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.
Logo momagri

How can one single country undermine global markets

by Paul-Florent Montfort,

Analyst, momagri

Plagued by the unprecedented drought and devastating wildfires that withered its grain production by 28 percent, Russia announced on August 5, 2010, its intention to halt exports, effective as soon as August 15, to conserve reserves for its domestic market. As a consequence and on top of a general price hike since April, wheat prices suddenly soared to their highest level since 2008––€236 per ton on European markets. In the U.S., prices set a maximum daily record on August 5, and the 80 percent increase recorded since mid-June is the highest in nearly 40 years.

While it registers the highest volatility, wheat is no exception. During the past four months, all agricultural commodities experienced a tenfold increase in volatility. Since April, prices of corn, soybean, cocoa, coffee or sugar are posting variations of 10 to 25 percent in only a few weeks1. So much so that the FAO foodstuff index, which interprets the price variations of key agricultural products, registered 165 points in July––only 15 percent below the 2008 peak of 191 that brought about hunger riots nearly all over the globe…

The world threatened again by a serious food crisis

Only two years after the severe food crisis, are hunger and widespread riots looming worldwide? While the Russian export freeze will not, in all likelihood, be enough to trigger a crisis, it fuels additional pressure in international agricultural markets and makes them more responsive to the slightest risk––climatic or otherwise. But what will happen if other nations decide to close their borders to safeguard their domestic market, as Ukraine and Kazakhstan are suspected to be considering? Similarly, what will happen if climatic disasters occur elsewhere in the world, like Argentina or Australia that both rank among the world largest producers and exporters of grain? We already know that in Pakistan the dramatic floods are impacting the rice crops of this large producer, while in Canada––the world’s fourth largest wheat exporter––farmers are warning that the high rain levels are threatening harvests. And this without factoring in the role of speculators, who are drawn by such price variations in international markets and whose power is such that only one of them can undermine markets. As witnessed by the recent fluctuations in cocoa trading, where the early July 2010 prices soared to their highest level since September 1977, due to the activity of a single trader who controlled close to 240,000 tons of cocoa––representing 7 percent of global cocoa production, 15 percent of global reserves and 25 percent of estimated European inventories… 2

Major international publications are measuring these risks with great concern. The Financial Times, for one, appropriately writes that close to 30 years have elapsed between the 2008 food crisis and the previous one. The paper also outlines the fact that, looming only two years after 2008, the threat of a crisis shows to what extent the international community is misguided and how imperative it is to renovate the current agricultural and food situation.

Unpredictable and unchecked volatility of agricultural prices

It is all the more urgent to react that price volatility in agricultural markets is unpredictable and increasingly less controllable, as shown by recent events. At the July 19 and 20 conference convened by European Agriculture Commissioner Dacian Ciolos to present the findings of the Public Forum, none of the attending European experts anticipated such drastic increase in wheat prices, while wildfires had been raging in Russia for over a month. Such soaring prices are indeed confirming the market shortcomings as well forecasting deficiencies.

Even international organizations responsible for the most conservative analyses are now compelled to admit that price volatility is a structural makeup of international agricultural markets. Thus, after downplaying the impact of volatility in its latest studies3, the OECD now spotlights it by devoting it a whole chapter in the latest edition of its “Agricultural Outlook” published jointly with the FAO4. By stating that “short term price volatility has greatly increased since the 2006-2008 price hike”, the organization in fact concludes that it represents a major component of markets, so much so that “basic commodity prices will remain unpredictable.”

Consequences on the global economy are more significant than considered

While observing that volatility represents a threat both for farm viability (low prices) and food security (high prices), the OECD even initiates a review of the political options to be implemented to provide “farmers with the means to manage risks inherent to their operations, while defending the food purchasing power of low-income consumers.” 5.

Today, regulating agricultural markets is a must. The recent price explosion in agricultural markets once again attested to their imperfection and unpredictability, and to the risks it creates for food security worldwide. The implementation of relevant governance for international agriculture is all the more imperative that recent events proved the magnitude of risks, both at the political level (hunger riots, destabilization of governments in power and possibilities of conflicts…) as well as at the economic level.

In addition, the rise in wheat prices in early August truly impacted other economic markets by generating a sizeable plunge in stock prices for major agribusiness firms. On August 5, Unilever recorded a decline of more than 5 percent in a single day; General Mills lost 2.5 percent and Nestlé 2.1 percent. The consequences transcend financial markets, since most of these companies immediately decided to pass on the high prices to their products, even if this triggers excessive inflation. When one considers that close to one third of the overall inflation in China is solely caused by the inflation in food products, the stability of the global economic recovery is threatened. Faced with such undue inflation, chances are that the Chinese central bank will increase interest rates––thus curbing The Middle Kingdom’s cash reserves, on which the current global recovery is essentially based… This is what globalization really means today: Soaring bread prices may slow down the entire global economy!

Now more than ever, agriculture and international agricultural markets stand at the heart of the political, economic and social challenges for mankind. Individualistic decisions––such as the one recently made by the Russian Government––clearly demonstrate, through the disproportionate reactions they spawn, the strategic nature of this specific activity. It is undeniable that we can no longer do without a governance system pertinent to agriculture and without the regulation of agricultural markets to stabilize them and durably feed mankind.

1As illustrated by The Financial Times graph, http://markets.ft.com/markets/commodities.asp
2 Please see momagri’s article “Cocoa: one isolated speculator dramatically raises world prices”, September 2010.
3 In the penultimate edition of the “Agricultural Outlook” published on June 17, 2009, the OECD omitted such market-destabilizing factor by considering volatility to be of a temporary nature.
4 “OECD-FAO Agricultural Outlook 2010-1029”, June 15, 2010, http://www.agri-outlook.org/document/20/0,3343,en_36774715_36775671_45447124_1_1_1_1,00.html
5 Idem, page 71.
Page Header
Paris, 20 April 2014