In the following short paper, I am going to evaluate the economic effects of food price swings on emerging and developing economies. In recent years, we witnessed enormous increases and volatilities in commodity and especially food prices. Concerns of starvation are therefore strengthening. These economies tend to have a high percentage of food in their standardized consumption basket, which means they spend more of their income on food in general. Since food is an essential good of living, the recent price developments over the past ten years are threatening the social stability of these economies as well as the well-being of their inhabitants. In contrast to developed economies, the population of these relatively “poor” economies is facing enormous problems feeding themselves and their children.
This paper antends to give an answer to the extend of the pass-through effects of price increases to developing economies and the driving effects of those prices.
In the first part of the paper I am going to give a short overview over recent price developments, then discuss the topic of influential factors on these prices, especially the extend which speculation has on aforementioned price in- and decreases.
In the second part, I am going to eruate the pass-through effects of world food prices to developing economies as shown in the autumn study of the international monetary fund (hereinafter mentioned as IMF), namely what effect a 5% increase of food prices on international trade markets has on these economies, especially their output gap, and the foreign exchange value of the currency. The question to evaluate will not only be how price developments are
created but also how they influence the economies and social stability of developing countries.
Table of Contents
1. Introduction
2. Food price swings
3. Influence Factors to world market prices
4. Influence factors to domestic prices in developing economies – the pass-through effects
5. A five percent price increase and the effects
6. Conclusion
Research Objectives and Key Topics
This paper aims to evaluate the economic impact of food price volatility on emerging and developing economies, specifically analyzing the pass-through effects of global commodity price increases on domestic market stability, inflation, and output gaps.
- Analysis of recent food price volatility and its historical context.
- Evaluation of influential factors on world market prices, including the role of speculation.
- Assessment of pass-through mechanisms from global to domestic food prices.
- Examination of the economic consequences of a 5% food price increase in developing nations.
- Comparison of impacts between economies with credible vs. non-credible central banks.
Excerpt from the Book
3. Influence Factors to world market prices
There are several factors influencing the prices of food commodities such as wheat or corn. Often, one or few countries produce a vast share of the world’s food production in a specific commodity. Russia for example produces a significant share of the worlds wheat production (therefore has high influence on wheat market prices). If Russia had a long draught over the summer and production suffered, world market prices could be influenced in the following. Such a development could be witnessed during enourmous bushfires during the summer of 2010 in Russia: Due to the severe damages in the landside and especially the cornfields, Russia laid a trade embargo on all wheat exports in order to ensure it’s own population’s nourishment. In effect, wheat prices rose in a short amount of time for about 75 percent. Russia contributes to about 10 percent of the overall world wheat production.
Other often metioned factors are for instance global warming, demand pressures in emerging markets or the rising production of bio-fuel and the herefore used areas of cultivable land. Experts are off the opinion that global warming will contribute to world wide draughts and therefore leaner crop harvests. If harvests might turn out leaner, or the cultivable landscapes are used otherwise for the production of bio-fuel, these factors might be other price inflaters in the nearer future to come. In regards to demand pressure, the social luxury of eating meat is becoming more and more popular in emerging and developing economies. This might have significant effects on the wheat price in the future: About eight kilogram of wheat or corn is needed in order to produce one kilogram of meat. With more demand in meat, more wheat and corn is fed to cattle other than selling as wholefood stock.
Summary of Chapters
1. Introduction: Outlines the scope of the paper, focusing on the economic effects of food price volatility and the vulnerability of developing economies.
2. Food price swings: Documents the dramatic volatility in food commodity prices since 2000, noting the significant impact of market crashes and recoveries.
3. Influence Factors to world market prices: Examines supply-side factors like natural disasters and climate change, alongside demand shifts and the substantial impact of financial speculation.
4. Influence factors to domestic prices in developing economies – the pass-through effects: Analyzes how global price volatility filters into domestic markets, considering local variables like subsidies and distribution margins.
5. A five percent price increase and the effects: Investigates the specific macroeconomic consequences of a hypothetical 5% price shock on inflation, output gaps, and exchange rates.
6. Conclusion: Summarizes findings, emphasizing the negative impacts of speculation on food security and economic stability in developing nations.
Keywords
Food prices, Volatility, Developing economies, Commodity speculation, Pass-through effects, Inflation, Output gap, Exchange rate, Central bank credibility, Food security, Market regulation, Supply shock, Trade embargo, Emerging markets, Macroeconomics
Frequently Asked Questions
What is the core focus of this paper?
The paper evaluates the economic repercussions of food price swings on developing and emerging nations, exploring how global commodity trends affect their domestic stability.
What are the central themes discussed?
The main themes include food price volatility, the role of institutional investors in commodity markets, the pass-through mechanisms to domestic pricing, and the influence of central bank credibility.
What is the primary objective of the study?
The primary goal is to determine the extent of pass-through effects when global food prices fluctuate and to analyze how these changes disrupt the economic foundations of developing countries.
Which scientific method is utilized?
The author analyzes secondary data from sources such as the IMF and FAO, utilizing macroeconomic frameworks and statistical models to assess correlations between global commodity indices and domestic economic indicators.
What is covered in the main body of the text?
The main body covers the drivers of global food prices, the mechanics of how prices pass through to local markets, and a comparative analysis of how different economies react to price shocks.
Which keywords characterize this work?
Key terms include commodity speculation, pass-through effects, macroeconomic stability, central bank credibility, and global food pricing.
How do institutional investors impact food prices?
The paper suggests that institutional investors have turned food commodities into speculation objects, contributing significantly to price volatility and decoupling prices from traditional supply and demand dynamics.
Why does central bank credibility matter during a food price shock?
The findings indicate that countries with lower central bank credibility suffer significantly worse impacts on exchange rates and output gaps compared to countries with higher credibility when faced with the same price shock.
- Citation du texte
- Thilo Trost (Auteur), 2012, The source of food price swings and their effect on developing economies, Munich, GRIN Verlag, https://www.grin.com/document/190661
