Combating volatility

by Chris Lyddon
Share This:
Better information is the way to head off wild fluctuations in international grain markets, speaker after speaker told delegates at the recent International Grains Council (IGC) Conference in London, England.

The French Agriculture Minister led the way with an attack on speculators, at the same time insisting that he is a believer in markets.

Bruno Le Maire, France’s Minister for Agriculture, Food, Fisheries, Rural Development and Spatial Planning, opened the conference at a time when France holds the presidency of the G20 group of industrialized nations.

“The President of France, Nicolas Sarkozy, has decided to put agriculture at the core of the French presidency of the G20,” he told delegates. “Your conference comes a point when it is very timely to talk about food security.”

He stressed the importance of agriculture to the world economy and the challenge of feeding 9 billion people with fewer farmers, less land and the effects of global warming.

“Agriculture is the first economic activity at the global level,” he said. “It represents 1.3 billion jobs. It represents 40 percent of world jobs.”

He also stressed the role of the agricultural sector in alleviating poverty. “This price volatility is an issue for all,” he said. “Most of all, it is a problem for producers and also for consumers who are faced with higher and higher variations in price.”

Speculation ‘unacceptable’

“Agriculture is also faced with speculation which is unacceptable,” he said. “France has nothing against markets. France is against speculation.”

He complained that 85% of positions in the Chicago Board of Trade are held by players who have no link with agriculture. “To fight against volatility doesn’t mean to fight against the market,” he said. “It means to improve the market.”

Le Maire proposed a common database, in the framework of the G20, to improve transparency, along the same lines as information sharing which already exists in the mineral oil sector.

“What we’ve done for oil we must also be able to do for wheat, rice and maize, which are just as strategic as oil,” he said. “We need your information, your reports. We will not fight against volatility if we do not have more transparency.”

The system would go beyond the G20’s members. “We want to work with all countries,” he said. “All of the international organizations involved have been consulted.”

He made a plea for international coordination, apparently addressing those countries which have imposed export bans.

“We cannot in the agricultural sector simply have decisions that are taken unilaterally by one state without informing the rest of the planet,” he said. “If one country suddenly stops exporting, how can we react? Developing countries need hedging instruments to fight risk. Developing countries need more availability of food aid to face crises.”

Regulating the markets is, in his view, outside the remit of ministers of agriculture.

“Financial regulation will be the result of the work of ministries of finance,” he said. “We would like markets to work better. We need markets. We need investors. We do not need speculators. We can all see that the current situation is unsatisfactory. We do not need people who made excessive profits in a few days in the agricultural markets.

“France doesn’t wish to control prices. What we want to fight is excessive volatility that disrupts the market. I recommend that we choose the path of cooperation.”

Same problems after 36 years

Some support for Le Maire’s position was offered from Noel de Luna, chairman of the Food and Agriculture Organization’s Committee on World Food Security (CFW).

“The Committee on World Food Security was born in 1974,” he said. “After around 36 years it seems we still have the same problems.

“Violent price fluctuations, more than anything else, arise out of the fact that nobody has the right information at the right time.”

He also explained why politicians have made some of the decisions, like export bans, seen in recent times.

“The decision-maker will always err on the side of his or her constituents, never on the side of people on the other side of the world,” he said. “Any sort of uncertainty will trigger a safety-first reaction.”

There was skepticism about willingness to share information. “Apparently nobody wants to do this in spite of all the agreements we have,” he said. “Knowledge is power. Current practice, when countries and communities keep such data secret, will have to be stopped.”

He described the sharing of accurate and reliable timely information, accessible to all, as a necessity.

Rod Gravelet Blondin, senior general manager of commodity derivatives at the Johannesburg Stock Exchange, gave an answer to the question posed in the conference’s theme: “Global market turbulence: a more food-insecure future?”

“My short answer is not necessarily,” he said. “Africa could be the food basket of the world. If we develop better policies in Africa and invest in infrastructure, it will go a long way to solve the problem.”

He explained why the Exchange had been started. “The farmers in South Africa have no support whatsoever,” he said. “There was a need for price risk management. We do not know what the future holds. If we knew exactly what drove prices, we’d all be very rich and we wouldn’t need conferences like this.”

Blondin provided a strong counterpoint to Bruno Le Maire’s attack on speculators.

“I firmly believe that prices move as a result of fundamental factors, not these other factors,” he said. “I don’t quite know what we’re going to do with all this transparency, but I’m all for it.”

When you have economic growth, you’re obviously going to have a rising prices, Blondin said. He welcomed the French minister’s insistence that markets were necessary.

“I believe the French agriculture minister is absolutely right when he says we need markets,” he said. “If we need markets, we need people who are prepared to take risks in those markets. Unfortunately the name for those people is speculators.”

Weilu Yang, deputy director, National Grain and Oils Information Centre in China, also noted the effect of prices on production. “One cannot expect lower prices to boost production,” he said. “The wheat prices are more stable in China than abroad.”

He agreed with Le Maire about needing to make more information available.

“It is necessary to set up a global grain cooperation system and research system,” he said. “Big countries have duties to increase grain production and help developing countries with grain output.”

Alan Tracy, president of U.S. Wheat Associates, responded to the attention which had been paid to his organization’s suggestion that trade could double by 2030.

“We responded by having our market analyst review those figures to 2030,” he said. “There is a bit of a disconnect between where grain is grown and where population is growing. We are looking at about a 50 percent increase in total importation by 2030.”

Demand for maize is being driven by the large increase in meat demand that’s coming from middle income households.

“That increase is coming primarily from developing countries,” he said. “You look at that in total and it shows a more than 50 percent increase in global grain trade by 2030.”

He predicted higher price volatility. “That, in turn, should put an emphasis on risk management,” he said. “We encourage buyers to form close relationships with their suppliers, not just by country but also by company.”

Higher volumes will put an extra strain on the infrastructure, but he noted that U.S. exporters were getting ready for the increased demand.

“We have a couple of new export elevators being built in the U.S. for the first time in a very long time,” he said. “It will create pressure on facilities in exporting regions.”

He suggested that usage this year might be higher than some people anticipate because of demand for maize, while production was set to come down. He also suspected that there might be less stock actually available than there appears.

“A big slice of that stock is in China and India, and it’s not coming out,” he said.

Maize production has suffered from less than ideal conditions.

“We’ve had some very difficult spring weather in the U.S.,” he said. “In the near term, we clearly need more acres and we’re going to need better weather.”

He also reminded the audience of the potential for increased production.

“On the bright side, keep in mind that the U.S. corn crop has doubled since 1980 on only 10% more acres,” he said. “This is a demand-led price increase. I never underestimate the ability of farmers to respond to a price increase and produce their way out
of prosperity.”

He did not support Le Maire’s call for more action on volatility.

“The greatest risk to trade from governments is not that they will do too little but that they will do too much,” he said.