FIGURE 1 Inflation-adjusted prices of agricultural commodities and oil, 1990–2011


100 150 200 250 300 350 400 450


50 0


Maize Hard wheat Rice Soybeans Crude oil


10 20 30 40 50 60 70 80 90 100


0


Source: Food and Agriculture Organization of the United Nations, FAOSTAT database, http://faostat.fao.org/; International Grains Council, World Grain Statistics 2009 (London, 2009); US Energy Information Administration, World Crude Oil Prices (online data) (Washington, DC, 2011), www. eia.gov. Note: Prices are adjusted for inflation using a consumer price index base year of 1982–84 (that is, 1982–84 = 100). Maize is US No. 2 Yel- low, wheat is US No. 2 Hard Red Winter, rice is White Thai A1 Super, soybeans are US No. 1 Yellow, and crude oil is the spot price for West Texas Intermediate at Cushing, Oklahoma.


consumers because they need to spend more money on their food purchases and therefore may have to cut back on the quantity or the quality of the food they buy or economize on other needed goods and services. For food producers, higher food prices could raise their incomes—but only if they are net sellers of food, if increased global prices feed through to their local markets, and if the price developments on global markets do not also increase their production costs. For many produc- ers, particularly smallholders, some of these condi- tions were not met in the food price crisis of 2011. Apart from these effects of high food prices,


price volatility also has significant effects on food producers and consumers. Greater price volatility can lead to greater potential losses for producers because it implies price changes that are larger and faster than what producers can adjust to. Uncer- tainty about prices makes it more difficult for farm- ers to make sound decisions about how and what to produce. For example, which crops should they produce? Should they invest in expensive fertilizers


16 RIDING THE ROLLERCOASTER


and pesticides? Should they pay for high-quality seeds? Without a good idea of how much they will earn from their products, farmers may become more pessimistic in their long-term planning and dampen their investments in areas that could improve their productivity. (Te positive rela- tionship between price volatility and producers’ expected losses can be modeled in a simple profit maximization model assuming producers are price takers. Still, it is important to mention that there is no uniform empirical evidence of the behavioral response of producers to volatility.) By reducing supply, such a response could lead to higher prices, which in turn would hurt consumers. It is important to remember that in rural areas


the line between food consumers and producers is blurry. Many households both consume and pro- duce agricultural commodities. Terefore, if prices become more volatile and these households reduce their spending on seeds, fertilizer, and other inputs, this may affect the amount of food available for their own consumption. And even if the households


Weekly crude oil prices (US$ per barrel)


Weekly agricultural commodity prices (US$ per metric ton)


1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011


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