Trade policy announcements can increase price volatility in global food commodity markets

Global food security is significantly impacted by price volatility in agricultural commodity markets. The 2007-2008 and 2010-2011 food price crises, and more recently the 2022 war in Ukraine, highlighted the vulnerability of global food systems to price shocks and fluctuations. While high food prices affect countries unevenly, impacting consumers negatively and benefiting producers, price volatility is universally detrimental to both producers and consumers. Volatility creates uncertainty, hindering optimal investment decisions for producers and budget planning for consumers, with particularly negative consequences in developing countries lacking effective hedging mechanisms. National governments often intervene with trade policies (e.g., export restrictions) to stabilize domestic prices, but there are concerns these policies may amplify global volatility, creating a "beggar-thy-neighbor" effect. This study investigates the impact of trade policy announcements on global food price volatility, focusing on wheat and maize due to their global significance and historical trade interventions.

Existing literature documents the uneven impact of high food prices on poverty and food security across and within countries. Studies have shown the negative welfare effects of food price volatility on both producers and consumers, emphasizing the difficulty in making optimal decisions under uncertainty. However, empirical evidence on the impact of trade policies on global food price volatility has been limited, with studies often focusing on a single policy type (e.g., export restrictions) or aggregated measures of government protectionism. This study addresses this gap by analyzing a broader range of trade policy interventions and considering the moderating role of stock levels.

The authors utilize an original dataset of trade policy announcements for wheat and maize from 2005 to 2017, focusing on announcement dates rather than implementation dates, under the assumption that efficient markets reflect information immediately. Daily price volatility is estimated using daily price ranges from futures contracts traded at the Chicago Board of Trade (CBOT), which is considered a robust measure capturing intra-day price movements. A conditional autoregressive range (CARR) model, augmented with exogenous variables (trade policy dummies), is employed to analyze the impact of trade policy announcements on daily price volatility. The model accounts for the autoregressive nature of volatility and allows for the inclusion of trade policy changes as explanatory variables. The analysis considers different types of trade policies (export restrictions, import liberalizations, etc.) and their direction of impact on supply and demand. The study further examines the moderating effect of stock levels (measured by the stock-to-use ratio) on price volatility, categorizing months as high-stock or low-stock periods. Robustness checks are conducted by restricting the sample to the top ten exporting and importing countries and by testing alternative stock level thresholds. Additionally, to assess the persistence of volatility effects, the event window is extended beyond the announcement day, and a supplementary regression analysis examines the relationship between the monthly count of trade policy changes and monthly price variance.

The study finds that announcements of trade policies expected to reduce world market supply (restrictive export policies and liberal import policies) lead to statistically significant increases in price volatility. This effect is particularly pronounced and persistent in periods of low stock levels. For wheat, the announcement of restrictive export policies increases volatility, and this effect is amplified when stocks are low. Import liberalizations also increase wheat price volatility when stocks are low. For maize, the impact of import liberalizations is significant irrespective of stock levels. In contrast, announcements of policies expected to increase world market supply (liberal export policies and restrictive import policies) do not significantly affect volatility. The effects of trade policy announcements typically persist for about ten trading days after the announcement, with longer persistence observed during low-stock periods. The analysis also indicates that clustered announcements within a short time frame can lead to longer periods of significantly elevated price volatility. Robustness checks using a smaller sample of major importers and exporters reinforce the main findings.

The results support the hypothesis that trade policies leading to negative supply shocks or positive demand shocks increase global food price volatility, especially under tight market conditions. This is consistent with the notion that adequate stock levels can mitigate the effects of supply and demand shocks on prices. However, the effectiveness of stocks varies across commodities, possibly due to differences in stock-to-use ratios (maize having generally lower ratios than wheat). The finding that import liberalizations can increase price volatility contrasts with some prior literature, highlighting the importance of considering the global market impact of such policies. These findings are consistent with other research showing the significant impact of trade policy on wheat prices but smaller effects on maize prices, possibly due to the dominant role of the United States as a maize exporter. The study’s focus on announcement effects assumes efficient markets, while acknowledging that implementation day effects could differ.

This study demonstrates that trade policy announcements, particularly those related to export restrictions and import liberalizations, can significantly increase global food price volatility, especially when stocks are low. Policymakers should carefully consider these global impacts and prioritize policies that increase stock levels to mitigate volatility. Future research could explore the effects of policy implementation timing, duration, and stringency, cross-commodity effects, the role of speculation, and the use of more sophisticated methods to analyze potential endogeneity issues between trade policy and price volatility.

The study focuses on announcement effects, assuming efficient markets and acknowledging potential differences in implementation-day effects. The analysis relies on futures prices as a proxy for global spot prices, and the use of US stock data as a proxy for global stock levels could introduce some limitations. The dataset comprises information primarily from English-language sources, and hence events in smaller countries might be underrepresented. While daily data help reduce endogeneity concerns, potential lead-lag effects between trade policy and price volatility warrant further research.