The workshop organized by momagri on the 4th and 5th of June 2009 at the Sorbonne, brought together around thirty international economists around the vital question of price volatility of agricultural raw materials. It emphasized the need for a revolution in our understanding of how the agricultural markets operate. Below is a summary of the debates that taught us so many things.
At the end of the two-day workshop, organized on June 4th and 5th, under the impetus of momagri, with the IAE of Paris, Arts et Métiers ParisTech and the ESTP, and which aimed to present works by high-level economists on the agricultural markets and price volatility. A reproduction of the debates and contributions took place on the afternoon of June 5th. Before an audience of over fifty international experts, scientists from many international organizations, and journalists, Professors Bertrand Munier1, Peter Timmer2 and Shyama Ramani outlined the economic and political teachings of the workshop, and in particular, the interest of the momagri model. Prof. Peter Timmer described the workshop as “one of the most enriching in which he has participated over many years”, in terms of the quality of the discussions, as well as the theoretical and strategic contribution of the works presented.
The discussions yielded three major points of agreement.
First point of agreement on the origin of agricultural price volatility
The financial and food crises have brutally reminded us of one major fact that has been neglected for many years: that risks and uncertainty are at the heart of how markets function, especially the agricultural ones. And, as Edi Karni, Professor at Johns Hopkins University (USA), underlined, the players in these markets, like most experts, often forget that they do not know ‘that they do not know.”
In their thinking, the experts should, therefore, include that the unlikely may occur, even repeatedly, and they should learn from the consequences in terms of modeling. It is essential, therefore, to consider uncertainty as the starting hypothesis, which conditions the quality of the simulation model results and expert advice, and not as the result, which justify forecasting and diagnostic errors.
By forgetting this factor in modeling agricultural problems, the experts, in explaining price performance, have undoubtedly accorded excessive importance to natural factors (climatic and epizootic hazards), and have underestimated factors linked to market structures and the behavior of the actors themselves.
Price volatility of agricultural raw materials is not due solely to exogenous causes guided by “the hand of God”, but also, and above all, due to endogenous causes resulting from the uncertain situation in which the producers, administrations, consumers and investors in the agricultural markets find themselves. Without having all the necessary information on hand at the moment they make their decisions (price, quantity and quality produced, etc.), the farmers over or under produce within the fluctuating international context. Thus, there is a gap between the quantities produced and demanded, which causes structural volatility of the prices, and which is boosted by the over reaction of different actors, including investors and even States.
This is the reason why price volatility, and particularly the recent worldwide surge in prices in 2008, is to a large part caused by causes “external” to the simple game of demand and supply of agricultural products. In addition to this, we need to add, as Bertrand Munier and Peter Timmer highlighted, “the role of financialization and excessive investor speculation, which have had a direct and brutal effect on price volatility.”
Second point of agreement on the need for reforms to work in terms of modeling
It is vital to understand, identify and evaluate the factors behind the recent crisis, and for work to be carried out by experts and academics in this field. But it is much, if not more, to measure the concrete implications of the crisis on risk evaluation procedures and tools, particularly the economic model. And it is here that wisdom and the scientific honesty of the experts questioned take their shape, and also here that these experts should adapt their theories and their models to reality, and not the other way around, by depending on policies and economic measures laid out by the different governments.
All the economists present, have agreed that the tools used today to formalize agricultural price volatility and the factors behind price performance, do not take into account the three factors presented in the first part, whether it concerns the Linkage model used by the World Bank, or the models used by the OECD and the FAPRI. They also highlighted the need to construct models that are in keeping with reality.
It is within this perspective that Bertrand Munier, head economist at momagri, presented the momagri model, whose main characteristic is to include the risks and uncertainties to which the international agricultural markets are exposed, as well as their progressive financialization through the development of investors and speculators on the futures market. Today, these questions are at the heart of international issues.
Labeled on numerous occasions by the economists present, and mainly by Prof. Peter Timmer and Prof. Shyama Ramani, as “the first of its kind”, the momagri model has been hailed as a model that should be taken into account from now on.
Third point of agreement on the consequences in terms of economic policies
Acknowledging uncertainty and risks are, therefore, two key variables in understanding how agricultural markets operate. But, questioning traditional economic models anchored in an almost “pure and perfect” competitive logic to formalize their method of operation, leads to important direct consequences for the economic policies to be promoted on international agricultural markets.
By acknowledging that agricultural markets are “imperfect”, and that most of the risks they face are endogenous, the economists present have clearly highlighted the dangers of unregulated trade liberalization, as that envisaged by the WTO under the Doha Round. Far from easing price volatility, unregulated market liberalization risks exacerbating it. The conclusions of Nora Lustig, Professor of Economics at George Washington University and an expert in development and poverty-related issues at the Center for Global Development, are unequivocal: unregulated free trade will translate into inflationist pressures in developing countries and /or isolation policies by the domestic markets of emerging or developing countries.
David Dawe, main economist at the FAO (United Nations Food and Agriculture Organization), who shows that price stabilization policies are economically preferred to liberalization policies, given the individual characteristics of the agricultural markets corroborates this result.
Consequently, there needs to be a spectacular turnaround in terms of economic policy to remedy the structural failures of the agricultural markets by suitable regulation and stabilization measures.
At the time when the food and financial crises highlight the limits of the schemas that have prevailed till now, and which were sometimes more ideological than scientific, the workshop that was organized with the help of momagri, confirmed, first of all, the urgency in bringing about a revolution in our understanding of how agricultural markets operate. It has also led to an identification of some areas of reflection in terms of stabilization/regulation policies that could be implemented. If these stabilization/regulation policies have given rise to numerous debates among experts, it now essential to provide concrete responses, as Shyama Ramani noted, as they lead to “real philosophical, ethical and political challenges, which should not suffer because of sterile, secondary ideological debates.” In fact, it should not be forgotten that at the end of the chain, what is at stake is the lives of a billion people who are suffering from hunger.
1 Head economist at momagri, Professor at the IAE de Paris, and the Arts et Métiers ParisTech
2 Professor Emeritus, Harvard University, USA
3 Professor, University of Maastricht, The Netherlands