Apr 12 2024Reviewed by Lexie Corner
According to a University of Southampton study, market forces have maintained reasonable food price stability over the previous 50 years despite harsh weather.
Economists at Southampton, working with UCL, have researched US wheat commodities and found that the market has not become unstable despite significant uncertainty over future harvest conditions.
Journal of Economic Dynamics and Control published the study.
In the United States, wheat is a major crop utilized for food production. A limited portion is used for animal feed, and the crop is not converted into biofuel. The primary buyers of wheat are flour mills, food processors, and direct consumers.
The researchers analyzed data on American wheat production, inventories, crop area, pricing, and overall market conditions from 1950 to 2018, as well as records of yearly weather changes throughout the same time period. This indicated a significant rise in weather and harvest variability beginning in 1974.
Before the mid-70s, oil was the dominant driver of wheat price fluctuations in the US, but after this point, we see a much stronger influence coming from a wider set of factors that includes weather and food consumption.
Dr. Vincenzo De Lipsis, Lecturer, Economics, University of Southampton
He added, “Extreme weather events, such as droughts and floods, are becoming more frequent and intense across the world due to climate change. Understanding the impact of this variability on food commodity prices is crucial, as it could have serious implications for food security.”
According to the authors' findings, the wheat market system in the United States has remained competitive and functional and has adjusted to the new, unpredictable climate conditions. Although weather variations might negatively impact wheat prices more often now, this has not really trickled down to the market. Wheat prices remain primarily steady, and so does the pricing of associated goods.
The researchers discovered that this is mostly due to farmers and agricultural sectors acting as a buffer, smoothing out any fluctuations in grain supply to retailers and consumers, hence decreasing market shocks caused by poor harvests. This has been accomplished by investments in large storage facilities, sophisticated infrastructure, and excellent transportation links.
According to the study, the US wheat industry has shown amazing resilience and flexibility in reacting to the ever-increasing unpredictability of the environment and harvest by changing its inventory management.
At the same time, there is little evidence that the wheat market is prone to excessive volatility in the related financial futures market, which frequently occurs in commodity markets in response to increased uncertainty about future production capacity.
“We have shown that market forces provide a powerful stabilizing mechanism to counter the increased variability in weather and harvest observed in the last half a century. The market mechanism is one of the most effective instruments that governments have available for climate change adaptation and food security. But for this to work effectively, we need a combination of factors in place: a well-functioning competitive commodity market, a modern infrastructure with extensive transport networks, sufficient food storage capacity, and a liquid futures market,” Dr. De Lipsis added.
He concluded, “However, while the system in the US continues to be robust, it’s hard to predict if storage mechanisms will work equally well if faced with unprecedented levels of weather variability—the kind of extreme events that can potentially disrupt the transport network and the very infrastructure on which it is based.”
The authors admit that stability is easier to accomplish in established and more wealthy countries. Still, they contend that their findings highlight the need to prioritize investment in these critical areas in emerging regions to maintain a stable and secure food supply in the future.
Journal Reference:
De Lipsis, V. and Agnolucci, P. (2024) Climate change and the US wheat commodity market. Journal of Economic Dynamics and Control. doi:10.1016/j.jedc.2024.104823
Source: https://www.southampton.ac.uk/