diverse set of crops that proves both
role of trade. Many countries also tried to use food competitive and sustainable, as well as by promoting
reserves to buffer volatility, but these have proven dietary diversification.
unmanageable, costly and ineffectual, especially if
shocks lasted for extended periods of time.
Further information
•• Price Volatility and Crises in Global Food Markets
(preliminary title), FAO, forthcoming in 2011
•• FAO Food Outlook, November 2010
www.fao.org/giews/english/fo
•• World Food Situation Portal
www.fao.org/worldfoodsituation
For questions or inquiries, please contact Adam Prakash of
FAO’s Trade and Markets Division: ES-Policy-Briefs@fao.org.