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Causes and Fixes for Food Price Volatility Targeted by FAO

October 26, 2011

At the Food and Agricultural Organisation’s (FAO) meetings in Rome last week the principal causes of, and solutions for, food price volatility were addressed by the Committee on World Food Security.  Food price inflation and volatility has led to signficant macroeconomic and food security concerns globally in recent years.

The first perspective put forward is that agricultural prices are inherently volatile, with principal causes of international price volatility being  demand elasticity; trade policies; and speculation.

A second perspective is of periodic volatility being driven by cycles of peaks and troughs of investment in agriculture.

The third explanation is that the current volatility is caused by a structural change associated with a break from historical unsustainable agricultural practice:

According to this explanation, the world could be facing the end of a long period of structural overproduction in international agricultural markets, made possible by the extensive use of cheap natural resources (e.g. oil, water, biodiversity, phosphate, land) backed by farm subsidies in OECD countries. In other words, we might be at the end of a period of historically unprecedented growth in agricultural production that relied on a strategy akin to mining.

The continued impact of energy demands on biomass, and climate change, are questioned in this context.

Lastly, the analysis considers the considerable heterogeneity in the impact and relationship of international and domestic price volatility interactions.

The analysis proposes some policy recommendations.  These are:

  • A review of trade rules including a focus on food security and export restrictions
  • International coordination and efficient management of food stocks
  • Focus on increasing transparency in food markets, and tighter regulation of speculation (targeting non-commercial participants)
  • Removing biofuels targets and subsidies
  • Enhancing sustainable investment in agriculture and agricultural research
  • Incorporation of externalities, including strategies to dis-incentivise non-renewable resource use and;
  • Promoting food security programs.

More detailed analysis of these issues can be found in the Policy Round Table document on Food Price Volatility tabled by the Committee on World Food Security.

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