February 4, 2011
Agriculture ministers, as some wiseacre pointed out long ago, are the last people who should be allowed to make decisions on agriculture policy. The truth of this sagacious insight was once again demonstrated by the recent gathering of G20 agriculture ministers in Berlin. Much of their deliberations should have been devoted to seeking ways of improving global food security. Ignoring the fundamental causes of recurring food price crises however, they spent much of their time obsessing about the perceived role of speculators and speculation in hiking up the price of the world’s daily bread.
Unfortunately, the apparent obsession with, as a majority see it, the malign role of speculation, appears to have prevented more thorough discussion of other more important and more likely basic causes: low use to stocks ratio (2007-8), export bans (2007-2010), climatic variation and inadequate production in the most vulnerable regions of the world. A suitably woolly concluding communiqué from the Berlin meeting appeared to avoid these basic factors which have been the major cause of food price fluctuations since before the time of the Pharaohs. Governments, said the statement, must “endeavour to strengthen the ability of agricultural markets to function properly, to improve market transparency and market information and to fight the abuse and manipulation of prices.” Many of the ministers – particularly those from the European Union – of course do not object to the ‘manipulation of prices’, provided it is done to protect farmers and discriminate against consumers
A very much more realistic view of the role of speculation has however now come from the European Commission. Futures and derivative markets it points out in its communication on ‘Tackling the challenges in commodity markets’, are a vital part of the price transmission process. “The liquidity, efficiency and accessibility of spot markets are strengthened by well functioning derivative markets and vice versa”.
As the communication stresses, the value of a derivative contract can only reflect the value of the underlying market to which it refers. “This is particularly the case where the underlying market is a physical market. The prices of commodity derivatives and underlying physical commodities are therefore interlinked. Commodity derivatives markets cannot therefore be regarded in isolation from commodity markets and vice versa”.
And these values are influenced by the fundamentals of the physical market itself: production, stock levels and demand. To ensure greater food security what is needed is less meddling with markets, not more, as the OECD pointed out this week. “Stronger discipline should be imposed on the use of trade restrictions – on both exports and on imports. OECD work has also shown the need for better public information on short-term production, consumption and stocks, as well as on medium-term market prospects. Greater transparency would help decision-making and avoid market panic”.
As WTO Director General Pascal Lamy emphasised at the Berlin meeting, trade will be increasingly important to food security in the future, because international markets will buffer demand and supply shocks affecting individual countries and provide long-run food security for countries with limited capacity for food production. The OECD has long argued, that deeper markets, with increased volume and more buyers and sellers, are less volatile.
For these reasons a successful conclusion of the WTO Doha negotiations is vital. However with its implications for tariff reduction, export subsidy limitation and reduction of subsidisation of farmers this is something that EU farm ministers are likely to be less enthusiastic about. Much better to continue tilting at the windmills of wicked international financiers.