Price Shocks, Volatility and Household Welfare: A Cross-Country Inquiry

Type Working Paper - ULYSSES Policy Briefing
Title Price Shocks, Volatility and Household Welfare: A Cross-Country Inquiry
Issue 11
Publication (Day/Month/Year) 2015
URL Scientific Paper 11_Price Shocks, Volatility and​Household Welfare A Cross-Country Inquiry.pdf
Several major price spikes in the past seven years, breaking nearly four decades of relatively
stable global food prices, have made price shocks and volatility once again a relevant topic
for discussion (FAO et al., 2011; HLPE, 2011; Tangerman, 2011, Dawe and Timmer, 2012).
Major changes in the world food economy over the past few years may help in explaining this
recent shift in international market behaviour: strong discrepancy between the positive trend
in global demand for food and the sluggish growth in agricultural production and productivity;
an upsurge in oil prices during the period 2008-2013; rising of the global biofuels demand2
increasing frequency and intensity of weather-related disasters in different parts of the world;
and the growing interest of financial traders in commodity markets (Von Braun and Tadesse,
The consequences of extreme international food price fluctuations on the economies of least
developed countries have been extensive, especially after the two major cereal price spikes
in 2007–2008 and in 2010–2011. On the consumption side, higher and more volatile food
prices substantially hurt net food consumers because food typically constitutes a large share
of the total household expenditure (Anderson and Roumasset, 1996; Ivanic and Martin,
2008; De Hoyos and Medvedev, 2011; and Cohen et al., 2009). Moreover, the response of
the poor and food insecure households to price changes is likely to be much different and
less predictable with respect to better-off consumers, generating a certain degree of
uncertainty in understanding the consequences. This is because their average caloric intake
is lower, food items they buy tends to be cheaper and less preferred in taste and status, and
the sources of their income are often much less regular and secure (Morales Opazo and
Barreiro-Hurle, 2010). In less developed countries such as those in sub-Saharan Africa,
movement of cereal prices play a special role for welfare because they are the main staple
food and typically account for the highest share of the dietary energy supply and 20 – 25
percent of the total expenditure for those in the bottom quintile of the income distribution
(Anriquez et al, 2013). In addition, even though cereals are often missing many key
micronutrients, high prices are still crucial for nutrition because they can crowd out
expenditures on other nutritious foods such as meat, eggs, milk and green leafy vegetables
(Block et al 2004; Torlesse et al. 2003; de Brauw, 2011).

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