How do food and fertilizer price spikes and volatility impact Central America and the Caribbean?

CGIAR Feb 10 2025

Recurring spikes and high volatility in international food and fertilizer prices (Figure 1) have triggered economic impacts around the world over the past two decades. These major shocks include the global food price crises of 2007-2008 and 2010-2011, the market disruptions of the COVID-19 pandemic, and the Russia-Ukraine war. In the months after Russia’s February 2022 invasion, real global food prices reached the highest levels on record in more than six decades, while key global fertilizer prices more than doubled over those of the previous year.

Figure: Source: Authors. Prices are obtained from FAOSTAT. Wheat prices correspond to Canada Western Red Spring, corn prices to yellow corn No. 2 FOB from the U.S. Gulf, and urea prices to prill urea from the U.S. Gulf. MT=metric ton.

Rising and volatile food and fertilizer prices pose significant threats to food security and overall well-being among vulnerable populations, especially in developing countries. Food price inflation directly affects poor households’ ability to meet their food and nutrition needs, given that they spend a significant percentage of their income on food. More than 75 million people were pushed into extreme poverty in 2022, estimates show, while around 29% of the global population was moderately or severely food insecure in 2023. Similarly, recurrent price fluctuations affect small-scale farmers, who rely on food sales for a significant part of their income and possess limited capacity to time their sales. Price volatility may also distort input allocation, inhibit agricultural investment, and reduce agricultural productivity growth, especially in the absence of efficient risk-sharing mechanisms.

But to what extent are international food price spikes and volatility transmitted at the national level? This question has important policy implications. If transmission is high, efforts should primarily focus on stabilizing and reducing international prices, for instance through concerted multilateral actions at the global and regional levels. If transmission is low, and local price spikes and volatility likely depend mostly on domestic factors, then local price stabilization policies and investments would be the most effective instruments to protect vulnerable populations. In addition, separately assessing price and volatility transmission is relevant, since both do not necessarily go hand in hand.

A recent study by IFPRI and the World Bank examines the degree of price and volatility transmission from international to domestic food and fertilizer markets in seven countries in Central America and the Caribbean (Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, Panama, and the Dominican Republic). The study uses monthly international and domestic price data for 26 key food staples, cash crops, and fertilizers across the countries and relies on a multivariate generalized autoregressive conditional heteroskedasticity (GARCH) approach—a robust statistical technique used to model volatility—to evaluate domestic responses to a shock in the international market. The analysis focuses on the level of transmission in the short run (one-month responses), permitting us to isolate the direct domestic response to an international shock. Focusing on the short-run level of transmission is warranted since vulnerable households, which typically face liquidity constraints,  are thus less able to cope with short-term shocks.

See https://www.ifpri.org/blog/how-do-food-and-fertilizer-price-spikes-and-volatility-impact-central-america-and-the-caribbean/