Study Finds Market Forces Ensure Food Price Stability Amid Extreme Weather

Researchers from the University of Southampton have discovered that market forces have maintained food price stability over the past 50 years, even in the face of extreme weather conditions. This study, conducted in collaboration with UCL, focused on US wheat commodities and found that despite high uncertainty regarding future harvests, the market has remained stable.

The findings, published in the Journal of Economic Dynamics and Control, reveal that wheat, a crucial crop for food production in the United States, has been effectively managed within the market system. The researchers analyzed extensive data on American wheat production, inventories, crop areas, prices, and broader market conditions from 1950 to 2018, along with weather fluctuation records for the same period. The analysis indicated a significant increase in weather and harvest variability starting from 1974.

"Before the mid-70s, oil was the dominant driver of wheat price fluctuations in the US, but after this point we see a much stronger influence coming from a wider set of factors that includes weather and food consumption," explains lead author Dr Vincenzo De Lipsis of the University of Southampton.

He added:

"Extreme weather events, such as droughts and floods, are becoming more frequent and intense across the world due to climate change. Understanding the impact of this variability on food commodity prices is crucial, as it could have serious implications for food security."

The study highlights the increasing frequency and intensity of extreme weather events such as droughts and floods, attributed to climate change. Despite this, the US wheat market has shown remarkable resilience and flexibility. The research suggests that farmers and agricultural industries have provided a buffer by investing in substantial storage facilities, modern infrastructure, and efficient transport links, thereby reducing market shocks from poor harvests.

Dr. De Lipsis commented on the study’s implications for policymakers:

"We have shown that market forces provide a powerful stabilising mechanism to counter the increased variability in weather and harvest observed in the last half a century. "The market mechanism is one of the most effective instruments that governments have available for climate change adaptation and food security. But for this to work effectively, we need a combination of factors in place: a well-functioning competitive commodity market, a modern infrastructure with extensive transport networks, sufficient food storage capacity and a liquid futures market.”

Dr. De Lipsis noted that “while the system in the US continues to be robust, it's hard to predict if storage mechanisms will work equally well if faced with unprecedented levels of weather variability -- the kind of extreme events that can potentially disrupt the transport network and the very infrastructure on which it is based."

The study also acknowledges that achieving such stability is easier in developed and more affluent countries. Nonetheless, the results underscore the importance of prioritizing investment in infrastructure, storage, and market mechanisms in developing regions to ensure a reliable and secure food supply in the future.

According to the Economic Research Service, a division of the United States Department of Agriculture (USDA), wheat ranks third in the U.S. among field crops in terms of planted acreage, production, and gross farm receipts, trailing only corn and soybeans. For the 2023/24 season, U.S. farmers are estimated to have produced 1.81 billion bushels of winter, spring, and durum wheat from a harvested area of 37.3 million acres, a slight increase from last year’s record low. This recent low in wheat plantings reflects a long-term downward trend in both planted area and production. Since reaching its peak in 1981, the U.S. wheat planted area has decreased by nearly 39 million acres, with production dropping by almost 1 billion bushels.

The USDA notes that U.S. consumer demand for food products made from wheat flour remains relatively stable and is largely unaffected by fluctuations in wheat prices or disposable income. It does add, however, that “demand is closely tied to population and changing consumer tastes and preferences.”