A Review of the G20 Meeting on Agriculture: Addressing Price Volatility in the Food Markets

Food price volatility has spiked to levels last seen in the 1970s. For low-income countries, food price hikes, such as have occurred recently, tend to significantly increase the incidence of intra-state conflicts, according to IMF research.

Auteur(s) :

Hilary Till

Research Associate, EDHEC-Risk Institute,Principal, Premia Capital Management, LLC

Therefore, it was fitting and proper that the G20 meeting of agricultural ministers, which was hosted by France at the end of June, put food insecurity squarely at the top of the 2011 G20 agenda. The June G20 agricultural meeting resulted in an action plan that will be carried forward at the Cannes Summit of G20 leaders in November. The 2007-2008 food crisis, and the resumption of more recent food price spikes, clearly have a number of causes, which will require a great deal of political courage to address and ameliorate. That said, in reviewing over a century of commodity price volatility, there are episodes of low volatility and high volatility, which would indicate that this may be a pattern of recurrent phenomena. As a result, it may be wise to focus on how to manage price volatility rather than believe that this phenomenon can be eradicated, as noted by Dr. Pierre Jacquet of the Agence Française de Développement. The World Bank, for example, has launched a program that will assist and encourage companies in developing countries to buy insurance in the derivative markets against sudden changes in food prices, according to the Financial Times. Notably, the action plan, agreed to by the G20 agricultural ministers in June, largely embraces marketbased solutions to the problems of food insecurity and food volatility, amongst its many action items. In contrast to the benign view of commodity derivatives trading, French president Nicolas Sarkozy stated at the opening of the June G20 agricultural meeting that the financialization of agriculture markets ... is a contributory factor in price volatility and that this was a priority issue for regulators to address. Ultimately, whether commodity derivatives trading (and speculation) increases price volatility is an empirical question. Assuming that one has access to transparent marketparticipant, position, and price data, one can carry out empirical studies to confirm or challenge this assumption. In reviewing the evidence so far regarding the impact of commodity trading, speculation, and index investment on price volatility, this report finds that the evidence for the prosecution does not seem sufficiently compelling at this point. That said, given the disastrous performance of financial institutions in 2007 and especially, in 2008, it is fully appropriate to revisit one's assumptions regarding the economic usefulness of all manner of financial instruments, including commodity derivatives contracts. This paper's conclusion is to agree with the World Bank president who has said, the answer to food price volatility is not to prosecute or block markets, but to use them better. And one sensible use of financial engineering is for hedging volatile food price risk with appropriate commodity derivatives contracts.

Type : Position paper
Date : le 26/07/2011
Pôle de recherche Finance

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