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

The regulation of financialized commodity markets.
Yes, but how?

By Bastien Gibert,


Expert, Momagri


The regulation of financialized commodity markets is going to be placed at the center of the up-coming G-20 Summit agenda. While all decision-makers are reaching the same observation, the odds are that talks will remain deadlocked. The reason is that we lack the innovative tool tailored to the reality of international markets to objectively model the financialization of such markets, as well as test the various feasible solutions.

Addressed to the European Commission by Paris, the request to deal with improving the regulation of financialized commodity markets represents a pressing obligation in order to fight price volatility. Besides, the request follows numerous demands and proposals advocated by other world nations––such as the United States or China––which are also seeking to limit the negative consequences of excessive and uncontrolled financialization.

Yet, a balance between “regulation and market performance” must be achieved to maximize trade efficiency. To that end, decision-makers must command tools that are powerful enough and able of describing what has now become the reality:
    - The irreversible nature of all decisions––including investment decisions––from one year to the next, thus precluding any adjustment of supply to the variations of market conditions during production (stockpiling policies excepted);
    - Commodity markets correspond to crucial issues on a geopolitical and geostrategic standpoint;
    - Uncertainty and risks are at the heart of commodity market operations, which are consequently highly volatile;
    - The intrinsic specificities of commodity markets––and their tightness in particular––obviously make them an attractive haven for short-term investors;
    - The growing integration of economies and the escalating interconnection of commodity markets are increasing systemic risks;
    - Commodity trading both on physical and derivatives markets allows for some coverage in theory, but most often leads to mounting financialization.
Yet, none of the economic models currently used in national and international arenas can enlighten decision-makers on the actual consequences of the various conceivable options to better regulate financialized commodity markets. Because the very notions of financialization, risk and uncertainty are not included. Even worse, most models currently in use are based on the hypothesis of unadulterated and perfect competition, de facto forsaking the very idea of regulation, since market laissez-faire would naturally lead to economic optimum, that is to say a situation where the interests of all economic players are maximized.

So, the forthcoming G-20 summits are fast approaching, but too few concrete proposals are being presented for lack of proper tools. In fact, how can we improve the regulation of financialized markets if simulation models used to better understand the intricate and numerous interactions of such markets do not simulate market financialization or financial players, such as short-term investors?

This is partly why, as early as 2006, the think tank momagri initiated the design of a global economic model focused on agricultural commodities, that enables the modelization of financialized agricultural market operations, as well as other market risks faced by the various economic players active in such markets. Principally based on the six above-mentioned assertions, the momagri model calls upon the most recent developments in areas of economic research and risk formularization. It models:
    - The producers’ aversion to risks that evolves in time according to market fundamentals,
    - The natural hazards and epizootic diseases that vary according to regions and whose consequences escalate in proportion with market and trade flow concentration,
    - The short-term investors active on futures markets, mostly on over-the-counter exchanges that are, by definition, unregulated,
    - As well as the many specificities that characterize agricultural markets, such as the limited resilience of supply and demand for prices, which represents additional grounds for inflexibility, and therefore increased price volatility.
The model’s results provided a wealth of findings and it could be used to test and discuss the various regulation scenarios with regard to:
    - Minimal stockpiling on physical as well as futures markets,
    - Variable margin calls or entry fees to limit the influx of speculators,
    - Even the suspension of quotations in case of excessive daily volatility.
Recently presented to the international scientific community, the momagri model currently represents the sole decision-making assistance tool that enables researching and understanding the issues concerning the financialization of agricultural commodity markets, and thus provides a first-rate scientific support to the proposals to be presented in the up-coming weeks.
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Advocating for
agricultural market
regulation and global
food governance
Paris, 24 May 2012