International food prices spiked for thesecond time in four years in early 2011, igniting concernsabout a repeat of the 2008 food price crisis and itsconsequences for the poor. International food priceuncertainty has also increased along with average levels.Although price volatility is an intrinsic characteristic ofagricultural markets, it has increased markedly over thelast five years, compared to the previous two and a halfdecades, even when controlling for inflation. More adverseweather conditions in the main producing regions, risingland and water constraints, and stronger linkages with morevolatile oil prices, including through biofuels, tend toplace upward pressure on food price volatility. Thesefactors are likely to persist in the short-to medium-termsuggesting that volatility may be higher in the future thanthat observed in the 1980s, 1990s, and early 2000s. Episodesof high prices and extreme volatility create uncertaintythat is a major threat to food security in developingcountries. Farmers deciding what to plant, and countriesdeciding when to import, face significant uncertainty withrespect to the distribution of future food prices. Whileproducers who are net sellers have welcomed recent periodsof high prices, uncertainty as to post-harvest prices is adisincentive to a strong supply response, especially inpoorer developing countries. Finally, there is a need toimprove the access of farmers to appropriate price riskmanagement tools (financial services, including savingmobilization) to reduce the negative impact of pricevolatility on production decision and help ensure supplyresponse to higher prices. Improving access toinfrastructure, maintaining low inflation (precautionarysavings), and financial sector development (reflective ofrisk management capacity) can help to reduce the negativeeffective effects of price volatility on production decisions.
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