Commodity Price Volatility: Causes, Effects and Implications

Agricultural commodities experienced substantial increases in prices over the most recent decade with major surges in both 2007-08 and again in 2010-11. These price movements coincided with sharp rises in energy prices, in particular crude oil. Sharp increases in agricultural prices were not uncommon, but it is the short period between the recent two price surges that has drawn concerns and raised questions. What were the causes of the increase in world agricultural prices and what are the prospects for future price movements? Were the trend driven by fundamental changes in global agricultural supply and demand relationships that may bring about a different outcome? What are its implication on global food security and sustainability? Several authors have discussed the factors lying behind the sharp food price increases over the period 2007-11 though no consensus has been reached on the cause of these phenomena. Rapid economic growth in China and other Asian emerging economies, decades of underinvestment in agriculture, low inventory levels, poor harvests, depreciation of the U.S. dollar, and financializiation and speculative influences are among the factors cited as leading to high levels of commodity prices. The diversion of food crops as bio-fuels stands out as an important and new factor that many have seen as accountable for the food price spikes. The price spikes were also associated with increased price volatility in commodity prices. The sudden and unexpected rise in world food prices in recent decade has drawn the attention of policy makers to agriculture and this has led to the debate about the future reliability of world markets as a source for food. Increasing volatility has been a concern for most agricultural producers and for other agents along the food chain as it renders planning very difficult for all market participants. Price volatility can have a long run impact on the incomes of many producers and the trading positions of countries and can make planning on production more difficult. The fear of further spells of volatility in food prices has prompted efforts in designing and proposing price stabilizing mechanisms both at international and national levels. This fear has been driven by the recognition that a new set of forces may be driving drive food prices and their volatility trend. These forces emerge from linkages between the agricultural and the energy markets, the role of financial and currency markets, collectively with the wider macroeconomy, which together, render agricultural markets much more exposed to shocks. The first chapter examines food and energy commodity price volatility over the past decade. The objective of this chapter is to analyse the evolution of this relationship considering the role played by biofuels. It aims at verifying whether the increased grains-crude correlations has led to greater grains volatility as shocks from the crude oil markets are transmitted into the grains market. It focuses on two main issues. Firstly, it establishes whether food and energy commodity markets have become more volatile in recent times. Secondly, it analyses the nature of relationship between food and crude oil prices. In particular, it investigates whether the volatility in food commodities is now driven by the transmission of shocks from the crude oil market as a result of increased biofuel production and consumption. The second chapter focuses on the structural changes in food and energy prices and price relationships given the role of biofuels and biofuel policies in the United States. Increases in energy prices, the boom in biofuel production and government policy interventions have led to questions in relation to the stability in the long run relationships between food and energy commodity prices. This chapter investigates the assertion that the advent of biofuels has altered the nature of the relationship between energy and agricultural markets. The main hypothesis of this second chapter is that recent market and policy events may have induced changes in the relationship between food and energy markets. The third chapter quantitatively assesses households’ welfare dynamics in the recent years. Given the recent international shocks and market related shocks, the objective of this chapter is to quantitatively assess poverty and vulnerability dynamics in Tanzania between 2008 and 2012.