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Market Forces Maintaining Food Price Stability: Study

Market forces have managed to maintain food price stability over the past half century, even in the face of increasingly wild weather, according to a new University of Southampton study. 

The research analyzed data on American wheat production, inventories, crop area, prices and wider market conditions from 1950 to 2018, together with records of annual fluctuations in the weather for the same period.  

Before the mid-70s, oil was the dominant driver of wheat price fluctuations in the US. Beyond that, however, a wider set of factors, including weather and food consumption began to wield greater influence, said lead author Vincenzo De Lipsis of the University of Southampton. 

The study found that in the US, the market system around wheat has remained competitive, functioning well and adapting to the new uncertain climate conditions. The potential for weather fluctuations to adversely affect wheat prices has increased, but this hasn’t been passed on to the market - wheat prices remain relatively stable, along with the price of associated goods. 
The stability in prices is mainly due to farmers and agricultural industries providing a “buffer,” the study said, smoothing out any bumps in the supply of grain to retailers and consumers, thus reducing shocks to the market that poor harvests may cause. This has been achieved by investment in substantial storage facilities, modern infrastructure and good transport links, the study said. 
“We have shown that market forces provide a powerful stabilizing mechanism to counter the increased variability in weather and harvest observed in the last half a century,” Lipsis said. 
The market mechanism is one of the most effective instruments that governments have available for climate change adaptation and food security, Lipsis said. But for it to work effectively, it needs a combination of factors in place: a well-functioning competitive commodity market, a modern infrastructure with extensive transport networks, sufficient food storage capacity and a liquid futures market, he said. 

“However, while the system in the US continues to be robust, it’s hard to predict if storage mechanisms will work equally well if faced with unprecedented levels of weather variability – the kind of extreme events that can potentially disrupt the transport network and the very infrastructure on which it is based.” 

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