2. World Commodity Prices
Food Price
Index
High food
prices still a
concern
Future Food
Supply
Discussed
3. Causes of price volatility – demand-side factors
1. Demand may be highly cyclical (high
income elasticity)
2. Peak/off-peak demand
3. Seasonal changes in demand
4. Speculative demand
5. Low price elasticity of demand
4. Causes of price volatility – supply-side factors
1. Unstable conditions of supply
2. Changes in actual versus planned
supply
3. Artificial limits on supply e.g. Export
quotas
4. Low price elasticity of supply
9. An increase in market demand
Price S1
Rise in demand with
P2 an inelastic supply –
causes steep rise in
market price.
P1
Note too the low
elasticity of demand
D2
D1
Q1 Q2
Quantity
12. Agricultural products have a low SR elasticity of supply
Price S1
Agricultural products
tend to have a low price
elasticity of supply
1/ Growing seasons
P1 2/ Time needed to
make investments and
begin production
3/ Costs of storing
products
D1
Q1
Quantity
13. And are vulnerable to supply shocks
S2
Price S1
Adverse weather can
cause actual supply to <
planned supply
P2
Fall in supply → fall in
P1 stocks → rise in price
Decline in stocks may
cause speculative
activity
D1
Q2 Q1
Quantity
15. Consequences of price volatility (1)
• Risk:
– Makes incomes and profits for producers unpredictable
– May limit capital investment spending from producers
• Poverty and Resource Allocation
– Falls in prices and incomes can cause deep poverty for farming
regions
– And cause increases in unemployment – a waste of scarce
resources
– Incentives - Collapsing prices may cause crop switch to drug
production
– Steep rise in prices can lead to food poverty, malnutrition and
premature death in countries where per capita incomes are low
16. Consequences of price volatility (2)
• Trade (Balance of Payments) and GDP growth
– Big swings in prices affect revenues for exporters
– Affecting their ability to finance imports of food and
technology
– Declining export prices damages GDP growth – negative
multiplier effects
• Price volatility has economic and social
consequences
17. Attempts to stabilise prices
Different options for government intervention
1. Price controls
– Price floors to protect farmers’ incomes
– Price ceilings to protect consumers
2. Trade controls
– Use of export quotas to maintain domestic supply
– Changes in import tariffs
3. Commodity price stabilisation schemes
– Buffer stock schemes
• These intervention options are covered in separate
presentations
