As the European Parliament overwhelmingly voted a recent resolution1 recognizing that “markets cannot by themselves provide producers with the reliable income they need to carry on their activities”, some leaders still believe in the benefits of markets to one day replace the CAP.
Taking a look at the other side of the Atlantic, we realize that the United States, as early as the summer of 2008, promptly asked Congress to study the occurrence of speculation in agricultural prices. A law to curb excessive speculation on commodities term markets––the Stop Excessive Energy Speculation Bill––was voted as early as September 2008.
Animated discussions still linger regarding the role of speculation in soaring prices and the advantages of term market to “smooth over” the quasi “natural” high volatility of agricultural prices. Let’s hope that the recognition of this phenomenon––and the political lessons it will generate––will soon occur in Europe, so that discussions on the future common agricultural policy do not become involved with the “illusionary perception of term markets”.
by Dominique Lasserre, Advisor, momagri
DL: Groupe Euralis brings together 15,000 cooperative farmers and employs 5,000 people on four continents. Your company, a symbol to the thriving and exporting French agriculture, disagrees with those who believe that financial markets can replace agricultural policies and regulation mechanisms to prevent the risks, which farmers must deal with.
CP: One could suppose that, in the liberalized and “financiarized” environment that institutions such as the WTO and the European Commission’s General Directorate for Agriculture want to impose on us, a company like Euralis comes out unscathed. And in some ways, it is true. We are sufficiently diversified, both in its product range and in its geographical presence, to prosper in such context. We even benefit from a team of traders––the so-called “open sesame” to guarantee profitable revenues!
Nevertheless, I am convinced that our future, the future for all farmers throughout the world–– and consequently for all consumers throughout the world––is not secure in such a system.
As early as 2007 and several months before the hunger riots, I did write a book, The Food Weapon. And unfortunately, I dread our progression toward a world in which agricultural products will become “power commodities”, such as oil and other energy commodities. The increasingly extreme price volatility we have recently been observing is as deadly for needy populations (in case of soaring prices) as it is for farmers (in case of declining prices). This is indeed proof that it is now imperative and justified to intervene to smooth over these “jolts”, whether upward or downward jolts.
My intention is not to say that financial markets are good or bad. I just wish to state the fact that the tools provided by financial markets to guarantee income:
> Are not available to all farmers;
> Are not the answer, especially since they contribute to heightening price volatility, which represents the #1 risk that we farmers must cope with.
As indicates Michel Fosseprez, Chairman of the Board of Union InVivo and Co-Founder of momagri, we do need term markets, but, on one hand, they do not solve everything and, on the other, they can even disagree with farmers’ genuine needs.
DL: Why, in that case, are financial markets not working for you?
Because a farmer does not have a sufficient presence regarding his final production cost to accurately set the price he must ask on financial markets to earn income, or even worse not loose income.
When a farmer turns to term markets, he does not know the volume of his crop nor the quality of his production that partly sets its selling price. In addition, he cannot determine with certainty his production cost, which is indexed to climate hazards and parasitic diseases that may affect his farm and require particular treatments. One can well see that an automotive assembly line does not have to manage all these unknowns!
As momagri accurately established, agriculture is the only economic activity that simultaneously presents the following four characteristics, and thus specifically threatened by risks:
> It is a market that is both physical and virtual;
> It is a market that is subject to climate hazards;
> It is a market whose output is defined by the irreversible nature of its production onset;
> Last but not least, it is a market that completely lacks a presence on the three following parameters: quantity, quality and selling price.
Term markets can therefore safeguard prices but since farmers do not know their final production costs, they can forecast prices that will prove to be not “profitable” in the end.
Secondly, farmers themselves do not set prices, all the more so since production is a live or perishable commodity. In the case of breeding, farmers are more limited by time. Chickens, for instance, can be “labeled” when 80 to 82 day-old. Consequently, it is impossible to sell them after 150 days since they do not meet the required norms.
Plant or breeding farming production is not a lifeless matter that can be sold when market price is right to cover production cost. Unlike an apartment, a car or a suit, an agricultural product does not stay the same! For plant production, goods are perishable after a specific time.
Farmers do not control the date, and therefore the sale price of their products. That is also why term markets cannot cover the entire price risk that farmers must tackle to ensure the existence of their farms and their own future. And this remains valid for all continents, all production
DL: You even state that term markets can represent a danger for farmers. Why?
All farmers do not possess finance as their #1 talent. Some of them have brilliantly tackled the science, but what about the others?
Their wisdom resides in their knowledge of plants and animals… They can certainly call on middlemen or traders, for those who can afford their services. This, by the way, immediately excludes farmers in developing countries, unless they are “affiliated” with large agribusiness groups or even financial funds.
But does this translate into a model for durable growth? I do not think so and I hope that our leaders will understand that the free trade agreements put forward by the WTO will foster the development of such a “financiarized” and “highly relocatable offshore” agriculture, with no consideration whatsoever for the fight against poverty and global food security.
Besides, this situation also imparts a predicament: term markets are increasingly disconnected from physical markets. We, at momagri, conducted studies that show that, at various times, 95% of transactions on the Chicago term market do not have any physical end correlation, even though these resulting prices define the recognized “global price” that is supposed to advise production decisions by farmers.
According to Mariann Fischer Boël, European Commission for Agriculture and Rural Development, this “price signal” should incite farmers to produce this or that crop. Such approach should lead them to become more competitive at last. Should we build the future of our food security on this approach? I do not believe so and that is the reason why I became involved with momagri.
1 Initiative Report of January 13, 2009, “Common Agricultural Policy and Global Food Security” by Mairead McGuinness, Member of the European Parliament.