On November 2, 2011, Pluriagri1
organized a conference on the theme “Regulation of agricultural markets: False debates and real issues”. In the current context of high agricultural price volatility and increased market financialization, various experts spoke on the complex issue of agricultural market regulation. With a large number of experts, journalists and leading figures of the agricultural world in attendance, and among the various topics that were addressed, the debates generated two key concepts that deserve closer examination, due to their importance in the current debates on the CAP and the G20: Enhancing market transparency while simultaneously regulating physical and futures agricultural markets.
Enhancing transparency in increasingly sophisticated markets
Placed at the center of the G20 talks this year, the issue of price volatility also fuels the discussions held in the framework of the European CAP reform and of the American Farm Bill. Among the many explanatory factors that can be stated, the recent but growing financialization of agricultural markets is increasingly mentioned, even while most experts highlight the complexity that unites these two trends. They nevertheless reach the conclusion that it is necessary to strengthen the regulation of financialized agricultural markets. The discussions held during the Pluriagri Conference were in line with the same dynamic path.
Based on the conclusion of the G20 Agriculture Ministers Meeting of June 2011 that emphasized the need to increase the quality, reliability and information accuracy of agricultural markets through the creation of the Agricultural Market Information System (AMIS), Professor Jean Cordier of Agrocampus Ouest, the Brittany-based agronomic graduate school, Nicolas Habert, a consultant on international finance issues, and Wayne Smith, Deputy Head of Market Regulation at the French Autorité des Marchés Financiers
, insisted on the risks tied to such opacity and the difficulties it was causing for the work of regulators.
Against a background of increasingly sophisticated markets and products, it is indeed absolutely imperative to get a better grasp the mechanisms at work and players involved. In doing so, a classification of market players is crucial, provided that, as indicated by Jean Cordier, it is a pertinent classification. The Commodity Futures Trading Commission (CFTC)––the U.S. federal agency in charge of regulating agricultural commodity markets––already manages a classification by types of players. Lastly, it must be underlined that this transparency effort must also takes place on OTC markets, which are little regulated yet represent close to 80 percent of agricultural transactions.
Regulating agricultural markets: A requirement whose measures remain uncertain
But limiting price volatility in the long term requires going beyond measures to increase transparency. While all the experts attending the Conference agreed on the need to strengthen the regulation of agricultural markets, opinions were divided as to the forms such regulation should adopt.
In its recommendations, the final communiqué of G20 Agriculture Ministers Meeting remained rather unclear regarding the precise measures to be implemented, and mentioned possible position limits––on the CTFC model2
––to fight manipulation and market abuses. The experts invited to the Pluriagri Conference did not reach an agreement on the pertinence of such position limits, even if most of them indicated they support them.
With regard to other intervention measures, several approaches were proposed during the Conference, such as the establishment of a Global Market Authorization to monitor transactions more effectively, or even the registration of businesses authorized to operate in both physical and financial markets. Given the complexity of such mechanism and the objectives to be reached––developing regulation that is at the same time effective, flexible and adaptive, and allowing markets to maintain their liquidity position and fully play their role of risk hedging––it is not surprising that no key measure was selected.
In this respect, it is important to bear in mind that progress has already been achieved in the United States in the framework of the Dodd-Frank Act, and, to a lesser degree, in the EU with the Markets in Financial Instruments Directive (MiFID). As we wrote in a previous note3
and as noted by the experts attending the Conference, it is now urgent to make sure that the various regulatory policies are developed in a concurrent and coherent manner in Europe, America and Asia, so that any regulatory bias is avoided.
Acting beyond financial markets to curb price volatility
Increasing transparency and regulation has thus become a requirement to curb agricultural price volatility. It is now accepted that agricultural market speculation is not the main cause of price volatility, but that it contributes to aggravate it, because of the spread of positions without counterparts on OTC markets. Other factors tied to the very structures of agricultural markets should be considered, and physical markets must also be regulated to effectively fight volatility.
On several occasions this year, the G20 leaders have reminded us that agricultural prices were partly linked to pressure on supply, pressure that should increase because of added demand from emerging nations. Didier Nedelec, Head of Grain Trading at InVivo, and Xavier Beulin, President of the French Federation of Farmers’ Union (FNSEA), put forward two essential preconditions to maximize agricultural market regulation––on one hand, increase production and investment in agriculture and, on the other, strengthen the world’s grain reserves, whose levels, as compared to global consumption, are at their lowest since the 1970s.
The Pluriagri Conference thus raised various basic issues. While the issue of regulating agricultural markets was almost nonexistent only a few years ago, the participants to the Conference emphasized its necessity. By linking market financialization to the issue of price volatility, they underscored the growing impact of speculation. Regulating financialized agricultural markets is therefore all the more urgent. With this fact in mind, momagri has, since early 2011, been conducting studies on this issue that led to ten fundamental measures to regulate the excessive speculation in financialized agricultural market, so that its negative consequences can be curbed, while preserving the interest it provides in terms of risk transfers and cash flows4
1 Pluriagri is a non-profit organization (Association Loi 1901) established by Unigrains, Sofiprotéol, Association de Recherche Technique Betteravière (beet technical research association) and Crédit Agricole S.A. to conduct studies and forecasting research on agricultural markets and policies.
2 Please see momagri’s article “US regulators decide to curb positions in agricultural commodity markets” http://www.momagri.org/UK/a-look-at-the-news/US-regulators-decide-to-curb-positions-in-agricultural-commodity-markets_1003.html
3 Please see momagri’s article “US regulators decide to curb positions in agricultural commodity markets” http://www.momagri.org/UK/a-look-at-the-news/US-regulators-decide-to-curb-positions-in-agricultural-commodity-markets_1003.html
4 Please see “momagri’s ten proposals to regulate speculation on agricultural commodity markets” http://www.momagri.org/UK/points-of-view/momagri-s-ten-proposals-to-regulate-speculation-on-agricultural-commodity-markets_948.html