Towards increasing volatility in agricultural prices
André Neveu1, member of the Academy of Agriculture of France (AAF), article published Academy of Agriculture’s magazine n° 6, may 2015
Volatility in agricultural markets has been one of the scourges and major challenges of the past two decades. This specific phenomenon, a danger to food security, is structural and has been progressively shifted to domestic markets due to the process of liberalization initiated in the 1980s and the dismantling, particularly in Europe, of agricultural policies for price support measures. These erratic fluctuations are currently harder to manage because of the unpredictability of agricultural prices.
The major agricultural powers have taken steps to limit the damaging effects of volatility on food security and are looking to secure their agricultural supply. In the latest issue of the journal of the French Academy of Agriculture (AAF)2, André Neveu, an Academy member, gives an analysis of the strategy for securing China's3 supply. He particularly focuses on the consequences of unilateral decisions taken in Beijing on the instability of agricultural markets, which contributes to heightening price shocks in international markets.
Finally, only agricultural policies aimed at the long-term development of agriculture and the closer coordination of international institutions will sustainably and efficiently limit price volatility.
Finalement, seules des politiques agricoles visant le développement à long terme de l’agriculture et une coordination plus étroite des institutions internationales pourront limiter de façon durable et efficace la volatilité des cours.
Momagri Editorial Board
During the 1980s and 90s, the major agricultural powers gave up on ensuring the level and stability of agricultural producer prices.
Consequently, national and international prices are now set based on supply and demand. At the same time, stocks of grain and other commodities have been greatly reduced because of their expense. In the absence of government intervention, price fluctuations have sharply increased as they depend directly on the quantities sold on the markets, hence the abundance of world grain, sugar, oilseed crops.... These changes pose many problems for producers, importers, processing companies and consumers.
It is therefore reasonable to wonder about the magnitude these price fluctuations could take in the future, because they could get worse - maybe because of more frequent and severe risks, but also because of certain countries, particularly China, that have policies to protect themselves.
THE FIRST REACTIONS TO PRICE INCREASES FROM 2007-2008
In 2007, poor cereal harvests, stocks that had been particularly low for a number of years and a fairly new phenomenon - speculative buying, resulted in soaring prices. This relative (and temporary) shortage surprised many governments who were unprepared for such an episode. Consumer food prices rose sharply with the poorest populations particularly affected. In thirty countries such as Egypt, Mexico and Senegal there were food riots which required special measures at extra cost to national budgets.
Structurally exporting countries were obviously in a more comfortable position. In a crisis, they benefit from high prices and can always make their domestic market a priority. By avoiding World Trade Organization (WTO) rules, they have the possibility of deciding embargoes on their grain exports for example, thus increasing the extent of the rise on insufficiently supplied international markets.
In 2008, Thailand, the largest rice exporter in the world, banned its exports, a staple food in many countries. Similarly, in 2010, Russia and Ukraine hit by a severe drought imposed a partial embargo on wheat exports. All these measures were incidentally lifted quite quickly because each situation proved less critical than imagined. For their part, for some time, Argentina has been heavily taxing its wheat and beef exports to supply its domestic market and to preserve social harmony. Finally India and China have increased their grain stocks by precaution to cope with poor harvests.
It is obvious that these measures are not sufficient for avoiding price spikes in the event of further incidents, for example in the event of major climatic risks. They are ineffective for resolving price drops, which in 2009 (and to a lesser extent in 2014), may follow an unusual rise.
Farmers are also penalized by price fluctuations that do not enable them to make new investments with a minimum of financial security.
THE STRATEGY FOR SECURING CHINA’S SUPPLY
China did not wait for the 2008 price increases to attempt to secure their agricultural supply. Since time immemorial, Chinese emperors have sought food self-sufficiency. Communist leaders have also made strong commitments in this regard.
This is an ambitious goal given China’s limited (and decreasing) cultivable land in relation to its huge population; and for the past fifteen years the desire of the new middle class for an improved, enriched and more diversified diet, this commitment is no longer tenable.
They are still self-sufficient for rice and wheat, but this is less true for corn and not at all for oil, milk and feed.
China now relies heavily on soybean imports from South America, palm oil from Malaysia and Indonesia, milk from New Zealand, sugar from Jamaica and Australia, not to mention lumber, rubber and cotton. For example, China's imports of soybeans represent 2/3 of the quantities sold on the international market.
But the scale of this country’s needs have led them to buy whatever is available in livestock feed on world markets. This is the case for sorghum of which they bought 15 000 tonnes in 2012 and 3.5 million tonnes in 2014, obviously pushing up prices on this up until now, exclusive market.
The Chinese government knows that its needs and consequently its imports will only increase in the coming years.
Not wishing to be subjected to the whims of international markets, moreover at the hands of 3 or 4 large traders, they have decided to take their supply issues into their own hands.
Three methods were used:
- The direct use of agricultural land where large areas are still available such as Africa, in the Russian Far East and Kazakhstan;
All this is already perfectly implemented. Though the seizure of farmland is performed with caution to take into account local sensibilities, contracts for the supply of agricultural produce have multiplied. Theses always include a promise to deliver a fixed volume at a pre-fixed price, regardless of the prevailing international market conditions. In return, Chinese companies finance the various investments needed for production and export such as transport, the creation of ports, silos construction...
- The signing of joint ventures with foreign companies;
- Contracts which allow them to directly integrate with local producers across production and processing chains.
DISASTROUS CONSEQUENCES FOR AGRICULTURAL PRICES
Obviously, the rapid increase in global demand for agricultural commodities only raises prices on international markets. But above all, in the event of crop failure, if a country takes significant quantities from an insufficient global supply, it results in terrible price increases for other buyers. Undoubtedly, these price spikes will be only temporary.
But the unfortunate countries who will for a time have to stock up from depleted international markets, will be heavily penalized.
During the “Cold War” trade between capitalist countries and the Soviet bloc was limited. Each economic system therefore operated by its own rules without disrupting those of the other. Now, a majority liberal economy that applies the laws of supply and demand must cohabit with China’s command economy, claiming to be exempt, including from the rules under which they committed themselves within the framework of the WTO.
By playing its own card, China will therefore contribute considerably to the upsurge in price volatility on international markets. Importing countries will face unbearable economic, social and political situations, as they will be unable to supply the most disadvantaged populations at reasonable prices.
Consequently, because of China’s major role in world trade, a situation is being created for massive unrest if not conflict. As the other great powers, the Chinese government should be contributing to world stability, yet this does not seem to be their main concern.
1 Former Deputy Director of Agriculture and Local Government of the National Fund of Credit Agricole
2 With their kind permission, we will regularly publish various publications by the Academy of Agriculture of France whose aim is to reflect on technical, economic, legal, social and cultural themes in the medium and long term in the domains of agriculture, food and environment.
3 The entire magazine and article are available from