HAS PRICE VOLATILITY CHANGED?

Prices of agricultural commodities are naturally volatile owing to their dependence on unpredictable factors like the weather. Periods of low volatility pose little threat, which cannot be said of periods of high volatility. Before distinguishing between different price volatility regimes, it is important to clarify what we mean by volatility and to highlight some conceptual difficulties. It is indisputable that price volatility measures price fluctuations. However, a trader in Chicago will probably give a different assessment of wheat price volatility than a smallholder farmer in Pakistan or a baker in Niger. Whereas they might all be looking at the same estimator to assess volatility, they will very likely focus on prices in different locations or different stages in the value chain. There are two fundamentally different strategies to estimate volatility: forward-looking and backward-looking. Exploiting traders' expectations about volatility as embodied in option prices offers a forward-looking way to determine volatility.