Policy options to address price volatility and high prices

Broadly speaking, interventions to reduce the costs associated with price volatility can be divided into two types. First, there are interventions that reduce price volatility, such as improving market information (Box 7). Second, there are interventions that accept price volatility as given and attempt to cope with it. These coping mechanisms can be either before (ex ante) or after (ex post) the fact. Further, the interventions can occur at either the international or the domestic level, and can be implemented by either the public or the private sector. Some interventions fit into more than one of these categories. Use of domestic buffer stocks and trade controls, for example, accept international price volatility as given and try to cope with it after the fact. But, at the domestic level, these interventions also try to reduce domestic price volatility. Before considering interventions to reduce and manage domestic price volatility, it must be recognized that some price volatility is an inherent characteristic of agricultural commodity markets. In the short term, because there is a mismatch between timing of supply (which is seasonal) and timing of demand (which is much less seasonal), agricultural commodities must be stored, and storage will not be profitable unless prices vary during the course of the year. Over the longer term, if the increase in food production is not keeping pace with demand growth, it is important that prices increase. This will provide incentives for farmers to increase supply and for the private sector to increase research and development, and will provide signals for the public sector to increase spending on public goods that support agricultural production and markets.