Factors Influencing the Volatility of Agricultural Commodity Prices - Coursework Example

? GLOBAL ECONOMY Discuss the factors influencing the volatility of agricultural commodity prices and the mechanisms available for governments and businesses to manage these price movements. Introduction The discussion responds to issues about prospects and causes of increased prices of agricultural commodities in various countries and markets, which started accelerating in 2006/07 and increased in late 2008, (Du, Yu and Hayes, 2009, p.23). Shifts in agricultural price volatility occur in two ways, for instance, in a total constant change, in the series volatility, and secondly, in a conditional or sporadic way where the series seem to have relative calm periods and others with increased volatility. Discussion Economists agree that commodities experience substantial volatility in prices resulting to uncertainty and risks in products supply, buying decisions and investment, (Clapp, 2009, p.78). Even though, prices of commodities in 2008 achieve historic heights, for instance, over the long run producers of a commodity (such as miners and farmers) have experienced deteriorating trade terms (decline in imports quantity they could purchase from their commodity exports). This shift is attributable to high supply (technological advancement) and low demand (mainly through substitute products, such as natural rubber replaced with synthetic rubber). Key drivers outlined behind the high price volatility includes shift in agricultural production and trade attributed to physical aspects of the production affecting the supply aspects, second, shifts in microeconomic conditions and their impacts affecting demand and supply aspects. Thirdly, trade policies and agricultural policies as well as, multiple policy responses affecting mainly, supply and have considerable effects on demand aspects, (Britto, 2005, p.9). Similarly, experts agree that some other structural factors such as growth in demand of global commodities can have some effects on the agricultural commodity price volatility. Reasons behind current prices increases are complex and have been echoed on various contexts. For instance, a combination of significantly heightened demand and reduced supply or shortfalls in production, and intensified by temporary policy and economic aspects. Such factors are mainly cyclical and structural in nature and their contribution and collaboration differs depending on the agricultural sector, ((Du, Yu and Hayes, 2011, p.26). For instance, high prices of wheat are mainly attributed to supply limited by climatic conditions (weather), whereas demand factors play a crucial function in the sector of oilseeds and maize. Even though, fluctuation in price is a feature for commodities exhibiting seasonality, for various products current increased exceeds explained levels by approved market essentials. Similarly, volatility emerges from undifferentiated commodities nature and demand and supply interactions, the supply and demand responsiveness to shift in prices – products may show elasticity in price or demand and supply elasticity. Agricultural commodity prices may be attributable to continued increased in prices of commodities due to commodities super cycle because of high demand from developing economies, (Clapp, 2009, p.80). With production mainly intense in a few numbers of exporting nations, minimal shifts in patterns of production can have crucial effects. The principle underpinning agricultural production and trade indicate that there exists periods of increasingly high and reduced volatility in agricultural commodity prices, even though the underpinning unconditional volatility remains constant. These changes may be witnessed in goods prices behavior, (Britto, 2005, p.17). For example, in trends farmers may experience permanent declines or increases in the series volatility. These are explained by variable in trends that describeunpredictability. In addition, as commodities’ stock level decline, it follows that the prices volatility increased. If the stock levels are low, consequently, the reliance on the recent production to cater for temporary or immediate consumption demands tends to increase, (Piot-Lepetit and M'barek, 2011, p.74). Any additional pressures to agricultural yields may therefore, result to an adverse impact on commodity prices. A given agricultural crop yields may substantially trigger the increase or decrease in price for a certain product. For instance, a certain increased yield (relative to market expectations) may trigger reduced prices and certain reduced yields may trigger increased commodity prices. This is because extensive yields increases the supply, reduces the price of the commodity and lowers the preference of the commodity. Similarly, reduced yield accelerate the demand and commodity price and reduce the supply. High prices predictability transmission is anticipated across products. Similarly, international markets suffer worldwide pressures that tend to affect global agricultural prices demand, and such markets may adapt to policy movements (trade agreements, for example) that may influence commodities number, (Clapp, 2009, p.81). In addition, volatility in a single market may directly influence another market’s volatility where stocks are speculatively held. Macroeconomic factors are crucial triggers of increased prices of commodities. Rapid developments in macroeconomic, in developing economics such as China are key triggers of volatility on commodity prices. This is because such economic development creates increased demand for products that lowers the use percentage of stocks, thus increasing the agricultural products prices, (University OF Stellenbosch and Bureau for Economic Research, 2004, p.3) Similar macroeconomic variables including weaknesses and strengths of United States dollar have also a critical impact on commodity price volatility. For instance, weak dollar influences prices because commodities are mainly prices in the dollar, which conversely, rise interest and prices in future contracts as a security tool against inflation to currencies, commodity stocks as well as bonds. Similarly, purchasing decisions and speculations affect commodity volatility in that increased financial commodity market speculations and decisions increase commodity prices. Government and businesses mechanisms to manage price shifts To manage fluctuations in prices of agricultural commodities various mechanism have been implemented, (Yuan and Parcell, 2009, p.34) International commodity agreement indicates some trials to adjust the commodity market operations to attain multiple goals including stabilization of prices or enhancements of prices, (Haigh, 1999, p.78). Such interventions help in attaining effective allocation of resources, proper levels of privately owned stocks in certain products and an equitable export earning distribution among trading nations. Buffer stocks aid in prices stabilization and ensure incomes of commodity producers. Since the combination of export earnings and price stabilization is difficult, conflict is likely to appear between commodity producers over the share of the market, and consumers and producers over product enforcement and prices, (Clapp, 2009, p.88).The agreement depends on consumption and production allocation and the interests’ commonality among parties. Some governments hold stockpiles to ensure a steady supply and reduce volatility and challenge uncertainty, for instance, the United States of America has an extensive tin and oil stocks. Similarly, in various cases, governments take part in markets of commodities to make sure that producers obtain adequate product prices for their commodities, (Huchet-Bourdon, 2011, p.90). A market remedy uncertainty and threats in product markets is offered by trading options and futures. These crucial mechanisms offer insurance for both buyers and suppliers against changes in prices. Therefore, a supplier may apply a forward agreement to sell a percentage of his products at a certain period for agreed cost, protecting him from various price reductions that may happen during that period. Similarly, a buyer may sign an agreement to purchase a certain commodity quantity for a certain period at an agreed cost, protecting him from price shoots over the period, (Munier, 2012, p.45). The government should remove all barriers in trade to allow open and competitive trade, which will accelerate increased trade volumes and increased participants in the global market. Trade barriers injure agricultural products trade and production and can hinder the price signal transmission while also leading to high volatility in global markets, (Haigh, 1999, p.87). Both business and government should foster innovation and change in technology to address various problems such as increased demands, dietary changes, climatic changes, limited resource competition and environmental preservation and enhancement. Conclusion Increase in agricultural price unpredictability is a main concern for agricultural sectors and farmers within the chain of production. Volatility in prices has substantial long-term effects on many producers’ income as well as the tradition status of nations and can impede planning production. Similarly, increased volatility leads to an overall welfare decline, though some may gain from increased volatility. Therefore, effective mechanisms to mitigate the risks to producers and agents are inadequate to various countries and markets. Bibliography Britto, R. (2005). Futures trading and the level and volatility of spot prices: a survey. New York, NY, Center for the Study of Futures Markets, Columbia Business School, Columbia University. Clapp, J. (2009). Food Price Volatility and Vulnerability in the Global South: considering the global economic context. Third World Quarterly.30, 1183-1196. Du, X., Yu, C. L., & Hayes, D. J. (2009).Speculation and volatility spillover in the crude oil and agricultural commodity markets: a Bayesian analysis. Ames, Iowa, Center for Agricultural and Rural Development, Iowa State University. Du, X., Yu, C. L., & Hayes, D. J. (2011). Speculation and volatility spillover in the crude oil and agricultural commodity markets: A Bayesian analysis. Energy Economics.33, 497-503. Haigh, M. S. (1999). Volatility spillovers between foreign exchange, commodity and freight futures prices: implications for hedging strategies. College Station, TX, Dept. of Agricultural Economics, Texas A & M University. Huchet-Bourdon, M. (2011). Agricultural Commodity Price Volatility An Overview. Munier, B. (2012).Global uncertainity and the volatility of agricultural commodities prices. Amsterdam, IOS Press. Piot-Lepetit, I., & M'barek, R. (2011).Methods to analyse agricultural commodity price volatility. New York, Springer. http://public.eblib.com/EBLPublic/PublicView.do?ptiID=763416. University OF Stellenbosch. Bureau For Economic Research. (2004). Economic activity expected during 2004 and 2005 Full survey : third quarter 2004. BER : Economic Prospects : Full Survey. 19, ii, 48 p. Yuan, Y., & Parcell, J. L. (2009).Three essays on agricultural price volatility.Columbia, Mo, University of Missouri--Columbia. http://hdl.handle.net/10355/9571. 2. Evaluate ‘traditional trade theory’ and ‘new trade theory’ as explanations of inter-industry and intra-industry trade.  Introduction Global competitiveness within the trade products and services context is the trade advantage of a country compared to the entire world. In this light, advantages of trade occur when the nation’s economic welfare enhances because of trade. The theory of trade suggests that economic welfare of a country depends on the services and goods production that a nation derives competitive benefit. Trade theoriesare divided into two groups such as, traditional theory of trade and the new international theory of trade. Similarly, the traditional theory of international trade combines the notion of perfect or healthy competition, similar or homogenous commodities and comparative benefits to productivity. Contrary, the new international trade theory, involves theories marked by differential products, imperfect completion as well as high scale of returns. The discussion aims to investigate traditional and the new trade theories as industry trade explanations. Discussion Trade patterns and locations have dominated the center of economic discussion. The main questions are such as what are the impacts of globalization and free trade and what are the driving pressures behind global urbanization?The international trade basis is exchange and specialization, (Rivera-Batiz and Oliva, 2003, p.56). Therefore, various theories have been formulated to explain international trade patterns and to argue additional related advantages of certain models of trade, such as free systems of trade whereby the government intervention is crucial to control trade. Two basic theories are crucial in understanding international trade patterns and operations – traditional and new trade theory. Traditional international trade theory extrapolates trade as a fundamental way for nations to gain from their differences. Since nations vary in climatic conditions, skills, cultural experience, practice and natural resources, each nation has a different comparative benefit in products production for which its unique character fits, (Rauscher, M. (1997, p.28). Consequently once can witness trade controlled by exchanges that reveal some economic strengths – such as manufactures exports by developed nations and raw materials exports by underdeveloped nations. Economies of scale and low costs of production may aid clarify why an extremely extensive world population percentage live in urban centers, and why more economic opportunities are concentrated in cities, (Unger, 2007, p.24). Reduced transport costs can drive a self-strengthening process in which a developing metropolitan population led to extensive large-scale production, intensified earnings and an extensively diversified products supply. Consequently, this triggers additional migration to urban centers. Traditional trade theories have revealed that the result of such processes can be that, locations became classified into advanced technology metropolitan cities, and underdeveloped ‘periphery’. Traditional theory suggests that production factors are internally mobile, and do not trespass national boundaries. The assumption is unrealistic because production factors are globally mobile to wider and narrower degree, (Markusen, 1995, p.45). With these factors flow, a nation with scarcity in certain input may acquire products that use that factor extensively or can acquire the input. In other words, products and factors can be seen as each other’s substitutes. For example, an extensive migration of labour of the 19th century triggered industrialization of America, resulted to movement of labour union and led to United States mosaic diversity. The diversity is enhancing as the immigration source has shifted over time. Instead of European continent as the main origin, as it was in the past, the current immigrants come mainly for Asia and America. Similarly, as the population of the industrial world ages, so will the acceptance of its labor inflows from third world countries. Currently, Europe is the center for various Sub-Saharan African, North African and South Asian immigrants. The US, also has become the home of various legal and illegal Latin American immigrants, (Jewczyn, 2010, p.32). Similarly, the aging population of Japan will have to choose between enhancing immigration percentage and facing low living standards. The international labor migration is becoming increasingly prevalent as labor shifts from increasingly young and poor emerging world to wealthy and aging industrial globe. The Heckscher-Ohlin strategy would suggest that with intensive global trade prices of inputs across, nations would decreases and eventual equalize, (Baldwin, 1991, p. 84). This does not appear on a large scale,but it is true based on industrial nations. After the First World War, there was an extensive difference between United States and Europe, but over time the discrepancy in production between the two nations reduced, and did the differences in wages. The current differences are because of technological differences, imperfect competition, cost of transportation and government policies such as commercial or trade policies. If variations in labor returns between these nations are significantly high to compensate for the relocating costs, then some people will try to emigrate, (Goto, 1990, p.41). In other words, the labour migration from one nation to another reflects the changes labor supplies in these nations. This is a crucial instrument of investigating economic development forces as labor moves from rural regions to cities. The labor demand is anchored on productivity of labor and the earned revenues for the extra output produced by an increase in labor. Traditional trade theory suggests that “nations vary and outline why some nations export Agro-products while others export industrial products” (Unger, 2007, p.30). The new trade theory, on the other hand, clarifies why global trade is controlled by nations that have both similar conditions (characteristics) and trade in common commodities – for example, a nation like Sweden imports and exports vehicles. This trade form allows specialization and extensive production that leads to reduced prices and extensive commodity diversity. New trade theory Its main idea is that of non-comparative or competitive trade advantage. Its theorists suggest that nations do not mainly specialize by adhering to their real comparative trade benefit, and mainly trade to exploit their in factor endowment differences, (Allen, 2005, p.23). Nations similarly trade because of high returns. Additionally, the products of a country are viewed as history results, accidents and earlier administrative policies instead of underpinning variations in country aptitudes and resources. The theory achieved critical innovations, for instance, its theorists achieved freedom from modeling of perfect competition by launching industrial organization into the theory of trade, (Baldwin, 1991, p.89). Second, theorists discovered means to prevent the two-ness in theory of trade, and thirdly, theorists dissolved the artificial difference between exclusively technological commercially outward economies. Given the above unexplainable trade portion, theorist of trade started to investigate for additional reasons for exchange, rationales where exchange could take place among similar nations and produce sizable trade benefits. The shift in focus in searching for reasons for exchange to take place between similar and equal nations characterizes the divergence between traditional theory of trade and the new theory of trade. Newer or current theories of trade can be explained as have trade origin from certain form of comparative trade benefit, but the origin of such comparative benefit is increasingly subtle, and in most cases, does not exist in autarky, but grows with the emergence of trade, (Chacholiades, 2008, p.52). The new theories hallmark is that a country can build a scenario where similar nations will exchange with other nations. Most of the new trade reasons are high scale returns or benefits, imperfect competition and diverse products (diverse quality and variety of products). Conclusion Both traditional and new trade theories emphasizes that comparative trade benefit emerge from the variation in productivity of labor. Comparative trade benefit originate from variations in relative land, capital and labor factor, endowments among nations that consequently, result to spatial difference in relative labor costs, (Steininger, 2001, p20). Nations have comparative benefit and limitation in products, which utilize more of their limited or abundant production factor. Therefore, countries will extensively utilize abundant local factors while importing locally scarce factors. Bibliography Allen, W. R. (2005). International trade theory: Hume to Ohlin. New York, Random House. Baldwin, R. E. (1991). Are Economists' Traditional Trade Policy Views Still Valid? Cambridge, Mass, National Bureau of Economic Research. http://papers.nber.org/papers/w3793. Chacholiades, M. (2008).International trade theory and policy.New York, McGraw-Hill. Goto?, J. (1990). Labor in international trade theory: a new perspective on Japanese-American issues. Baltimore, Johns Hopkins University Press. Jewczyn, N. (2010). International trade: traditional theory, current research, and practical application. New York, iuniverse Inc. Markusen, J. R. (1995). International trade: theory and evidence. New York, McGraw-Hill. Rauscher, M. (1997).International trade, factor movements, and the environment.Oxford, Clarendon Press. Rivera-Batiz, L., & Oliva, M.-A. (2003). International trade: theory, strategies, and evidence. Oxford, Oxford University Press. Steininger, K. W. (2001). International trade and transport: spatial structure and environmental quality in a global economy. Cheltenham, UK, Edward Elgar. Unger, R. M. (2007). Free trade reimagined: the world division of labor and the method of economics. Princeton, Princeton University Press. Read More