It's become clearer and clearer in recent years that spikes in food prices can have significant impact on incomes, markets, and nutrition worldwide. Extreme fluctuations in the price of food can pose challenges for both consumers and producers, and also often lead to political and market overreaction such as export restrictions. While such policies are designed to protect domestic populations, they can further exacerbate price spikes on the international market and have devastating consequences for global food security. Understanding the causes behind price volatility, and the policy options that exist for dealing with periods of volatile food prices, can significantly lessen the likelihood of policymakers engaging in such knee-jerk responses.
Since 2011, the Excessive Food Price Variability Early Warning System has measured and identified time spans of increased price variability. This tool, the first of its kind, tracks price volatility for five major commodities: maize, soybeans, rice, soft wheat, and hard wheat. To determine whether each commodity is experiencing excessive price volatility, the Early Warning System's statistical model looks to futures price returns for the previous 60 days. If within those 60 days, the model observes a large number of extreme positive realized price returns (log returns of future price contracts expiring between 1 and 3 months), it considers that commodity to be in a period of excessive volatility - i.e., a period in which the realized returns are higher than expected based a certain preestablished statistical threshold. This threshold is normally taken to be a high order (95 or 99%) conditional quantile, (i.e. a value of return that is exceeded with low probability: 5 or 1%). This model uses the 95% quantile. (Read further technical documentation.) When the model finds a period of excessive volatility, the Early Warning System's color-coded status will alert users to the change in volatility levels.
Such accurate, timely information is key in helping policymakers create better informed decisions regarding their countries' food security and trade policies.
A new addition to the Early Warning System has now been added: the Days of Excessive Volatility Per Year graph. This new data visualization charts the number of days in which each commodity has experienced periods of excessive volatility in each year from 2002 - present. As the chart shows, periods of excessive volatility for these commodities prices have declined significantly overall since the 2007-2008 food price crisis, and were particularly low in 2012. Thus far in 2013, none of these commodities prices have experienced excessive levels of volatility.