The current danger of price volatility

According to the UK’s Agriculture and Horticulture Development Board (AHDB), grain prices are on the way up in the world.

Lack of rain has reduced yields in Argentina. Last month the country temporarily banned maize exports as a result, leading to to a rapid rise in global maize prices. The ban was changed to a daily limit of 30,000 tons 12 days later, which has since been removed but may be re-imposed.

The COVID-19 pandemic has reduced 2020/1 maize yields by about one-fifth in Ukraine and has also reduced yields in Russia, which has raised its export taxes as a result. Russia has also introduced a quota – a maximum of 17.5 million tons of wheat, meslin, barley, maize and rye can be exported during the fourth months from February to June 2021. Ukraine may take similar measures.

It is not surprising that these three countries are seeking to reduce prices at home by using export taxes and/or quotas to limit the amount they export. They will do this to keep prices down for their own citizens by ensuring that a higher proportion of available supplies is directed towards the home market. From the reaction in Argentina, Ukraine and Russia, all of them big, grain-producing countries, it is perfectly clear that when there is a shortfall in domestic production governments batten down the hatches and protect their own citizens, even if this makes everyone else’s situation worse. Their leaders could hardly expect to stay in office if they did anything else. But the result will be to harm their own balance of payments and to pass on higher prices to the rest of the world.

 

Will other countries follow suit? It is possible. The AHDB has published the latest prices of wheat futures, which show a clear expectation of rising prices (see below). There is a clear indication of various factors coming together (recession, pandemic, poor harvests) and threatening to cause a perfect storm leading to much higher prices for some foodstuffs.

ACTION believes that food reserves provide the only effective means of limiting price volatility in foodstuffs. As we have said many times, whatever lip service is paid to free trade, countries will always protect their own consumers by limiting exports and/or introducing quotas if they feel that there is a threat of rising prices at home. We believe that the way to stabilise prices is to build up buffer stocks from which supplies can be released onto the market when there is an overall shortage of supply, thereby keeping prices down.

The stocks can be replenished in future years when prices fall, as they may well do after plentiful harvests and when the pandemic is over. This will help to boost demand and keep prices from going too low, which is also a problem if it leaves farmers with the prospect of producing at a loss. Buffer stocks are the best way of ironing out the creases, of reducing the dangerous volatility which happens on world markets from time to time, and which may well be starting to happen now.