Recent bouts of extreme price volatility in global agricultural markets portend rising and more frequent threats to world food security. To reduce countries’ vulnerability, policies should improve market functioning and equip countries to better cope with the adverse effects of extreme volatility.
Variability and uncertainty
Volatility indicates how much and how quickly a value changes over time, for example the price of a commodity. While this concept may seem obvious, a precise definition of volatility is elusive and measurement prone to subjectivity. In economic theory, volatility connotes two principal concepts: variability and uncertainty; the former describing overall movement and the latter referring to movement that is unpredictable.
Price fluctuations are both a normal attribute and a necessary requisite for competitive market functioning. The essence of the price system is that when a commodity becomes scarce its price rises which induces a fall in consumption and more investment in the production of that commodity. 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.
Historically, bouts of such extreme volatility in agricultural commodity markets have been rare. To draw the analogy with natural disasters, they typically have a low probability of occurrence but bring with them extremely high risks and potential costs to society.