Yours Truly in Foreign Affairs (or Why Food Price Volatility Doesn’t Matter)

Warning: Blatant self-promotion ahead.

An excerpt from an article in Foreign Affairs by Chris Barrett and I on the current food crisis:

“If demand outstrips production, food prices rise and sellers begin tapping their food inventories. Inventory management stabilizes prices by supplementing supply in times of scarcity and boosting demand in times of surplus. But if food inventories are excessively drawn down during periods of unusually high prices, carryover stocks will be insufficient to stabilize prices during further supply or demand. This can lead to price spikes.

But high food price levels and high food price volatility are not the same things. Food price levels are at historic highs, but food price volatility, although high these past few years, is not out of line with historical experience and is generally lower than it was in the 1970s. This means that the world does not necessarily face a price volatility problem. It faces a high food price problem.”

2 comments

  1. Natalie

    Congratulations on the piece- very interesting.

    I’m currently finishing up a Masters in food security in Rome. Many of our lecturers come from FAO and we’ve certainly been told that the problem is volatility NOT prices. Always given with the inevitable “If markets are functioning properly…” prices will signal farmers to produce more. If the market doesn’t transmit these signals properly, that’s where the volatility comes in.

    Here you mention the “food crisis” (http://marcfbellemare.com/wordpress/2011/05/food-geopolitics/)
    which we are always cautioned against from our FAO professors. It’s drilled into us that it’s the volatility, not the high prices that created the 2007/2008 crisis.

    Perhaps it is because our program focuses more on rural development (where most of the producers live), than on urban hunger.

    I don’t mean this as any kind of criticism on your piece. In fact, I completely agree with the suggestions to policy makers. But I suppose that though high prices and political instability are correlated, that doesn’t mean that high volatility doesn’t have social implications. The effects of volatility carry over into the next growing season, meaning that supplies might be lower, and thus prices even higher.

    Congratulations on the work! Just wanted to share what we’re being told directly by FAO.

  2. Marc F. Bellemare

    Thanks for your comment, Natalie. Regarding my use of the term “food crisis,” my thinking is that if we called what happened in 2008 a food crisis, why are we so afraid of calling what is happening now — which is worse than in 2008 — a food crisis?

    As for the issue that volatility is the problem, it depends on which side of the consumption–production divide you sit. If your interest is in helping out consumers (and the bulk of the world’s population is made up of food consumers), you should care about high food prices. If your interest is in helping out producers (and even in rural areas of developing countries, there are very few producers who are net sellers of food), then you should care about food price volatility. But there is nothing in any of the empirical work I have conducted, either on my own or with coauthors, that indicates that the poor care much about food price volatility. See Bellemare, Barrett, and Just (2011) or Bellemare (2011), available through my research page, for more precise discussions.

    My impression is that policy makers have a hard time distinguishing rising food prices from food price volatility since the two are correlated, as you rightfully point out. But conducting a thorough statistical analysis allows isolating specific factors (i.e., holding them constant), which allows being more precise and filtering out those correlations.

    Lastly, I am envious that you actually live in Rome. I’ve lived there in 2001 when I worked for IFAD and loved it. I have been back quite few times since, including once for our honeymoon, but I miss it.