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Why is it Imperative to Set Up a Ratings Agency for Agriculture?
As they currently face strong criticism for their shortcomings in risk prevention and management of the international financial crisis, ratings agencies are nevertheless a must to assist decision-making and minimize risks by providing globally recognized and quasi-institutional indicators. In addition, these agencies provide governmental interventionism with the sole alternative to reduce a growing information asymmetry on international markets, particularly on agricultural markets.
The creation of a ratings agency devoted to agriculture and its challenges thus takes on a very special meaning, all the more so since this current spell is marked by an increasing opaqueness concerning agricultural markets, which are about to experience fundamental decisions. This is the reason why we at momagri undertook the development of such an agency in 2009 to tackle the three major issues that affect agricultural markets and, more generally, global food security.
Reducing the growing information asymmetry on international markets
Agriculture is a specific economic field in which information plays a crucial role because, unlike any other field, an important information asymmetry exists between the various players (farmers, speculators, corporations, governments), asymmetry that increases because of the “financialization” and rising globalization of economic policies.
Farmers’ decisions (and not only investment decisions) are almost totally irreversible from one year to the next and thus farmers have no advance knowledge of future yields, of their quality and, even less so, of the price they will get for their production. Natural hazards (climate hazards and epizootic diseases) as well as demand fluctuations constantly intrude and impact selling prices of agricultural products. Private investors and speculators, who intervene on futures markets –– very often taking short-term positions –– influence international markets’ supply and demand and, consequently, prices that will be paid to farmers in the end.
Faced with such information asymmetry, we observe over-reaction phenomena on international markets, since all players are aware of such asymmetry and strongly react to any new information. This was the case with the 2007 announcement that wheat production would be 50% lower than estimated, when Australia instigated a panic movement on international markets, whereas the production gap in global production only fell by 2%. Reducing the information asymmetry that is quasi-structural for agricultural markets is therefore essential and, at this point in time, no international institution or private organization fills this responsibility.
The financial crisis also revealed the various transmission conduits through which the factual economy could be affected, particularly the agriculture and food conduits. Yet today, we do not have any pertinent indicator at the international level to warn decision-makers of agricultural market discrepancies and of potential spread to agriculture of a crisis in a given economic field. This lack of an international control panel for agriculture is a worrisome issue for three reasons. First, because markets are increasingly decompartmentalized and systemic risks become considerable. Subsequently, because agriculture represents the groundwork for economic development in all countries –– especially in developing nations –– and because an agricultural market crisis can generate a major crisis for their economic situation. Lastly, because agriculture maintains strategic bonds with three global public goods: the environment, economic development and the fight against poverty and hunger.
Anticipating Shortcomings and Improving Agricultural Markets Operations
Major decisions are about to be made by the WTO, but they are based on a flawed approach that essentially focuses on trade and lacks any strategic and development concerns. If a trade viewpoint is indeed necessary, it is hazardous to limit agricultural challenges to the sole issues of trade, which, let’s not forget it, only averages 10% of all global agricultural production.
Promoting the establishment of large “world farms” on the pretext that they benefit from competitive advantages in some farming activities, can lead to the failures that have brought about the financial crisis: just as many banking institutions and analysts favored financial products offering higher yields to the detriment of risks that they were passing on to the community (sub-prime lending), some nations––China and Brazil for instance––could favor immediate agricultural profits without any thought to the social, health and environmental consequences for the international community. It is thus crucial to evaluate agricultural competitive factors in the various regions of the world.
One cannot deny, however, that trade matters play a key role in international agricultural governance, but this is as decisive as providing answers to the three following questions: >
- How must we organize free trade to make it fair and durable?
- How must we maximize agricultural market operations without disrupting these very operations?
- How to prevent manifestations of irresponsible and non-ethical behavior in international agricultural markets?
A ratings agency is the only structure capable of bringing a solution to the problem we are currently facing, problem that can be described as mission impossible: how can we avoid the shortcomings inherent to agricultural markets (excessive price volatility, stowaway behavior…) induced by unregulated market liberalization, without disturbing market operations nor resorting to governmental interventionist strategies?
Improving Policies and Strategies in Agriculture
Agriculture is a strategic activity for the economic development of a region, but no organization or any independent institution is responsible to evaluate the relevance of implemented policies and strategies in relation to their assigned goals.
That is the case, however, in all other economic activities, from finance to currency to industry. Indeed, all these activities benefit from control indicators that enable them to a-posteriori rate the performance of a given program, to warn decision-makers in cases of dysfunction or oversight, and thus to facilitate their operations on a daily basis.
Do we want today to continue making an informed use of economic models of simulation, when we know that their estimates were regularly contradicted by reality?
Do we want international institutions, such as the WTO, to continue supporting a liberalization plan for agricultural markets, when we know it will not enable African nations to develop and eradicate poverty?
Do we want governments to make major decisions for their future based on flawed and biased hypotheses, as it is the case in Europe with the planned CAP reform, which presumed, this past March, that agricultural prices would slowly be increasing?
The most serious aspect concerning these assessments is not that they are flawed when they are made, but it is the fact that we cannot acknowledge their failings over time because we are lacking appropriate indicators and organizations.
This is the reason why a ratings agency tailored to agriculture and its challenges is now indispensable and why momagri has initiated the creation of an agricultural ratings agency. We will undertake its formulation in 2009 and will increasingly develop an information and expertise network throughout the world to share techniques and procedures. It will facilitate cooperation, international decision-making and policy coordination, since a ratings agency is, by nature, much more reactive than an international institution can be.
To do so, the Agency will achieve three main functions. First, it will act as a beacon, indicating the course to be reached and the necessary data to make, at any given time, pertinent decisions. It will then act as a barometer indicating pressures and tensions between the various agricultural players (governments, corporations, international institutions and non-profit organizations), regulating by means of information and thus facilitating the emergence of negotiation and cooperation strategies. Lastly, it will act as a compass serving as prescriptive force to ensure that implemented agricultural policies are in accordance with the major goals set by the international community1 : Respecting a fair international trade system focused on markets (Doha Round); Fighting hunger and poverty (objectives of the Millennium Round); Guaranteeing durable development and preserving the environment (Rio Conference).
by momagri’s Jacques Carles, Executive Vice President and Bastien Gibert, Expert of momagri
1 Please visit www.momagri.org for our article A New Way that Combines the Goals of the Doha Round, the Millennium Round and the Rio Conference (section: Our Work/Governance). |
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Advocating for
agricultural market
regulation and global
food governance | |
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