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Output Value Risk for Commodity Producers: The Uncertain Benefits of Diversification

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  • Merener, Nicolas
  • Steglich, Maria Eugenia

Abstract

Commodity price volatility has long been recognized as a main risk for commodity producers’ welfare and has led to diversification efforts. Less noticed has been the importance of commodity correlations, and their increase after 2006, in the risk faced by producers. To assess their impact, we perform an empirical analysis of the market value of commodity producers’ output. In a sample of 56 countries producing 26 commodities we find that diversification and correlations strongly explain output value volatility. During 1987–2006, producers effectively specialized in a single commodity had an average output value volatility of 27.0% while producers of three or more commodities had a 12.7% volatility. In this period average correlation was 8% and diversification was very effective. In the 2007–12 period, correlations averaged 26% and output volatilities for specialized and diversified commodities were 30.4% and 19.5% respectively, thus reducing the benefit of diversification at a time of macroeconomic distress. In 2013–16, output volatilities reverted to levels close to those in 1987–2006 as commodities decorrelated again. Our findings should be relevant to policy makers embarking in diversification efforts and in the analysis of macroeconomic risk of commodity producers.

Suggested Citation

  • Merener, Nicolas & Steglich, Maria Eugenia, 2018. "Output Value Risk for Commodity Producers: The Uncertain Benefits of Diversification," World Development, Elsevier, vol. 101(C), pages 322-333.
    • Handle: RePEc:eee:wdevel:v:101:y:2018:i:c:p:322-333
    DOI: 10.1016/j.worlddev.2017.05.039
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    Cited by:

    1. Bacon, Christopher M. & Sundstrom, William A. & Stewart, Iris T. & Maurer, Ed & Kelley, Lisa C., 2021. "Towards smallholder food and water security: Climate variability in the context of multiple livelihood hazards in Nicaragua," World Development, Elsevier, vol. 143(C).
    2. Hamed Ghoddusi & Franz Wirl, 2019. "A Risk-Hedging View to Refinery Capacity Investment," Working Papers 1327, Economic Research Forum, revised 21 Aug 2019.
    3. Jiang, Yong & Zhou, Zhongbao & Liu, Qing & Lin, Ling & Xiao, Helu, 2020. "How do oil price shocks affect the output volatility of the U.S. energy mining industry? The roles of structural oil price shocks," Energy Economics, Elsevier, vol. 87(C).
    4. Fabian Frick & Johannes Sauer, 2021. "Technological Change in Dairy Farming with Increased Price Volatility," Journal of Agricultural Economics, Wiley Blackwell, vol. 72(2), pages 564-588, June.
    5. Ghoddusi, Hamed & Moghaddam, Hussein & Wirl, Franz, 2022. "Going downstream – An economical option for oil and gas exporting countries?," Energy Policy, Elsevier, vol. 161(C).
    6. Vianna, Andre C. & Mollick, Andre V., 2018. "Government size and openness: Evidence from the commodity boom in Latin America," Resources Policy, Elsevier, vol. 59(C), pages 318-328.

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