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Weather shocks, traders' expectations, and food prices
Author(s) -
Letta Marco,
Montalbano Pierluigi,
Pierre Guillaume
Publication year - 2022
Publication title -
american journal of agricultural economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.949
H-Index - 111
eISSN - 1467-8276
pISSN - 0002-9092
DOI - 10.1111/ajae.12258
Subject(s) - leverage (statistics) , supply shock , economics , shock (circulatory) , food prices , price shock , monetary economics , agriculture , food security , agricultural economics , monetary policy , medicine , biology , ecology , machine learning , computer science
The empirical literature on the impacts of weather shocks on agricultural prices typically explores post‐harvest price dynamics rather than pre‐harvest ones. Inspired by the intra‐annual competitive storage theory, we empirically investigate the role of weather news in traders' anticipations on pre‐harvest price fluctuations in India's local markets. Using a panel of district‐level monthly wholesale food prices from 2004 to 2017, we leverage the time lag between a weather anomaly and the corresponding supply shock to isolate price reactions caused by changes in expectations. We find that drought conditions significantly increase food prices during the growing period, that is before any harvest failure has materialized. These results suggest that markets respond immediately to expected supply shortfalls by updating their beliefs and adapting accordingly and that the expectation channel accounts for a substantial share of supply‐side food price shocks. A direct comparison with the effects of the same weather anomalies on the prices of the first harvest month reveals that expectations anticipate more than 80% of the total price impact.