Production shocks crucial to wheat price developments

It is usually production shocks such as those induced by droughts that cause price peaks of wheat on the world market. Low storage levels as well as protective trade policies exacerbate these shocks. In contrast to widespread assumptions, neither speculation across stock or commodity markets nor land-use for biofuel production have been decisive for annual wheat price changes in the past four decades, scientists at Germany’s Potsdam Institute for Climate Impact Research maintain. For their surveys, they used global data deriving from the US Department of Agriculture.

A threat to food security

“To a large extent, food security is a matter of prices, hence our interest is understanding what drives variations from one year to another,” says lead author Jacob Schewe from the Potsdam Institute for Climate Impact Research (PIK). When global wheat prices, along with those of other staple crops, skyrocketed in 2007/08 and again in 2010/11, this caused poor people in many developing countries to suffer – these temporary price rises have even been linked to food riots in several countries. Such recent peaks, as well as others, were preceded by severe droughts that reduced crop production. Now we can show that these weather-induced shocks have the potential to induce strong price increases,” says Schewe. “Moreover, they can trigger protective trade policy responses, including hoarding or export bans, which further exacerbate the global effects of production shortfalls even though they may seem rational from a country's point of view. This happened during the recent price peaks.”

Commodity speculation has a more immediate effect

While cross-market speculation might further exacerbate the problem on monthly or shorter time-scales, the data indicate that in the end it was a minor factor for annual prices, the scientists claim. This is despite the fact that the sudden price increase in 2007/08 coincides with speculation by index funds driven out of the collapsing US housing and stock markets.

For their surveys, the researchers developed and applied a rather simple computer simulation of wheat markets. The factor of supply and demand from storage – also based on existing data from markets – was integrated in their calculations. The simulation model could be applied for assessments of future wheat price fluctuations under climate and land use changes, the researchers maintain. This would then also show them what can be done to limit food price peaks in the future. “First, besides improving productivity, experts can seek to carefully adjust trade policies as well as storage capacities. Second, stabilising the climate by reducing greenhouse gas emissions is key if we want to limit the risks of weather extremes across the globe,”
says co-author Katja Frieler.

Article: Jacob Schewe, Christian Otto, Katja Frieler (2017): The role of storage dynamics in annual wheat prices. Environmental Research Letters [DOI:10.1088/1748-9326/aa678e]

(PKI/sri)