The microeconomics of agricultural price risk

Much of neoclassical economics is concerned with prices-more specifically, with relative prices. Similarly, economists have studied behavior in the face of risk and uncertainty for at least a century, and risk and uncertainty are without a doubt a feature of economic life. It is thus puzzling that price risk-that is, unexpected departures from a mean price level, or price volatility-has received so little attention. In this review, we discuss the microeconomics of price risk. We begin by reviewing the theoretical literature, a great deal of which is concerned with the effects of unstable agricultural prices on the welfare of producers, consumers, and agricultural households. We then discuss the empirical literature on the effects of price risk on economic agents. We emphasize policy responses to agricultural price risk throughout, discussing price stabilization policies from both theoretical and empirical perspectives. Perhaps most importantly, we provide several suggestions for future research in the area of price risk given increasing risk on world agricultural markets due to both policy uncertainty and climate change.