The variable response of agricultural supply to world price instability in developing countries

This paper analyzes the effect of world price instability on the agricultural supply from developing countries and determines to what extent this effect is dependent upon the macroeconomic environment. Producers from agricultural commodity-exporting countries are particularly vulnerable to the fluctuations of world prices: they are widely exposed to price shocks and have little ability to cope with them. Nevertheless, the effectiveness of risk-coping strategies is conditioned by the influence of macro-economic factors (infrastructure, inflation and financial deepening). Thus country-specific price indices are established, and the response of production indices to price instability indices is estimated, by using a panel model including macro-economic variables which interact with price instability. Such analysis is based on a sample of 25 countries between 1961 and 2002. The results highlight a significant negative effect of the world price instability on supply, and further show that high inflation, weak infrastructure and a poorly-developed financial system exacerbate this effect.