Maize price volatility and deforestation

Abstract

AbstractWe develop a model of deforestation using a real option on agricultural land conversion and establish an important link between agricultural commodity price volatility and forest loss. Higher price volatility of staple commodities increases incentives to delay land conversion and is associated with lower levels of deforestation. Using satellite‐derived estimates of local deforestation and high‐frequency local maize prices across a panel of market catchments across 26 countries in sub‐Saharan Africa, we find strong empirical evidence that maize price volatility is negatively associated with forest loss. Our findings are driven by catchments in biomes that are relatively well‐suited to maize production. Instrumenting for changes in price levels and price volatility with spatially explicit temperature and rainfall anomalies yields results consistent with our main approach. The findings highlight important tensions between agricultural price stabilization policies, conservation efforts, and environmental externalities.