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Global Economy: Market Structures and Trade Theory - Essay Example

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Global Economy: Market Structures and Trade Theory Name: Institution: GLOBAL ECONOMY: MARKET STRUCTURES AND TRADE THEORY 1. Agricultural prices and mechanisms for their management The last eight years, the price of agricultural commodities has doubled. However, the possibility of a fresh international recession and sovereign debt issues for the developed world has seen a shift in attention from the escalating prices of agricultural commodities (Atkin, 2009: p6)…
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Download file to see previous pages Housing value depreciation and stock market declines have aided in the heightening of commodity futures appeal as assets. The higher petroleum prices on the input side have seen an increase in agricultural commodity production while government actions to mitigate the impact of global prices on their domestic market prices have also aided this volatility (Atkin, 2009: p7). Against a high volatility background, the price of soy bean was 10% higher in July 2012 compared to July 2008 prior to the global crisis with maize being 4.4% higher than it was in the month of April 2011 (United States Department of Agriculture, USDA, 2012: p1). The drought experienced in the US drove these record prices as it destroyed crops significantly. The lower output and yield also resulted in a decrease in the narrow stock/consumption ratio, which had been narrow. This was especially so in the case of maize that was used in the industrial production of ethanol. The graph below shows the evolution in price for major agricultural commodities. (United States Department of Agriculture, USDA, 2012: p1) Financial speculation has had an especially significant impact on the prices of agricultural commodities. ...
Volatile rates of currency exchange may play a role in significantly increasing the risk that is inherent in the returns. Therefore, it is expected that a positive volatility in the exchange rate transmission could lead to volatility in price for agricultural commodities. Another mode of financial speculation that could lead to volatility of agricultural prices is the interest rate volatility. Interest rate volatility is a vital macroeconomic factor that could result in a direct effect on agricultural commodity prices since they are representative of cost to stock holding (Cooke & Robles, 2010: p57). They also, however, act as an important indicator of the economic conditions. Thus, the volatility of interest rates could also act as an indicator of uncertainty in economic conditions and, therefore, affect commodity demand. Another short term factor has to do with oil price volatility, which has seen the most significant shifts in the last decade. This shift is expected to continue, at least in the short term, especially with the recent move towards the bio-fuel use (FAO, 2009: p22). Recent studies have shown that there is a transmission between the price of sugar and that of oil. There is a likely link between the costs of input commodities and output. Costs of freight, use of mechanized agriculture, and the price of fertilizer are interlinked with the price of oil and are transmitted to the overall cost of agricultural commodities. In light of the last decade’s unprecedented oil price volatility, there is every chance that it has spilled over into the agricultural commodity market. Government intervention has also led to volatility in the agricultural commodity market. One of the methods used by governments to lower ...Download file to see next pagesRead More
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