A recent study conducted by the University of Southampton revealed that despite extreme weather conditions, market forces have been able to maintain good food price stability over the last fifty years. The research, which focused on US wheat commodities, was carried out by economists from Southampton in partnership with UCL. They found that despite the high uncertainty surrounding future harvests, the market has remained stable. The findings of this study have been published in the Journal of Economic Dynamics and Contr.ol.
Wheat is a crucial crop in the United States that is primarily used for food production, with a small portion being used for animal feed and none for biofuel. Flour mills, food processors, and direct consumers are the main purchasers of wheat.
Researchers examined data on American wheat production, inventories, crop area, prices, and broader market conditions from 1950 to 2018, as well as annual weather fluctuations during the same period. The analysis revealed strong evidence of increased weather and harvest variability starting from 1974.
<p”Prior to the mid-70s, oil was the primary influencer of wheat price fluctuations.”ctuations that have occurred. However, they noted that other factors such as weather and food consumption have started to play a stronger role in influencing the market. Dr. Vincenzo De Lipsis, the lead author from the University of Southampton, emphasized the increasing frequency and intensity of extreme weather events like droughts and floods worldwide due to climate change. Understanding how this variability affects food commodity prices is essential as it could significantly impact food security. The study also highlighted the competitive and adaptable nature of the market system for wheat in the US despite the recent fluctuations.The unpredictable weather conditions have the potential to disrupt wheat prices, but so far, this has not been reflected in the market. The price of wheat and related products has stayed fairly consistent. Researchers discovered that this is largely due to farmers and agricultural industries creating a buffer to minimize the impact of grain supply disruptions. They have achieved this by investing in storage facilities, infrastructure, and transportation.port links.
The research shows that the US wheat industry has been able to adapt to the unpredictable climate and harvest by making changes to its inventory management. It also indicates that the wheat market is not at risk of excessive volatility from the financial futures market, which can happen in commodity markets when there is uncertainty about future production capacity.
Dr. De Lipsis commented that policymakers can learn from the research, stating, “We have demonstrated that market forces play a significant role in stabilizing the wheat market.”The market mechanism is seen as a way to address the increased variability in weather and harvest observed in recent decades. Governments view it as one of the most effective tools for adapting to climate change and ensuring food security. However, for this approach to be effective, there needs to be a combination of factors in place. This includes a well-functioning competitive commodity market, modern infrastructure with extensive transport networks, adequate food storage capacity, and a liquid futures market.
While the system in the US remains strong, it is uncertain whether storage mechanisms will work as well when confronted with future challenges.Unprecedented weather variability can lead to extreme events that have the potential to disrupt the transportation network and the infrastructure it relies on, according to the authors.
The authors also acknowledge that stability is easier to achieve in developed and more affluent countries, but they emphasize the importance of prioritizing investment in these key areas in developing regions to ensure a reliable and secure food supply in the future.
Journal Reference:
- Vincenzo De Lipsis, Paolo Agnolucci. Climate change and the US wheat commodity market.Journal of Economic Dynamics and Control, 2024; 161: 104823 DOI: 10.1016/j.jedc.2024.104823