Measuring Commodity Price Volatility and the Welfare Consequences of Eliminating Volatility

Commodity price volatility in international markets has been used to justify numerous policy interventions, including the need for buffer stocks and counter-cyclical payments. The common measure of volatility, the standard deviation or coefficient of variation, likely overstates the actual variation faced by economic agents. By making a distinction between its predictable and unpredictable components, volatility is found to be low, suggesting that significant welfare gains may be unattainable with policy interventions designed to stabilize prices. The use of the standard deviation implies price volatility as high as 30 percent for certain grain markets. Removing the predictable components from this measure decreases volatility to between 0.1 percent and 15.9 percent. We find little evidence to suggest that volatility is increasing over time for all commodities. The benefits of eliminating low levels of commodity price volatility are small, less than 1percent of consumption for the majority of commodities studied