A new vision for agriculture
momagri, movement for a world agricultural organization, is a think tank chaired by Christian Pèes.
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.
momagri, mouvement pour une organisation mondiale de l'agriculture
Point of view

The frosting and the cake: The growing volatility of agricultural commodity prices is less the consequence of recent market financialization than the intrinsic nature of an atypical economic sector

by Raphaël Alomar,
Chief Executive Officer, momagri

One must commend France’s bold stand in tackling several very complex and consensus-lacking issues, which have to be investigated and dealt in the framework of its current presidency of the G8 and G20 summits. The issue of the volatility of commodity prices––including agricultural commodities––is by no means the least important, since the power stakes are high and the positions of key actors orthogonal.

While the causes of agricultural price volatility are still being discussed on a theoretical level, it is nevertheless possible to assert empirical truths in light of the events recorded since the start of this century.

First of all, global agricultural commodity markets have been subjected to growing globalization and financialization for the past 15 years. Three factors have gone hand in hand with these changes: the gradual and unfettered deregulation of the activity, coupled with an ongoing liberalization of international trade as well as farmers’ increased indebtedness that is tied to the strain in adapting to a situation partly induced by the first two developments.

Following a detailed study of these phenomena, we did observe that the agricultural price volatility is, since the turn of the century, first and foremost the result of the gradual dismantling of supply regulatory policies in Europe (demise of market joint organizations, fallow land, etc…) and in the United States (end of the price intervention system and fallow land). This transformation has been dictated by the WTO talks, themselves based on a basically false analysis of agricultural economics and the hypothetical benefits from unfettered liberalization applied to agriculture.

Thus, this historical evolution is not a coincidence but the outcome of calculated policy choices resulting in consequences that are currently detrimental to all players in agricultural and food activities, and even now to consumers. These consequences are surprises for only those who forget facts, or wish these facts to be in compliance with an economic ideology that might have been beneficial to other economic sectors, at least as long as a border protection system deterred massive outsourcing of our industrial operations. But who would dare seriously contest today that global––or even regional––food security is increasingly, regularly and soundly jeopardized? Indeed, the recent agricultural price fluctuations lead to either an increase in agricultural prices that affects consumer solvency, or a price collapse that generates the elimination of producers, thus weakening food security at best, and producing a serious threat to social and political stability at worst.

Then yes! We must take the bull by its horns and deal with speculation, which is the most obvious expression of agricultural market imbalances, and unavoidably devastates the real economy. We must certainly improve financial market transparency, possibly curb investor positions in these markets, and demand that operations be handled through clearinghouses to avoid that 90 percent of agricultural trade occur without any supervision or physical counterpart, as it is the case today. In other words, we must stop playing with food products and introduce transparency, regulation and order in the spot and futures markets.

All these measures must be implemented, since observers––such as ourselves at the momagri1, think tank––are not questioning the link between the increase in agricultural commodity contracts and the increase of upward or downward price volatility, and are currently studying the recent changes in agricultural commodity markets.

However the idea to throw out the baby with the bathwater is far from our minds. We are confirming in no uncertain terms the usefulness of agricultural futures markets with regard to risk and cash transfers. But momagri champions the urgent necessity to supervise the agricultural primary and derivatives markets, in order to curb the wild speculation they experience.

But please, let’s not err through naïve thinking, by reversing cause and consequence. Because if these financial proposals aim to curtail the detrimental consequences of speculative practices––that is to say their escalation effects on price volatility––let’s not forget that that speculation is based on overlooked specificities of the real agricultural economy.

The supply/demand balance is indeed very fragile and unstable for micro and macro economic reasons and because of endogenous and exogenous factors that are unheard of in the manufacturing sector. Prices of wheat, corn, rice or meat abide by different rules than prices of cars, smart phones or computers. Have we yet seen car prices fluctuate by 100, even 200 percent, from one year to the next? Yet this is the case of agricultural products, with increasingly higher rates of recurrence and greater upward or downward amplitudes every year.

For all these reasons, which have been carefully studied by momagri2, we know that agricultural issues are more complicated.

Today, these explanations lead us to state that the financial proposals being discussed in the framework of the G20––including the political effort needed to make them acceptable at the international level in spite of our diplomats’ talent––will have a real, positive and long-lasting effect only if all fundamental aspects of the factual agricultural economy are simultaneously dealt with. Undoubtedly, the political challenge is even greater. But if the path has to be a lengthy one, it can already be subject to a fair analysis that we will share with men of goodwill.

All will agree on the simple idea that to ensure the effectiveness of the financial measures that are up for discussion––and thus rein in agricultural price hyper-volatility––we must (i) improve agricultural supply without delay, in quantity as well as in quality both locally and internationally, and (ii) adopt a new international approach regarding the supervision, management and regulation of prices of key products on physical and futures agricultural markets.

For momagri, improving agricultural supply therefore involves retaining two basic themes.

The first involves firmly increasing investment in agriculture, which has been far too overlooked by governments as well as international organizations during the past thirty years. This is a must in terms of innovation (R&D in biotechnologies in particular) and infrastructures (logistics, warehousing, etc…) in order to produce more and better, to limit losses (climatic factors or impact of political, economic and social crises), to improve trade flows at the local and global levels (net importers/agricultural product exporters).

The idea is to establish, especially in poorer countries, the virtuous circle of economic development based on agriculture. In fact, agricultural investment and innovation generate productivity advances, which simultaneously lead to lower unit production costs, and indirectly lower food costs. These productivity gains also lead to reinvestment in agricultural operations and the creation of a powerful, or even exporting, agribusiness industry. The primary sector effectiveness––and therefore its productivity––is the core of not only food security but also development of other economic sectors, as shown throughout all currently developed nations in modern history.

The second improvement theme inevitably involves reinstating the ability to physically intervene on markets, that is to say using prevention-dissuasion and management tools in cases of agricultural market excesses and upward or downward speculation in agricultural commodity prices. We feel that we must again build up public and/or private reserves, whose volumes, management and procedures should be discussed and approved at the global level. These reserves would be sorted in three types: strategic, market regulation and emergency.

Today’s existing reserves are too low (less than two months for some grain crops, while grain accounts for 70 percent of human food consumption) and reserves no longer carry any persuasive interest nor genuine strategic or emergency purpose (food shortages caused by climate, health or political crises). Confronted with a growing demand and unstable markets, it is thus crucial to bring back this instrument, which is as old as the world and more needed today than ever. Truth be told, it is currently a well-know fact that the concept of just-in-time production is not pertinent to agriculture.

Last but not least, momagri advocates the creation of a world organization for agriculture (WOA) that would manage a system to control international prices of key staple products. Established for each production zone with comparable economic and social development, the system’s objective would be to stabilize prices within an upward and downward variation range. This is the indispensable condition to provide the global agricultural economy––and first of all producers––with minimal compensation for production factors and adequate visibility to invest and support innovation, a source of yield improvement and enhanced respect of nature. Failing that, not only the number of farmers and yields will drastically decline, but income insecurity will also prevent any optimization of production factors. Under such conditions, the needed supply will not meet the growing demand for food products, and a trail of negative consequences will occur in very short order.

To those who have doubts on the technical feasibility of the proposal to establish a WOA, we will argue that ten food products now account for 85 percent of the world food consumption, for 80 percent of international trade and only involve approximately ten exporting nations. We might also add that G20 countries stand for 83 percent of global GDP, represent all five continents and include the world key food product exporters and importers. The WOA that we are advocating, and whose pressing need seems to be glaringly visible considering the recurrence of food crises presenting structural attributes, could play a future role of sophisticated alert, supervision of erratic price variation and management of acknowledged food crises.

We are hereby advocating a light organization whose steering should be entrusted to the FAO––the most appropriate among United Nations organizations––whose mission and means of intervention should be clarified and supplemented. The body we are calling WOA would bring together international organizations with agricultural objectives (WFP, IFAD) or some agricultural purposes (World Bank, UNDP, WTO, etc…) and whose officials would directly report to the G20 (ministers of agriculture or heads of state). It entails the prior political declaration that food security (agriculture and food) is a global public good.

To those for whom the 2008 and 2010-11 warnings were not sufficiently convincing of the need to finally tackle these issues with resolve and complete priority, we would counter that events will unavoidably and unfortunately will prove us right. How many tragedies, food shortages, hunger riots and revolutions will we need, so that a clear awareness of these issues and the threat they pose for humankind justify the reasonable and commensurate measures we are pinning our hopes on? We are not the only ones to do so. Just as others do, we remember that it took two world wars for the international community to set up, through the creation of the United Nations Organization, rules to avert the occurrence of another disaster. Half a century later, the food issue is now giving us similar responsibilities for the next fifty years.

1 momagri, the movement for a world agricultural organization, is a think tank established in 2005 that focuses on agricultural economics and advocates a new international agricultural and food governance system.
2 The momagri economic model specifically includes, in a general and computable equilibrium model, the natural and market risks and thus, in addition to volatility exogenous factors, the endogenous volatility of agriculture. Such volatility is particularly tied to recurrent gaps between supply and demand, to unavoidable anticipatory errors by agricultural market players and to market financialization, all factors that are not incorporated in the reference models used by the international community (FAPRI, World Bank, OECD…).

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Paris, 16 June 2019