World Food Policy Volume/Issue 2-2/3-1 Fall 2015/Spring 2016 | Page 159

World Food Policy

costs, and hence, on output prices by
the growing mechanization of world
agriculture.

Oil was $25 a barrel in 2003 but
soared to almost $148 in 2008. In July
2014, the price of Brent crude has been
~$110 a barrel. But this has now fallen to
$40 a barrel at January 2016.
What about Macroeconomic Factors?

Macroeconomic factors play an
important role in impacting the falling /
rising trend of food commodities prices.

According to the FAO, extreme
price volatility has been extremely rare
in agricultural markets, but the global
food system is becoming increasingly
vulnerable to it and susceptible to
episodes of extreme volatility, as markets
are increasingly integrated in the world
economy. Extreme price volatility in
global a gricultural markets means rising
and more frequent threats to world food
security.

Volatility connotes two principal
concepts: variability and uncertainty; the
former describing overall movement and
the latter referring to movement that is
unpredictable. However, the efficiency
of the price system begins to break down
when price movements are increasingly
uncertain and subject to extreme swings
over an extended period of time.

Furthermore, despite of a rise in
liquidity, inflation is very low and even
negative in a few developed countries.
Real commodity prices are falling.
The most common explanation is the
global economic slowdown, which has
diminished demand for energy, minerals,
and agricultural products.

The appreciation of the United

States dollar (USD) against major
currencies (reaching a 13 year high in
September 2015) is significant because
international commodity prices have
typically had an inverse relationship
with the value of the USD. When the
USD strengthens against other major
currencies (euro and yen), commodity
prices typically fall. On the other hand,
when the value of the USD weakens
against other major currencies, the prices
of commodities increase. This relationship
is largely a result of commodities being
priced in USD and of international
buyers being required to purchase them
with USD. When the value of the dollar
rises, buyers have less purchasing power
and so demand typically weakens and
symmetrically.
The
correlation
between
commodity prices and interest rates is
an additional macroeconomic factor.
There is a negative correlation between
falling real interest rates and commodity
prices. In the 1970s, in 2002–2004, and
2007–2008 falling real interest rates were
accompanied by rising real commodity
prices. In a situation of large liquidity,
the money flows also into commodities,
and so bids their prices up and thus that
prices fall when interest rates rise (Frankel
2014). According to Frankel, high
interest rates strengthen the domestic
currency, thereby reducing the price of
internationally traded commodities in
domestic terms (even if the price has not
fallen in foreign currency terms).

Increased vulnerability is being
triggered by an apparent increase in
extreme weather events; a greater reliance
on international trade to meet food needs
at the expense of stock holding; a growing
demand for food commodities from other

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