HIGH PRICES AND VOLATILITY IN AGRICULTURAL COMMODITIES
Agricultural commodity prices rose sharply in 2006 and, in some cases, are soaring at an even faster pace this year. The FAO food price index rose by 9 percent in 2006 compared to the previous year. In September 2007 it stood at 172 points, representing a year-on-year jump in value of roughly 37 percent. The surge in prices has been led primarily by dairy and grains, but prices of other commodities, with the exception of sugar, have also increased significantly.
High price events, like low price events, are not rare occurrences in agricultural markets although often high prices tend to be short lived compared to low prices, which persist for longer periods. What distinguishes the current state of agricultural markets is rather the concurrence of the hike in world prices of, not just a selected few, but of nearly all, major food and feed commodities. As has become evident in recent months, high international prices for food crops such as grains continue to ripple through the food value/supply chain, contributing to a rise in retail prices of such basic foods as bread or pasta, meat and milk. Rarely has the world felt such a widespread and commonly shared concern about food price inflation, a fear which is fuelling debates about the future direction of agricultural commodity prices in importing as well as exporting countries, be they rich or poor.
The price boom has also been accompanied by much higher price volatility than in the past, especially in the cereals and oilseeds sectors. Increased volatility highlights the prevalence of greater uncertainty in the market. Supply tightness in any commodity market often raises price volatility in that market. Yet, the current situation differs from the past in that the price volatility has lasted longer, a feature that is as much a result of supply tightness as it is a reflection of ever-stronger relationships between agricultural commodity markets and other markets.