Food Price Volatility and Macroeconomic Factors: Evidence from GARCH and GARCH-X Estimates
Apergis, Nicholas, Rezitis, Anthony, Journal of Agricultural and Applied Economics
This article examines food price volatility in Greece and how it is affected by short-run deviations between food prices and macroeconomic factors. The methodology follows the GARCH and GARCH-X models. The results show that there exists a positive effect between the deviations and food price volatility. The results are highly important for producers and consumers because higher volatility augments the uncertainty in the food markets. Once the participants receive a signal that the food market is volatile, this might lead them to ask for increased government intervention in the allocation of investment resources and this could reduce overall welfare.
Key Words: relative food prices, volatility, macroeconomic factors, GARCH and GARCH-X models
JEL Classifications: E60, Q10, Q19
Over the recent past, food prices increased dramatically, leading to much debate about "the end of cheap food" period. This type of food crisis has serious implications for ecological sustainability, for the role of international financial institutions, and for the risk of future nutritional emergencies. In rich countries, food covers a relatively small part of a household's budget; by contrast, in poor countries, households use a large share of their income for food expenses, implying that food price increases lead to reduced real income as well as to higher risks of malnutrition and higher uncertainty (volatility) in food markets, because food price inflation severely stresses the most vulnerable groups. Nevertheless, these international prices for the major food types have decreased almost just as dramatically as they had increased, exacerbating the magnitude of food price volatility. This decline in food prices accompanies the dramatic fall in international economic activity resulting from the global economic slowdown. However, a report by the FAO (2009) shows that food prices have remained "sticky" in many countries, implying that they remain at high levels. As a result, many low-income countries and, especially, households continue to be adversely affected by high levels of food prices.
Factors such as the role of financial speculation in food commodity markets along with global financial markets' turmoil, export bans, adverse weather conditions, precautionary demand for food stocks, lack of efficient logistics systems, infrastructure for food marketing and distribution, rising energy prices, and energy intensity of the agricultural sector, the diversion of certain food commodities to produce alternative fuel, and political factors through policy inadequacies, weak institutions that undermine incentives for agricultural production, input subsidies, and involvement of public agencies in food imports have received criticisms about their contribution to such an uncertain food market environment. Certain empirical studies identify that unexpected trading volumes in commodity futures trading lead to higher cash price volatility (Sahi and Raizada, 2006; Yang, Balyeat, and Leatham, 2005), whereas Gilbert (2008) finds weak evidence that such speculative activities could influence food prices. Campiche et al. (2007) and Thompson, Meyer, and Westhoff (2009) report evidence in favor of the impact of oil prices on production costs, whereas the reverse route is nonoperative. Furthermore, Irwin and Good (2009) provide evidence that a new era of crop price volatility has begun with considerable uncertainty about the new level of average nominal prices causing great stress to market participants. They also state that the change in crop markets today is comparable to those during the mid-1970s and they anticipate that market participants will adjust to the new pricing environment with surprising speed. Von Braun and Torero (2009) identify two major explanations behind the 2007-2008 international food price crisis; first, the ad hoc trade policy interventions such as export bands or high export tariffs or high import subsidies, and second, the significant flow of speculative capital from financial investors into agricultural commodity markets. …