What, really, is world price anyway?
May 1, 2003 12:00 PM, By Daryll E. Ray
People talk about the “world price” for wheat and other commodities. I usually don't know what most people mean when they refer to world price and, from their response to my inquiry, I often am convinced that they don't know either.
So how and where is the “world price” determined? The geographical reference probably varies by major commodity group. Coconuts and bananas are priced from different shipping points than grains and cereals.
One of the few that have tried to statistically tackle the what-is-the-world-price issue is the United Nations Food and Agricultural Organization (FAO). FAO computes a Cereal Price Index which measures world prices for all cereals.
This Cereal Price Index provides monthly data and measures the price of cereals in international trade, not local domestic prices. For comparison purposes we converted the monthly prices to annual prices based on an August-July marketing year and re-indexed it so 1996 equals 100.
For the Unoted States, we constructed a price index (see graph) of the six major cereal export crops weighted by value of production and indexed to 1996 equals 100.
The accompanying graph shows a comparison of the two measures. In viewing how closely these two lines follow each other it must be remembered that nearly two-thirds of the FAO Cereals Price Index reflects non-U.S. international trade. It certainly can be said that the U.S. price and the world price are highly correlated.
While the direction of causation cannot be ascertained from the line graphs, it is nonetheless clear that U.S. prices suspiciously reflect the weather-shortened U.S. crop in the middle 1990s and the effects of the elimination of supply management mechanisms beginning with the 1996 crop year.
It seems apparent as well that year-after-year, world prices stepped in the U.S. price footprints. If it is true that the United States is the dominant player in cereal markets, it is no wonder that U.S. policies that lower farm prices mean lower prices for all.
It also explains why we are currently getting so much flak internationally, especially from producers in less developed countries. They believe that the change in U.S. policy has driven down their prices as well as U.S. prices.
As devastating as the low prices have been in the United States, farmers in less developed countries do not receive “mailbox” revenue to help compensate for low prices.
Daryll E. Ray holds the Blasingame Chair of Excellence in Agricultural Policy, Institute of Agriculture, University of Tennessee, and is the director of the UT's Agricultural Policy Analysis Center. (865) 974-7407; Fax: (865) 974-7298; dray@utk.edu;http://www.agpolicy.org.
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