Factors influencing the volatility of agricultural commodity prices Essay

Factors influencing the volatility of agricultural commodity prices and mechanisms to manage these price movements - Essay Example Discussion Economists agree that commodities experience substantial volatility in prices resulting to uncertainty and risks in products supply, buying decisions and investment, (Clapp, 2009, p.78). Even though, prices of commodities in 2008 achieve historic heights, for instance, over the long run producers of a commodity (such as miners and farmers) have experienced deteriorating trade terms (decline in imports quantity they could purchase from their commodity exports). This shift is attributable to high supply (technological advancement) and low demand (mainly through substitute products, such as natural rubber replaced with synthetic rubber). Key drivers outlined behind the high price volatility includes shift in agricultural production and trade attributed to physical aspects of the production affecting the supply aspects, second, shifts in microeconomic conditions and their impacts affecting demand and supply aspects. Thirdly, trade policies and agricultural policies as well as, multiple policy responses affecting mainly, supply and have considerable effects on demand aspects, (Britto, 2005, p.9). Similarly, experts agree that some other structural factors such as growth in demand of global commodities can have some effects on the agricultural commodity price volatility. Reasons behind current prices increases are complex and have been echoed on various contexts. For instance, a combination of significantly heightened demand and reduced supply or shortfalls in production, and intensified by temporary policy and economic aspects. Such factors are mainly cyclical and structural in nature and their contribution and collaboration differs depending on the agricultural sector, ((Du, Yu and Hayes, 2011, p.26). For instance, high prices of wheat are mainly attributed to supply limited by climatic conditions (weather), whereas demand factors play a crucial function in the sector of oilseeds and maize. Even though, fluctuation in price is a feature for commodities e xhibiting seasonality, for various products current increased exceeds explained levels by approved market essentials. Similarly, volatility emerges from undifferentiated commodities nature and demand and supply interactions, the supply and demand responsiveness to shift in prices – products may show elasticity in price or demand and supply elasticity. Agricultural commodity prices may be attributable to continued increased in prices of commodities due to commodities super cycle because of high demand from developing economies, (Clapp, 2009, p.80). With production mainly intense in a few numbers of exporting nations, minimal shifts in patterns of production can have crucial effects. The principle underpinning agricultural production and trade indicate that there exists periods of increasingly high and reduced volatility in agricultural commodity prices, even though the underpinning unconditional volatility remains constant. These changes may be witnessed in goods prices behavi or, (Britto, 2005, p.17). For example, in trends farmers may experience permanent declines or increases in the series volatility. These are explained by variable in trends that describeunpredictability. In addition, as commodities’ stock level decline, it follows that the prices volatility increased. If the stock levels are low,