When Financial Investors Get a Cold, Agricultural Markets Sneeze

Following the example of other commodities, the prices of agricultural bulk products dropped in the past few weeks: wheat lost half of its value since March and the Reuters-Jefferies CRB Index––the oldest and most widely recognized measure of commodities––declined by 30% since its July 2 high.

While the 2008 exceptional crops can partly explain this new situation by introducing conditions for a significant softening of agricultural markets, they cannot explain the spread of variations that were monitored.

It seems that operations carried out by financial investors played a significant role. In their chase for liquid assets in the recent international financial upheaval, speculators were quick to convert their portfolios’ healthier holdings––particularly agricultural assets––into cash. “Arbitrage funds sold several millions dollars worth of holdings invested in commodities to meet their clients’ demand” indicates Frank Holmes at US Global Investors, Inc. The bankruptcy of Lehman Brothers, a prime broker of many investment funds, certainly sped up the trend.

Thus, after acting as shelter securities during the sub-prime mortgage crisis, agricultural commodities are again acting as compromise variables for speculators facing a financial market becoming increasingly shaky. It has become urgent to benefit from tools that will permit to evaluate these consequences on agricultural markets and the momagri model seems to be the only one to fit the bill. In addition, it is also urgent to work out concrete proposals to launch what the President of France called for in his September 22 address at the UN: “a controlled and regulated capitalism.”