Price Dynamics in Biological Production Processes Exposed to Environmental Shocks

This paper demonstrates a mechanism by which environmental shocks in biological production processes can lead to extreme price movements and thus be a contributing factor to short-term food price volatility. In biological production processes, environmental shocks can lead to a stock-out when the harvest transitions to a new stock (year class) with a different marginal value. The result in the market is a temporary price spike, or bubble, bounded by the marginal value of the new stock. We highlight this phenomenon in a cohort, or year class, biological production setting. Each year class in the model is a finite "non-renewable" capital stock, and capital theory is used to solve for the stochastic dynamic competitive equilibrium. The model is parameterized to be representative of the Norwegian salmon aquaculture industry. Results suggest that the model can replicate much of the observed patterns in price, harvest, and capital stock dynamics, including the infrequent occurrence of extremely high prices in the market.