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The Global Economy - Essay Example

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The Global Economy Name: Institution: THE GLOBAL ECONOMY 1. Discuss the factors influencing the volatility of agricultural commodity prices and the mechanisms available for governments and businesses to manage these price movements. Prices of agricultural commodities, it has been argued, are volatile due to short run supply and low elasticity…
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The Global Economy
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The Global Economy

Download file to see previous pages... They demonstrate average volatility shifts of many prices of agricultural commodities and finds further support in implied volatility evidence. This happens against a backdrop of shifts towards global markets and market liberalization, as well as dramatic alterations within the energy sector with regard to bio-fuel production. One factor that affects the volatility of these agricultural commodity prices is trends (Cooke & Robles, 2011: 56). Long run decreases or increases in series volatility may occur. These can be accounted for by the inclusion of time trends in variables explaining volatility. Another factor is stock levels. As stock levels of various commodities drop, there is an expectation that volatility in prices of these commodities will also increase. Low stocks will lead to dependence, on current production, to meet consumption demands in the short term also increasing. Further yield shocks could portend an increasingly dramatic effect on the commodity prices. The yields for particular crops will also drive a commodity’s price up or down. In relation to expectations, a large yield may cause prices to drop while a particularly low yield may result in an increase, in the price (FAO, 2011: p123). If the prices respond in a symmetrical manner to the yields, then no impact will be expected on the series volatility. If, however, a bigger yield impacts more on the prices, then volatilities will be positively related to yields while, conversely if lower yields have more impact on the prices than higher yields, then the volatilities will have a negative correlation to the yields. Another factor has to do with the transmission across prices. Positive transmission of price volatilities is expected across agricultural commodities. Global markets do experience international shocks that could influence the world demand for agricultural commodities with these markets also adjusting to policy movements, which may impact simultaneously on a number of commodities (FAO, 2011: p124). In addition, Volatility in a particular market may have a direct impact on another’s volatility where stocks are speculatively held. Exchange rate volatility is another factor that affects volatility of agricultural commodity prices (Hill, 2011: p33). Prices received by producers on deflation into the domestic producer currency may impact significantly on commodity prices at which the producers are prepared to sell. This is also extended to stockholders. Volatile rates of exchange significantly increase the risk inherent in returns. Therefore, it is expected that a positive volatility of exchange rate transmission could result in agricultural commodity price volatility. Oil price volatility is another factor with perhaps the biggest agricultural production shifts in the past decade, and one that is expected to continue, being the move towards the use of bio-fuels (Hill, 2012: p56). Recent empirical studies have suggested the transmission of prices between sugar prices and oil. A likely link also exists between the costs of input and that of output. Freight costs, mechanized agriculture, and fertilizer prices all depend on the price of oil, which are transmitted to agricultural commodity prices. In light of the recent unprecedented volatility of oil prices, this volatility shows a potential to spill over into agricultural commodity volatility. For example, the sudden interruption of fuel availability during the Iraq war in 2002 ...Download file to see next pagesRead More
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