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Price Dynamics in Biological Production Processes Exposed to Environmental Shocks

Author

Listed:
  • Frank Asche
  • Atle Oglend
  • Tore Selland Kleppe

Abstract

This paper demonstrates a mechanism by which environmental shocks in biological production processes can lead to extreme price movements and thus be a contributing factor to short-term food price volatility. In biological production processes, environmental shocks can lead to a stock-out when the harvest transitions to a new stock (year class) with a different marginal value. The result in the market is a temporary price spike, or bubble, bounded by the marginal value of the new stock. We highlight this phenomenon in a cohort, or year class, biological production setting. Each year class in the model is a finite “non-renewable” capital stock, and capital theory is used to solve for the stochastic dynamic competitive equilibrium. The model is parameterized to be representative of the Norwegian salmon aquaculture industry. Results suggest that the model can replicate much of the observed patterns in price, harvest, and capital stock dynamics, including the infrequent occurrence of extremely high prices in the market.

Suggested Citation

  • Frank Asche & Atle Oglend & Tore Selland Kleppe, 2017. "Price Dynamics in Biological Production Processes Exposed to Environmental Shocks," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 99(5), pages 1246-1264.
    • Handle: RePEc:oup:ajagec:v:99:y:2017:i:5:p:1246-1264.
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    File URL: http://hdl.handle.net/10.1093/ajae/aax048
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    Citations

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    Cited by:

    1. Atle Oglend & Hans‐Martin Straume, 2020. "Futures market hedging efficiency in a new futures exchange: Effects of trade partner diversification," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(4), pages 617-631, April.
    2. Atle Oglend & Vesa-Heikki Soini, 2020. "Implications of Entry Restrictions to Address Externalities in Aquaculture: The Case of Salmon Aquaculture," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 77(4), pages 673-694, December.
    3. Atle Oglend & Frank Asche & Hans‐Martin Straume, 2022. "Estimating Pricing Rigidities in Bilateral Transactions Markets," American Journal of Agricultural Economics, John Wiley & Sons, vol. 104(1), pages 209-227, January.
    4. Muhammad Imran Chaudhry & Mario J. Miranda, 2024. "Endogenous price fluctuations: Evidence from the chicken supply chain in Pakistan," American Journal of Agricultural Economics, John Wiley & Sons, vol. 106(2), pages 637-658, March.

    More about this item

    Keywords

    Aquaculture; food production; price volatility; resource management;
    All these keywords.

    JEL classification:

    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market
    • Q11 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Aggregate Supply and Demand Analysis; Prices

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