A new vision for agriculture
momagri, movement for a world agricultural organization, is a think tank chaired by Pierre Pagesse, President
of Limagrain. 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.
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  Editorial  
  Hyper-volatility on agricultural forecasts

By Bastien Gibert,
Advisor, momagri

Until very recently, most agricultural experts believed in a “law of gravity” that governed the evolution of agricultural commodity prices. This law could be expressed as follows: the prices of agricultural raw materials directly depend on the relationship between food needs, non food needs and available quantities (produced and stored). The latter, showing an increase for various reasons due to both agronomic factors and climatic or political factors. The result, they say, is a medium term increase in agricultural commodity prices, this increase is linear because of the progressive liberalization of international trade. Any sudden price downturn could only be attributed to special factors, which by definition are unpredictable.

But the fact remains that year after year, virtually all forecasts prove false. Yet each time, the same experts re-explain why, to paraphrase Peter Lawrence, the forecasts they made yesterday do not prove true today, while they continue making new predictions as if agriculture evolved in a sure world.

It doesn’t and this is one of the lessons to be learnt from the repeated crises we have gone through and from which we are barely emerging.

The problem is not so much the imprecision, however great, with which these predictions were made, but their unchallenged approach to markets and their forecasts, when the facts clearly show their imperfections.

Also, the guessing game on price movements must stop because the political and strategic implications are too great. If our overall understanding of the economic mechanisms underlying market function has improved, our ability to anticipate trend reversals remains poor. But it seems that we have been recently witnessing a reversal in the way the future of agriculture is comprehended, since the uncertainty in which agricultural markets evolve is now one of the elements which determines forecasts and not the result which justifies forecast errors.

By underlining the fact that supply/demand models cannot alone explain recent price trends, as pointed out in a recent article in the Financial Times on 19th May1, more and more experts demonstrate the importance of factors unrelated to the fundamentals of classic supply and demand, such as speculation or market psychology.

It is therefore essential to encourage economic research in this field and to build forecasting models adapted to the almost chaotic nature of agricultural markets rather than taking the gamble, risky considering the current context with dangerous implications, that agricultural markets are self-regulating and free interplay of market forces is the ultimate antidote to crises and price hyper-volatility. The momagri model was built with this in mind. It integrates the different types of risks faced by agricultural markets:
    1) Natural hazards
    2) Forecasting errors
    3) Increasing financialization
The financial crisis and recent financial scandals have resulted in numerous regulatory measures and changing attitudes in understanding and assessing risk. Nobody can now say they do not know that a sudden and unanticipated reversal may occur on the financial markets. It is the same on agricultural markets, especially since they are the subject of growing and uncontrolled financialisation which exposes them to external shocks.

Now it is time for this “intellectual and ideological revolution” to integrate agriculture and adapt predictive models to reality, and not vice versa, but also to promote the regulation of agricultural markets as the precondition to their development. Hopefully the next G20 summit will translate into firm steps in this direction. Because in the future, we will no longer be able to say that we had not been warned.

1 See momagri article of 30/05/11 : http://www.momagri.org/UK/a-look-at-the-news/The-Financial-Times-links-volatility-with-the-psychology-of-market-players_917.html
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Advocating for
agricultural market
regulation and global
food governance
Paris, 24 May 2012