A new vision for agriculture
momagri, movement for a world agricultural organization, is a think tank chaired by Pierre Pagesse.
It brings together, managers from the agricultural world and important people from external perspectives,
such as health, development, strategy and defense. Its objective is to promote regulation
of agricultural markets by creating new evaluation tools, such as economic models and indicators,
and by drawing up proposals for an agricultural and international food policy.
Agriculture's key figures
The equivalent of 46 times1 the world’s wheat production is traded every year on the Chicago Mercantile Exchange
 
Since over 80%2 of these transactions are not made at the Chicago exchange but on OTC markets3, it could even be over 200 times the annual wheat production that would be traded on financial markets.

Agricultural commodities are now representing one of several investments in portfolio management strategies. How did we get to this? And what are the repercussions?

Agricultural markets have been developing into financialized markets for a decade

Markets become financialized when traded physical commodities are massively used as underlying financial products4.

Several factors have contributed to the financialization of agricultural markets: Primarily, the deregulation of financial operations and the changes in negotiating practices for financial contracts.

In this respect, the role of the 2000 Commodity Futures Modernization Act in the United States, which deregulated financial products, has been instrumental.

Consequently, transactions of agricultural products surged, not only on organized markets5, but on OTC markets as well, which led to the speculation recorded these past few years.

As they do not generate settlements on physical markets, most agricultural transactions on OTC markets must be considered as pure speculative operations.

Consequence: the necessary correlation between prices on financial markets and
 
underlying physical prices––so that futures markets can assume their role in covering price risks for farmers––is no longer validated…

And this even when prices in financial markets are mostly directing agricultural production prices on regional markets!

Worse even, the resulting speculation breeds soaring agricultural price volatility.

Consequence : Agricultural markets have become complex anticipatory markets in which price volatility is now the rule!

This financialization has altered agricultural market operations: The determinant factor in setting agricultural prices is not longer the confrontation of physical supply and demand, but is now the psychology of economic players.

Agricultural price volatility, which has always been present on physical markets, thus tends to increase as financial operations are multiplying.

Yet, for Warren Buffett, derivative transactions6 are heavy weapons to destroy markets having the strongest fundamentals7. … .

Undoubtedly, the excessive speculation recorded these past few years is generating risks for the future of farmers as well as for global food security!

In this economic environment, momagri commends the American and European initiatives aiming to reverse the financial deregulation movement. But this is only a first step: Stabilizing agricultural policies are required to fight agricultural price volatility and guarantee decent revenues for farmers.

1 Christine Lagarde, French Minister of the Economy, at the “Financial” G20 (February 18-19, 2011), under the G20 French Presidency.
2 Source: Bank for International Settlements (BIS).
3 An Over The Counter (OTC) market is a market where a transaction is directly made between seller and buyer. This is in contrast with an organized market where transactions are made in an Exchange.
4 Futures, options or swap contracts.
5 Operations regarding agricultural contracts for field crops on the Chicago Mercantile Exchange have increased threefold between 2003 and 2010, according to the French Center for Studies and Foresight in September 2011.
6 They represent the core activity of financial markets. A derivative operation or product is a contract between two parties––a buyer and a seller––that sets future financial flows for an underlying real, theoretical and generally financial asset.
7 Bertrand. Munier, “Economic modeling and complex thinking. The case of financialized commodity markets”.
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Paris, 25 October 2014