Unit 1: Agriculture and price volatility.

Unit 1 questions often focus on price volatility in world markets. See below for an example;
“The value of banana exports for developing countries depends critically on the world price of bananas. The price is volatile in the short term, yet there are distinct trends in price over the medium term.”

Banana prices have been volatile in recent years and this is due to a mix of demand and supply-side factors
Demand causes include:

1. Cyclical demand (i.e. high income elasticity of demand) Many commodities are used in producing other goods and services

2. Peak/off-peak demand differences and seasonal changes in demand

3. Speculative demand from investors who treat commodities as financial assets

4. Low price elasticity of demand (Ped) – e.g. when there are few close substitutes and where the raw material is essential in providing other products

Supply causes include:

1. Unstable conditions of market supply including uncertain yields in farming because of volatile climate. This leads to changes in actual versus planned supply and thus changes in stock levels

2. Artificial limits on supply e.g. Export quotas / bans introduced by a government

3. Low price elasticity of supply e.g. due to limited capacity or a low level of stocks. Fresh fruits are expensive to store and refrigerate and may deteriorate if held as part of a buffer stock scheme

Here are some links for further reading on this topic:

Revision Presentation on Price Volatility

Price Volatility Chart (Bananas)