The price effect of weather shocks: the case of staple crops in Mexico

Abstract

This paper investigates the effect of weather shocks on agricultural prices focusing on Mexico and its two major staple crops: white corn and dry beans. Mexico provides a relevant case study due to its high exposure to climatic variability. Given the importance of white corn and dry beans in both consumption and production, weather-induced supply shocks may have significant economic and welfare implications. The analysis relies on the estimation of fixed-effects models using a 20-year long panel of monthly prices at the market level, linked to weather shocks experienced by the main supplier states of each market. To identify these suppliers, a relevance index is constructed combining information on production levels, geographical distance, and commercialization patterns, allowing for a more accurate representation of the relationship between weather conditions in producing areas and observed prices in the consumer markets. Our results show that positive temperature and negative precipitation shocks of at least 0.5 standard deviations relative to the climate normal have immediate and lagged effects on the price of these crops. The immediate effect is about 2%, while the lagged effect is between 1% and 2.5%, depending on the timing of the shock within the crop´s growing period. These results are consistent with the detrimental effect that weather shocks have on crop productivity that has been largely documented in related literature. Overall, these findings suggest that weather shocks may generate upward pressures on agricultural prices with potential implications for food inflation under increasing climate variability.