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Agricultural Price Volatility - the "Kangaroo" Effect
The momagri editorial
The momagri model is showing high price volatility reaching into 2010 and even into 2050, contradicting preconceived notions that prices will remain high and stable.
Agricultural raw materials prices rose significantly in 2007, particularly among grains and dairy products. The increases are most often attributed to climatic accidents and increased global demand. So prices will remain high! At least, that is what some political leaders (such as Mariann Fischer Boel in her CAP health check) are saying, and what the agricultural sector itself is counting on. As the momagri model has shown, however, there is nothing to indicate that prices will stabilize at high levels. On the contrary, the only certainty is that agricultural prices are volatile. This volatility will result in erratic price jumps, with significant fluctuations varying from 100 to 300 percent for grains and 100 to 500 percent for sugar, for example. This is the "kangaroo effect." In terms of volatility, tomorrow will not be another day. Why not?
Many believe demand is what drives markets.
Supply, however, is the most sensitive and decisive factor. All farmers in the world look at current prices to inform their decisions about future production, but lack the full information they would need before reaching that future production cycle. Their choices can therefore be trumped by events. This is the most fundamental difference between agriculture and industry, which instantly adjusts production to demand. Each year will thus turn up excess or insufficient supply, depending on unforeseeable changes in demand. It is this phenomenon that, for the very first time, the momagri model is taking into account.
Other factors, more cyclical in nature, will also come into play, such as dips and peaks in the intrinsic volatility of agricultural prices,
weather hazards and the mobilization of unused production capacity depending on price levels, the surface area of cultivated land could increase.
Finally, the interconnection of markets due to speculation and the financialization of agriculture also contributes to an accentuation of price volatility.
Investment funds will therefore have increasing influence on the dynamics between real estate, agriculture, new technologies and energy. The subprime crisis has already affected the agricultural markets.
Slight percentage gaps between supply and demand have always resulted in considerable price variations. The figures speak for themselves: in 2007, 603 million tons of wheat were produced, and 617 million consumed.
The gap was only two percent, but prices doubled.
Tomorrow's prices simply cannot stabilize at the wave of a magic wand.
That is what the World Bank model was predicting, in assuming that supply automatically adjusts to demand - in other words, that individuals would eat more or less depending on price levels. The momagri model's findings have shed new light, calling for new directions to be taken in policy choices and international negotiations.