Extreme climate events impact domestic and international agricultural prices

A recent JRC study investigated the effects of extreme climatic events on agricultural commodity markets.
Heatwaves and droughts can have an impact on both regional and international agricultural markets. ©by-studio, adobe stock 2019 zoom

It shows that if historical events, such as the 2003 European heatwave, the 1988 and 2010 droughts in the US and Russia occurred in the near future, the economic impact would be visible not only on regional crop yields and prices but also on international markets.

The study found that crop prices are more severely impacted by negative than positive climate extremes.

If the most damaging climatic conditions of the last decades were to happen in the EU in 2019/20, for instance, domestic wheat yields would be 7% lower and producer prices 8% higher than expected.

On the contrary, if the most favourable agroclimatic conditions of the last decades were to recur in 2019/20, domestic wheat yields would be 5% higher and producer prices 5% lower than expected.

What is the impact?

The magnitude of the transmission effect of those events depends on a number of factors, such as the attributes of the simulated extreme climate events, the affected country’s market shares and sensitivity to those events, as well as the market status quo at the time of the shock.

Negative agroclimatic anomalies (any combination of temperature, rainfall and evapotranspiration in critical time windows during the crop growing season that leads to lower-than-expected yield) translate into negative domestic supply shocks that ultimately dictate lower domestic export demand and higher import demand.

The reverse applies for positive agroclimatic anomalies that lead to higher-than-expected crop yield.

Overall, the study found significant trade impacts in either direction indicating both winners and losers depending on the case.

For developed (or exporting) countries the consequence of negative climate extremes would be the loss or gain of world market shares, whereas developing (or importing) economies would come face to face with temporary self-sufficiency issues, higher import dependency, and price destabilisation.

Opposite but not necessarily symmetric effects apply to positive extreme events.

What could this mean for the future?

A major finding is that trade may not always be enough to ameliorate the damage from negative extreme events.

If grand-scale harvest failures become more frequent, grain stocks may get depleted and crop prices may become more responsive to such events.

Rethinking international trade regimes and formalising grain reserve arrangements, two suggestions that frequently arise in the literature, would require the specification of optimal stock quantities to be held and agreed upon, be it within the World Trade Organization or in the form of multi-country emergency reserves.

In this regard, this study paves the way for the quantification of agricultural commodity market risk (magnitude × probability) stemming from extreme climatic events, which is a requirement to investigating case-specific policy mechanisms that may mitigate devastating economic and humanitarian consequences.

Why is this study useful and for whom?

This JRC study helps to identify issues or opportunities that may or may not merit policy intervention, such as lower self-sufficiency resulting from damaging extreme events or higher export potential due to beneficial extremes.

Additionally, the approach offers a practical tool to assess the extent to which extreme events could cause regional and global market disturbances by attributing production, consumption, trade, stock, and price anomalies to single or combined agroclimatic events.

Finally, the study may be of interest to various actors such as market and policy analysts, financial institutions, commodity traders, farmers, agribusinesses, and any other market participants who might not otherwise have access to similar information provided by private sector analysts.

Therefore, country- and crop-specific yield and price intervals improve information asymmetry.