While the financial world is experiencing a crisis brought on by the burst of the speculative real estate bubble in the United States, the prices of most agricultural raw materials have remained high. With the liberalization of trade underway via the WTO, however, these products are increasingly exposed to a variety of risks, exacerbating the extreme volatility that characterizes them.
I. Wheat, vegetable oils and diary products – still on the rise
PPrices for wheat, vegetable oils, milk and dairy products have continued their upward trend due to increasing demand, and do not appear at all affected by the “subprime” crisis.1.
For wheat, a worldwide inventory at its lowest level since 1981 has kept prices high. Reserves continue to diminish at an alarming rate, with volumes currently equivalent to only 66 days of consumption, a situation that affects food security worldwide, particularly in the poorest countries so reliant on foreign supply. And yet the situation is not likely to improve in the short term, what with the production cuts in the European Union, Ukraine and the Black Sea countries. Speculation is also running high about how much the drought in Australia and Argentina may affect production, countries in which production is subject to significant vagaries of weather and can vary as much as 100 percent.
Ethanol- and agrofuel-consuming industries are, for their part, increasing demand for corn, soy and palm oil, with the surface area of farmland dedicated to those crops is growing quasi-exponentially, often to the detriment of food crops. But will this trend last?
Finally, after a period of time in which in which veritable “oceans” of milk were flooding the international markets, the current trend is toward a shortage. The price increases resulting from this growing shortage, at a time when demand is even stronger from emerging countries such as China, are affecting certain consumer prices. In Germany, for example, the price of a stick of butter has already climbed 50 percent! This is in addition to the growing cost of livestock feed, due to the increased prices of grains and soy, a situation primarily affecting livestock producers.
The worldwide climate on the agricultural markets, and for grains in particular, is extremely tense. This context leads market operators to overreact to any new demand or supply information. India, the world’s second largest consumer, indicated in its most recent bid solicitation that it required not 530,000 tons, but rather 795,000 tons of wheat. At the same time Russia, the world’s fifth-largest exporter, plans to curb its wheat exports by applying a prohibitive tax to deter the sale of wheat and other grains abroad, in response to the rapid inflation in bread prices, a particularly undesirable situation with elections ahead. The repercussions of these announcements did not delay, with market prices immediately climbing to 300 euros per ton!
The behavior of market operators is thus fueling this destabilization of international prices, at least as much as the traditional factors influencing supply and demand (harvests, weather, etc.). Forecasts by market agents catalyze the trend and either push prices higher – as we are observing today – or lower – which has been seen in the past and which is a possibility for tomorrow.
Let us also remember that this sudden increase, following a several-year downward trend, is not a first. Luc Guyau, Chairman of France’s Permanent Assembly of Chambers of Agriculture [Assemblée Permanente des Chambres d’Agriculture] and founding member of WOAgri, reminds us in an Op-Ed article in Le Monde on September 6, 20072 that the current price of wheat, in real terms, is not even half of what it was in the 1960s, and that it is 300 percent lower than its peak prices in 1973 and 1952!
II. Sugar, cocoa and coffee shaken by the financial crisis
The prices of sugar and certain exotic products such as coffee and cocoa have, on the contrary, recently decreased. The traditional factors determining supply and demand do not suffice this time to explain this recent change in prices. The weak financial markets are to blame: international hedge funds, in quickly selling off their positions to cut their exposure to risk and finance the losses on other markets wholly unrelated to agriculture, have completely destabilized the cocoa market. On the two principal stock markets, London and New York, speculators have altogether dropped, net of buy transactions, 800,000 tons of beans, leading prices on the New York Board of Trade (NYBoT) for December to drop 17 percent in one month. And this when the trend, based on the traditional factors, should be the opposite; the quality of the harvests in Côte d'Ivoire and Ghana remains uncertain and the International Cocoa Organization (ICCO) has just reported an upward revision of its deficit for the 2006/2007 season, while estimates for the 2006/2007 season appear no better.
For sugar, the usual causes are at play: following historic highs in February 2006 due to the worldwide shortage, prices today have dropped significantly, in large part due to the bumper crops of the previous harvests. But here again, we cannot disregard the impact of the financial crisis.
The fact that agriculture is increasingly traded for investment purposes, as evidenced by the increase in the number of purely speculative operators on the markets, should be of concern to the agricultural sector. Price visibility is not likely to improve for producers, given the dangerous game played by speculators and the increasing interconnection of markets, both agricultural and otherwise, which in turn heightens uncertainty and exposes the future of agriculture and agricultural trade to an ever-growing number of risks.
With the CAP “health check” around the corner, it must be firmly reemphasized that the explosion in the prices of agricultural raw materials falls within a larger context of price volatility that recent economic history has consistently highlighted. That is why now, more than ever, we must regulate the agricultural markets with appropriate instruments, as WOAgri has set out to achieve. It is the stability of tomorrow’s world that is at stake and, therefore, maintenance of a peace that has become all the more fragile now that our planet will soon be home to seven billion people, and, in the space of two generations, to nine billion.
WOAgri Editorial Department.
1 “Sub-primes” are high-risk, variable-rate mortgage loans in the United States that are granted to clients with poor credit and supported by the value of the property the loans are used to finance. Speculation with these loans led to overvaluation in the American housing market and later, as that market turned around, to a worldwide financial crisis beginning in July/August 2007.
2 La hausse des prix agricoles, un signal fort à écouter, Luc Guyau, in Le Monde on September 6, 2007.