The G20 is coming up and France is already starting to convene “ministerial meetings” with the goal to bring together the ministers of concerned nations to prepare the talks item by item before the November summit. Finance ministers of the G20 nations thus met in Paris on February 18 and 19, “to reduce international imbalances” and progress on the issue of agricultural commodity market regulation, which does not have unanimous backing from G20 members.
In this context, the Centre d’Analyse Stratégique (CAS)––a French Government agency, whose objective is to assist the Government in defining and implementing its policies––recently outlined, in an analytical report published in January, its proposals to improve financial agricultural market regulation.
Included in the report is the primary basic assessment by two CAS economists––Johanne Buba and Maxime Liegey––confirming that commodity markets are not markets like any other market. Commodities are indeed “input resources of the real economy and their price fluctuations bear direct and immediate consequences on investment, production or even food.” Yet, agricultural commodity prices have become increasingly volatile during the past few years.
There are several phenomena at the root of this volatility: Speculators’ renewed interest for agricultural markets, increased tensions between supply and demand, lowered stock levels and climate hazards. It seems difficult, however, to see to what extent each of these factors contributed to the instability of prices, since little data is available, especially regarding the still relatively opaque financial markets.
This is the reason why the CAS considers that the requisite underlying principle for any financialized market regulation is more transparency and improved supervision of market players. Two key measures are emphasized.
First and foremost, the CAS would like to have all players’ transactions and positions recorded, both on organized markets as well as on OTC markets. In cases of abnormalities, that is to say in cases of too large positions by a single operator, it would then be the responsibility of market authorities––such as the European ESMA 1 ––to get involved.
In addition, the CAS advocates the creation of an OTC market clearinghouse that would oversee all transactions following the same model as for organized markets. The visibility of ongoing operations would thus be improved.
The CAS rightly feels that it is necessary to simultaneously achieve better transparency of physical markets, especially regarding the levels of resources, reserves as well as short- and medium-term supply and demand.
The CAS propositions are essential. They represent the first needed segment on the road to regulating speculation on agricultural commodity markets. Nevertheless, several prior conditions are required if we want to maximize the effectiveness of these measures:
1) Having tools to simulate and understand agricultural market operations, including the latest developments in terms of formalization of exogenous and endogenous risks as well as speculation modelization, so that the roots of market destabilization and volatility can be assessed;
To increase the efficiency of these measures, it is also crucial to initiate a new approach to oversee, manage and regulate agricultural markets through the creation of a world organization for agriculture in charge of assessing agricultural markets and implementing regulation mechanisms adapted to physical and financial markets.
2) Having databases and statistical records to provide homogenous, global and transversal information on physical markets (fundamentals such as supply and demand, stock levels as well as similar data on farmers indebtedness, social welfare, etc…) and on financial markets (derivatives contracts, financial parties’ deposits guarantee, derivatives contract compensation…);
3) Implementing “homogeneous” international regulation of financial markets, to avoid competition between financial exchanges and the circumvention techniques made possible by the lack of international rules;
4) Pursuing investment in agriculture to produce more and better crops, limit losses and facilitate local and global trade.
This global agricultural organization would not be an additional international organization, but a platform bringing together all required expertise to “administer” agricultural markets, expertise which is currently widely spread out: the WTO for trade, the FAO for food security, The World Bank for development, the IMF for financial and currency issues…
Indeed, the regulation of agricultural markets will be successful only if these preliminary conditions are accepted and implemented at the international level. All major agricultural powers must toe the same line, an identical regulation rationale that must be coherent and commonly applied to all. Otherwise, disagreements between the various regional coalitions will arise, which will spawn even greater agricultural market instability.
Such organization would act both upstream, by improving transparency in agricultural markets through a reliable and global information system (databases, surveys and audits), as well as downstream, by implementing appropriate regulatory measures (alert system on the same principle as rating agencies, establishment of equilibrium prices, management of local and regional stock levels). This issue of new agricultural governance, which is crucial if we want to permanently stabilize agricultural markets, will be on the agenda of up-coming international meetings, including the second “Agricultural Dakar” to be held in Senegal next April 18 and 19.
1 The European Securities and Markets Authority.