Commodity Prices and Volatility in Response to Anticipated Climate Change

Mounting evidence indicates climate change will adversely influence agricultural crop yields and cause greater year-to-year variability. This paper considers how a rational, forward-looking and competitive commodity market would account for these anticipated changes and thereby influence time path of storage, prices, price volatility, and social welfare. We forecast 1600 hypothetical yield paths from 2000 to 2080 using estimates from a recent global statistical analysis of weather and crop yields combined with projections from 16 climate models. We then extend the dynamic competitive storage model to account for land response to price and anticipated yield shift. We simulate 1600 stochastic-equilibrium price paths under climate change relative to a baseline of stable prices using our hypothetical yield paths together with estimated demand and supply elasticities and storage cost from the literature. Our results indicate that, under the impact of climate change, world crop price level will increase twofold and world crop price volatility will increase fivefold between 2000 and 2080. Welfare analysis suggests that by 2020, the world would have welfare loss equivalent to food for 180 to 200 million people annually.

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 Record created 2017-04-01, last modified 2018-01-22

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