What Is the Role of Food Commodity Price Booms and Busts in the Agricultural Sector? Implications for Monetary Policy

Abstract

Do food commodity price booms play a more important role in incentivising farmers to increase output, investment and employment? Yes, evidence shows that food commodity price booms play a significant role in increasing output growth, investment growth and employment growth. Evidence shows that positive shocks to food commodity prices and boom (bust) episodes result in an increase (decline) in the agricultural sector output growth, investment growth and employment growth. The results indicate that increases and booms in food commodity prices do not necessarily induce producers to increase area planted and quantities produced. But food commodity price booms induce farmers to increase employment growth. Food commodity price booms and busts push food and consumer price inflation, agricultural sector output growth, investment growth and employment growth in different directions. These movements imply opposing effects for monetary policy. Although food commodity price booms are good for the agricultural sector output growth and employment growth, they come at a cost of heightened food and consumer price inflation with implications for monetary policy. The sustainability and profitability of famers, and the pursuit of low and stable inflation, financial stability and maximum employment demand policy co-ordination.