In 2008, The Agence Française de Développement (AFD)––the French Development Agency––pointed out the risks linked to the excessive volatility of agricultural commodity prices for developing countries, and stressed the importance of developing a mechanism to reduce it. This is the reason why the “fonds de lissage”––or adjustment fund––implemented in Burkina Faso in 2005 has shown both relevance and effectiveness.
It actually allows limiting price volatility and supporting a segment of agriculture, as Pierre-Henri Texier explains in an article in the monthly publication of the General Council for Food, Agriculture and Rural Areas of the French Ministry of Agriculture.1
In 2009, momagri emphasized the significance of such an approach2, whose overall reasoning meets a rationale similar to the price regulation system that is the focus of the think tank’s work.
Marked by the food crisis and price hyper-volatility, recent events are reinforcing the need for such a system and for its implementation, not only in developing countries but also in all countries across the globe, since all farmers suffer from the full consequences of excessive volatility.
momagri Editorial Board
As innovative financial instruments, the “Fonds de lissage” are intended to reduce excessive agricultural commodity prices. They are based on pooling cooperative precautionary savings.
The concept of “lissage”––or smoothening––is consistent with the “Joseph effect” recognized by agricultural economists: It consists of guaranteeing farmers with an adequate price, or income, no matter the market situation (good or poor years).
Managed by either professionals or trade associations, the “fonds de lissage” makes economic players accountable, since governments only intervene in cases of “disasters.”
The objective is to provide farmers, even before cultivation starts, with a guaranteed purchase price for their crop. Consequently, as expected profits are assessed, they can rationally select cropping systems.
A purchase price, named “target price”, is set before each new harvest. This reference price delineates, through boundaries between ceiling and bottom markings, an acceptable price range and price zone for farmers according to markets.
At the close of the harvest, the “actual price” is the average selling price recorded during the year. Three cases can then occur, depending on the amount of the “actual price.”
• If the actual price is within the planned price range, the fund does not get involved with farmers;
An important concept: The price range asymmetry
• If this price is lower than the price range, the “pooling fund” provides farmers with a compensatory indemnity to arrive at the bottom price set by the range;
• If the price is higher than the range ceiling, farmers must pay an insurance premium to finance the pooling fund.
So that the system works, the fund must be sufficiently endowed to allow paying all farmers the bottom price when necessary. This bottom price must be assessed contingent on inherent risks of a given market––the greater risk of significant price gaps, the lower bottom price is to be set.
The ceiling price and the bottom price should be asymmetrical in relation to the “target price”.
The price range (between minus five percent and plus one percent of the target price) has already successfully worked, in spite of several years with low prices.
Implementation of the fund
While the fund resources must be sufficient to allow intervention, they should not be too large, so that outlays are not tied up and cannot be better used elsewhere. The initial contribution must be around 25 to 30 percent of a yearly crop value, to protect the fund against several consecutive loss-making years.
Calculation of premiums
Farmers pay into the fund when they benefit from prices higher than ceiling prices, but it is psychologically difficult to require them to endow the fund with the entire amount of the extra profit. Thus, premiums only amount to a percentage of the surplus, percentage that is contingent on the profit importance.
The premiums also hinge on the fund replacement rate. Consequently, the lower the fund (following several years of low prices generating interventions), the more urgent is the need to replenish it.
It is important that the premium calculation method––even if based on a mathematical formulation––should be understandable by all players. This enables reaching a consensus from all parties concerned, and therefore establishing a trust-building environment.
The Success of this type of “lissage”: Asymmetry and differential
This “fond de lissage” system differs from older stabilization funds or from the early years of the CAP (Common Agricultural Policy). It actually initiates the establishment of an “asymmetrical range” and of a premium differential collection, while stabilization funds were based on concepts of symmetry regarding target prices and fixed collections. It offers the advantage to be connected to market signals and to make economic players aware of their responsibilities.
The above-mentioned principles can be generalized to:
• A group of crops,
Simultaneously applying to importers and exporters––or to producers and consumers––the principles of this asymmetrical and differential “fonds de lissage” could notably reduce the destructive consequences of agricultural commodity price fluctuations, since collection from one party becomes the endowment of another.
• An equalization grain/livestock fund (grain and cattle feed prices being symmetrically adjusted),
• The adjustment of income for farms with similar technical and economical orientation (OTEX) through the management of their Single Payment Scheme (SPS) portfolio. “In good years, farmers would save a share of public financial aid, to reallocate it in the years when prices are low.”
1 From issue No. 54 of March 2011 of the AAER publication of the General Council of Food, Agriculture and Rural Areas.
2 Please see momagri July 13, 2009 article, http://www.momagri.org/UK/focus-on-issues/The-Fonds-de-Lissage-for-the-Cotton-Sector-in-Burkina-Faso-A-Pertinent-Initiative-to-Fight-Price-Volatility-_525.html