The Reasons Behind the Volatility of Agricultural Product Prices and Essay

The Reasons Behind the Volatility of Agricultural Product Prices and Other Questions - Essay Example The prices of agricultural products tend to be unstable because the supply of agricultural products changes from time to time, and this mainly depends on the variable weather conditions that affect the size of the harvest. According to a study carried out by Riley, he makes the conclusion that when the agricultural output falls short of planned output, for a given level of demand then the prices of products are bound to rise. On the other hand, Riley says that when the actual output is in excess of the planned output, for a given level of demand then the market price does fall (2006, p. 3). More often, the demand of a product has the effect making the value of the product higher when the supply for the products is low. Toepfer international carried out studies to determine the reasons for the price volatility of agricultural products. The study shows that there are three key market fundamentals. These fundamentals are responsible for the greater price variations of agricultural produ cts. The report states that agricultural output does vary from season to season due to the natural shocks such as weather and pests. They also state production in the agricultural sector does take time, so the aspect of supply cannot respond much to price changes in the short term and lastly, the supply and demand elasticity is small when compared to the issue of price. The agency explain that, during a supply shock, the variation between supply and demand need to be strong so as to enable the regaining of the balance of supply and demand this is fundamental when dealing with a case of low stocks (2011, p.5). The supply and demand shocks are a vital part when it comes to the determination of the prices of agricultural commodities. A clear example is the massive drought that hit Russia in the year 2010; this was accompanied by the restriction of the exportation of grains out of the black sea region. These circumstances massively affected the prices of commodities; there was a reporte d increase in the prices of agricultural commodities. In such times of high and volatile prices, most countries decrease their exports and increase on their imports. The end results of such measures is a destabilizing effect, for instance, the restriction of the exportation of rice by leading exporters in the year 2007 saw the tripling of prices despite the stable demand and harvest (2011, p. 5). The issue of price volatility in agricultural products has been of serious concern to most of the governments. In June 2011, the Agricultural ministers of the G20 gathered their ideas on how this issue could be addressed. Among the many suggestions, they focused on the launching of the Agricultural Market Information system this would enable the providence of timely accurate reliable and transparent information that would be of help in addressing the issue of price volatility. The Agricultural ministries of the G20 also suggests the strengthening of the international governance of agricultu ral trade in favour of an open, rule based and well functioning global market for agricultural products. The main reason for this is that the international trade contributes in the improvement of food security and in addressing the issue of price volatility. Many governments also have invested in the boosting of agricultural production by strengthening agricultural research and innovation. The establishment of well and functioning markets is also a strategy that focuses on the encouragement of the public and private sector t invest in agriculture (Toepfer International, 2011, p.6). A group of researchers observed that the instability of financial markets and the strong variations in the exchange rates are among