A new vision for agriculture
momagri, movement for a world agricultural organization, is a think tank chaired by Pierre Pagesse.
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.

National Assembly
Personal account

For a French National Assembly report, the hyper volatility of agricultural commodity prices requires strong regulatory measures

This past October, the Committee on Economic Affairs of the French National Assembly issued an information report on commodity prices. Presented by two Members––Catherine Vautrin1 and François Loos2––it concludes the work conducted by a fact finding mission chaired by Member Pascale Got3.

We highly recommend this extremely detailed report4, which tackles a series of fundamental questions, in particular the exceedingly forceful issue of volatility of agricultural commodity prices since the early 2000s, volatility which calls for the rapid implementation of regulatory measures.

While the report recognizes that agricultural markets are unstable by nature, it emphasizes the “unprecedented” levels of the agricultural price volatility during the past few years. Indeed, one must be reminded that grain prices rose by 74 percent between July 2007 and January 2008, and by 30 percent between September 2010 and March 2011. Similar drops were also recorded, especially between April and November 2008.

According to the authors, who point fingers at the financialization of agricultural markets and the increased speculation they are experiencing, this excessive price volatility, whose repercussions are devastating for consumers and producers, is likely to worsen in the coming years.

While the report underlines that no systematic link could be made between “speculation and long-term price formation”, it nevertheless observes on the one hand “that speculation can, in the short term, be the source of fluctuations unrelated to the real economy”, and on the other, “that the financialization of markets represents an amplification factor for the structural volatility of agricultural prices.”

As we pointed out on several occasions5, the past few years have recorded the increased influence of financial players in agricultural markets. In fact, at the height of the 2008 turmoil, 90 percent of agricultural transactions were occurring on OTC markets––the unregulated gray areas––and 80 to 90 percent of such transactions did not generate physical settlements. They could thus be considered as pure speculative operations.

As it reinforces the need to increase transparency and improve mechanisms to oversee financial agricultural markets, the report is consistent with the work on financial regulation conducted by the International Organization of Securities Commission (IOSCO)6, by the G20 proposals under the French presidency7, and by the current reforms of European and American directives8. In addition, it deserves the credit for going even further by advocating among others:
    - Extending regulation and oversight measures––obligation to declare transactions and description of position limits––to all financial products and markets, including OTC markets, which gather most financial agricultural transactions;

    - Implementing measures to improve the operations of physical markets through the creation of a European database listing the physical contracts that present high liquidity, and through extending the financial regulator’s powers to the analyses of underlying markets and to the oversight of spot settlement transactions;

    - Encouraging, in the framework of the new CAP, the establishment of regulatory reserves at the regional, national and European levels, according to procedures to be outlined in the G20 work. Consequently, it is urgent to increase the storage capabilities in France, which have declined by over 10 percent in 10 years.
The report’s proposals represent essential approaches for the talks currently conducted in the framework of the CAP reform and the G20 concerning agricultural market regulation. While most studies on these issues are leading towards the need for the combined regulation of agricultural markets––both on physical settlements and financial markets––the concrete regulatory measures remain too weak because of a lack of precise data on three aspects: the economic realities of agricultural markets, the transmission channels that enable the spread of volatility, and, most importantly, a precise comparison between the support policies implemented in the large agricultural powerhouses.

While the G20 under French presidency has made it possible to achieve significant progress regarding the first aspect, thanks to the implementation of an Agricultural Market Information System (AMIS), let us hope that Mexico, which assumes the G20 presidency this year, will direct its thinking to the two other crucial and complementary aspects, so that decision-makers acquire greater visibility on the economic and strategic implications of the planned regulatory measures.

1 First Vice President of the National Assembly, UMP Member of the 2nd district of the Marne Département, Member of the Reims City Council
2 UMP Member of the 9th district of the Bas-Rhin Département (resignation as of November 2011)
3 PS Member of the 5th district of the Gironde Département
4 http://www.assemblee-nationale.fr/13/pdf/rap-info/i3863.pdf
5 Please see momagri’s article “In France, OTC transactions must now be declared. An essential, albeit still inadequate, first step”, http://momagri.fr/UK/a-look-at-the-news/In-France-OTC-transactions-must-now-be-declared-An-essential-albeit-still-inadequate-first-step-_1036.html
6 Please see momagri’s article “The report of the International Organization of Securities Commissions: A significant contribution to the G20 and up-coming European negotiations” at http://www.momagri.org/UK/focus-on-issues/The-report-of-the-International-Organization-of-Securities-Commissions-on-financial-regulation-A-significant-contribution-to-the-G20-and-up-coming-European-negotiations-_1013.html
7 Please see momagri’s article “G20 Summit: Positive conclusions for agriculture and food security” at http://www.momagri.org/UK/a-look-at-the-news/G20-Summit-Positive-Conclusions-for-Agriculture-and-Food-Security_1011.html
8 Please see momagri’s article “Defining a new regulatory framework for agricultural commodity derivatives markets” at http://www.momagri.org/UK/editorials/Defining-a-new-regulatory-framework-for-agricultural-commodity-derivatives-markets_1034.html
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Paris, 19 April 2014