TITLE:
Agricultural Commodity Markets: Reference Point for the Real Value of a Currency
AUTHORS:
Ian McFarlane
KEYWORDS:
Agriculture, Commodity, Currency, Econometrics, Volatility
JOURNAL NAME:
Modern Economy,
Vol.5 No.5,
May
23,
2014
ABSTRACT: Using
monthly time-series data 1999-2013, the paper shows that markets for
agricultural commodities provide a yardstick for real purchasing power, and
thus a reference point for the real value of fiat currencies. The daily need
for each adult to consume about 2800 food calories is universal; data from FAO
food balance sheets confirm that the world basket of food consumed daily is
non-volatile in comparison to the volatility of currency exchange rates, and so
the replacement cost of food consumed provides a consistent indicator of economic
value. Food commodities are storable for short periods, but ultimately
perishable, and this exerts continual pressure for markets to clear in the
short term; moreover, food calories can be obtained from a very large range of
foodstuffs, and so most households are able to use arbitrage to select a near
optimal weighting of quantities purchased. The paper proposes an original
method to enable a standard of value to be established, definable in physical
units on the basis of actual worldwide consumption of food goods, with an
illustration of the method.