The impacts of production uncertainties on world food prices

Abstract

Purpose

Because of large time lags between the production decision, completion and sale of output, any uncertainty during the process of production, such as bad weather, disease or financial crisis, can affect the prices within food markets systematically. Therefore, the paper aims to analyze the influence of production uncertainties on world's wheat and corn prices.

Design/methodology/approach

In a specially designed two-step method, at first, the contributions of deterministic and uncertainty factors to wheat and corn production in around 100 countries are decomposed. Then, a panel model is applied to estimate the combined impact of each type of factors on the prices. Furthermore, the authors decompose the explained variances of the panel models in order to determine the importance of each type of factors for price adjustments.

Findings

The uncertainties in wheat production do significantly affect both wheat and corn prices on a global scale, whilst those of corn do not. Moreover, the variance decompositions reveal that deterministic factors contribute much more to the explanation of world food prices than indeterministic factors.

Practical implications

As deterministic factors are much more important than uncertainty factors for explaining market price movements, farmers should organize themselves to coordinate production in order to stabilize world food prices.

Originality/value

The paper proposes a simple methodology, which enables scholars to integrate production uncertainties into food price analyses.

Citation

Meyer, S. and Yu, X. (2013), "The impacts of production uncertainties on world food prices", China Agricultural Economic Review, Vol. 5 No. 4, pp. 459-472. https://doi.org/10.1108/CAER-05-2012-0045