US food supply shocks shred the global economy
Gert Peersman 16, Professor in Econ at Ghent University, with; Jasmien De Winne, Management Assistant at Strabag Belgium, 2016, "Macroeconomic effects of disruptions in global food commodity markets: Evidence for the United States,” https://www.brookings.edu/bpea-articles/macroeconomic-effects-of-disruptions-in-global-food-commodity-markets/
The authors compare their estimates on food supply shocks to the impact of similar economic shocks, such as to the global crude oil supply. They find that the impact of a rise in real food commodity prices on economic activity is roughly twice as large as the impact of a rise in crude oil prices of equal size, and that while the dynamic effects of both shocks on real personal consumption are more or less the same, the average food supply shock has a slightly stronger and more persistent impact on consumer prices than the average oil supply shock.
They highlight, that both types of shocks cause monetary policymakers to respond in different ways. A food price shock of 5 percent increases the Federal Funds rate by 24 basis points (a rise in 10 basis points leads to a fall in real GDP between 0.05 percent and 0.1 percent), whereas the rate decreases by 20 basis points, on impact, in response to a 10 percent oil shock. In other words, monetary policy seems to amplify the consequences of food market disruptions on economic activity. The authors estimate that monetary policy response to food market disruptions can potentially explain almost one-third of the effects of the shock.
Given the substantial rise in the use of food commodities to produce energy goods, the research into the relationship between food supply shocks and the macro economy is increasingly important. Quantitative evidence can not only inform business cycle fluctuations, but also help policymakers assess the usefulness of food security program like SNAP or design optimal monetary policy responses to changes in food prices.
The authors highlight that the evidence will become even more important in the years ahead, as the consequences of climate change increase the likelihood of significant weather shocks to agriculture.
“In sum, the macro effects of food market disturbances are compelling, and should be taken into account for business cycle analysis, countercyclical policies, public risk management schemes for the stabilization of food markets, and the assessment of climate change and policy measures that may influence food prices,” they conclude.