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The new situation on markets requests a new vision in order to measure the risks: this is the role of the momagri model
Interview of Pr. Bertrand R. Munier,
Chief Economist of momagri
1. You recently addressed the Euronext conference on “Changing Grain Trading Strategies” in Paris. How are trading professionals and agriculture decision-makers reacting to the high-volatility of agricultural prices?
Indeed, I spoke at the Euronext-Liffe conference on the evolution of grain trading strategies. It is important to observe the concerns, and for some the disbelief, that professionals are showing faced with excessive volatility of agricultural commodities prices. Almost all of these prices have doubled in a two-year period but some of them have declined by over 50% of their market value in the eight-month period between March 15 and November 15, 2008 (between 52% and 56% for wheat according to the Paris or Chicago exchanges).
Of course, a significant amount of volatility is not cause for alarm to traders but the volatility levels registered during the past few months are well beyond the risk exposure that banks and operators generally cope with. The message I intended to convey during my speech can be summed up as follows: this new situation of the markets demands that we modify risk measures. Obviously, this message is backed by an analysis of grain and general agricultural commodities markets.
2. Today’s major concern is to assess the impact of speculation on the volatility of agricultural prices. How do you rate this phenomenon in the framework of your work?
Without a doubt, markets analysis can no longer be managed in terms of final supply and demand analyses, as our micro-economic textbooks have taught us until now. I myself wrote an introductory text of this type just before the first oil crisis but customs and circumstances have change since then, as have the markets and the analysis they generate.
The study of curves and intuitive reasoning––at best using cleverly compounded indicators––might run the risk of repeating the blunder of the Harvard Barometer (which foresaw growth a few weeks before the Great Depression!) Today, two key factors shape an accurate analysis of the various markets: on one hand, the conventions and institutions (“macro-structure”) that define them, and on the other, the handling techniques on which they are based (“micro-structure”).
Except for academic introduction purposes needless to say, no one can any longer support a pure competition model––free of all institutional consideration––nor “perfect” market structures––independent of any market “handling technology”. We must now switch from a market economy to a markets economy, and I insist on the use of the plural!
In fact, economics Nobelist Maurice Allais––the only French Nobel prizewinner in that field so far––outlined, almost forty years ago, the concept of markets economy, an initiative similar to our current topic, and which, in any case, called for this analysis evolution. This new outlook demonstrates that markets showing little volatility, such as most industrial markets, operate to the benefit of a greater number when inflexible situations, excessive regulations and monopoly positions have been outlawed.
At the same time, we can grasp that markets with unavoidable volatile prices, such as those we just mentioned, are raising added handling and regulation concerns. The goal of the momagri model is to bring out some of the issues related to commodities markets and the agricultural markets in particular. For the past few years, increasing financiarization has characterized these markets and we must acknowledge this situation. The behavior of players facing risks must obviously be included in the corresponding analysis that must be conducted. This is precisely what we tried to do with the momagri model.
3. You recently stated that extensive improvements have been achieved in risk analysis. Can you explain their concrete repercussions to the comprehension of agricultural policies and international trade for example?
The century and the world we are now entering are marked by deep uncertainty, or even by dangers that we have not had to face since the post World War II period. Concurrently, risk analysis has been enhanced during the past 25 years by significant steps forward that are as valuable as those achieved during the three centuries that separate the Treatise on the Arithmetic Triangle by Pascal in 1654 and the Theory of Games by von Neumann and Morgenstern in 1944.
Today, we have a much keener grasp of the mental and economic aspects of risk than we did 30 years ago. Better yet, we have at our disposal the means to put these two aspects to use for our companies or for our analyses. It is thus our moral and scientific duty to make the most of the recent advances to assist those aspiring to a better understanding of today’s world and, more specifically, its markets. This precise endeavor––integrating a true vision of risk and dangers in economic thinking––is the model that momagri wants to implement in international agricultural policies and negotiations.