In an article published in the November 10 issue of the British daily The Financial Times and titled “Grain export bans create fresh problems”, the commodities correspondent Javier Blas analyzes the new “agflation”1 facing the international community.
While most observers believe that agricultural price volatility is caused by investors’ speculative behaviors and dollar fluctuations, Javier Blas adds a third factor––the restrictions on agricultural products unilaterally imposed by a number of agricultural powers.
Since the beginning of the summer in fact, export restrictions concerned Russia (grains), Ukraine (wheat, barley and corn), India (sugar and non-basmati rice), Pakistan (wheat), Egypt (rice) and Kazakhstan (grains). “Those restrictions, which are spreading fast, have triggered a rush to snap up agricultural and food products that is exacerbating market volatility,” explains the article.
However, Javier Blas indicates that it was only after the U.S. Department of Agriculture alerted investors to a risk of shortage in cotton supply––following India’s decision to control its exports––that markets spiraled out of control. Hence, cotton prices soared to $1.57 a pound in New York, the highest level in 140 years and since the creation of futures contracts.
This situation accurately shows the complex and specific nature of agricultural markets. In an environment of increased trade liberalization, any restriction on trade flows (embargoes or others), as well as the current currency instability, have a direct bearing on the levels and volatility of agricultural commodity prices, an impact all the more important if the country in question is a significant player in international trade (importer or exporter). However, this explanatory factor is bolstered by the concurrence of two issues:
- The behaviors of players active on agricultural markets are mimetic––even sheep-like––for various reasons (either strategic, geopolitical or economic…),
In such a case, all conditions are then met for renewed soaring agricultural prices.
- The increased financialization of agriculture since 2005 has converted agricultural markets in intricate anticipatory markets, where it is not any decision as such that is important but the manner in which the various players (producers, investors, States…) interpret it and react to it.
1The term was first used in a 2007 report of the American investment bank Merrill Lynch and refers to agricultural price inflation.