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The WTO agricultural policies "package" therefore combines trade liberalization, subsidies to producers to facilitate the transition, and the use of financial instruments for risk protection.

Commodity Prices

The management of instability through the natural effect of market expansion and of the dismantling of public price stabilization policies in fact discriminates "against" households and poor countries that lack access to direct aid or financial instruments for risk management. They only have access to external markets, an access that lacks sufficient power to stabilize their revenues, which the other two elements of the "package" provide.

As mentioned above, instability poses a fundamental problem of inequality, as does its contemporary management if we consider the "package" of measures that was institutionalized by the WTO agricultural agreement. Even if liberalization does not increase the instability of agricultural markets, it does mean that poor households are more consistently exposed. The new link between agricultural commodity markets and energy markets is difficult to contest. Agricultural markets and energy markets are therefore linked due to the anticipation of high oil barrel prices along with the US need to secure energy supplies.

Retrospective and prospective data collected by Goldman Sachs Currie, show that in there was a "spike" in the demand for agricultural products for energy, and the legitimate expectation that an increase in biofuel supply would continue. For some, these figures put US maize ethanol demand into perspective regarding its culpability for the rise in global prices of wheat and other cereals - and ultimately in the rise of agricultural prices as a whole.

It is true that aggregate data seems to clear biofuels of blame. However, the announced rise in the use of cereals for agrofuels has increased the attractiveness of the market for financial speculators interested in agricultural commodities so that, according to Bricas and Bru , "it is more the anticipation of an increase in demand, rather than an actual increase, that accounts for the price surge".

Furthermore, the use of globally aggregated data consistently underestimates the statistical share of North American maize energy consumption out of all produced and consumed cereals. According to the same authors: "It is not the current volumes of agricultural commodities used for agrofuels that explain the rise in prices, except at a local level for US maize providers, who are the main producers of these fuels.

If one accepts the idea that prices are established at the marginal value of the quantities traded, the price of maize may be determined by the price of US ethanol, even though it only accounts for a small share of the aggregate or average consumption globally. While rising US maize and cereal prices can be explained by the rapid increase of domestic demand for maize for biofuel production, there are discrepancies between the different analyses on the contamination effect of rising US prices that reaches across the world and spreads to other products.

Even though the figures are questionable especially given the absence of firm counterfactuals , it is important to consider the orders of magnitude of the quantitative simulations conducted to determine the contribution made by the increased supply of US biofuel maize towards generating the global agricultural price surge of Table 1.

It is also important to consider that the tension caused by the actual or anticipated scarcity of food maize on the North American market has had direct impacts on soy and wheat prices, by their replacement in crop rotations, which has contributed to the increase and exceptional amplitude of price; even if the exact measurement of this contribution is impossible, as is its relative measurement, in the available global models. Biofuel policies seem to be the last instrument of national sovereignty in agriculture.

In the case of "large countries", their effects go beyond national borders and they become objects of multilateral coordination, thus necessitating inclusion on the G20 agenda. In the final version of its Communication on commodities and raw materials on 2 February , the European Commission acknowledged the existence of a "strong correlation between positions on derivative markets and spot prices".

This statement replaces one contained in a previous version that read: "There is no conclusive evidence on the causality between speculation in derivatives markets [on the one hand] and increased volatility and price increases in the underlying physical markets [on the other hand]. So, is there any empirical evidence for the liability, or neutrality, of speculation in terms of causing the spike in commodity prices? Here we present the most salient reasoning on this subject, produced by economics experts since the spike.


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Three observations emerge. The first is that economics does not provide a complete and coherent explanatory model of the observed price developments on a given market, whether it is "spot" or "futures".


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  • The second observation is that to fill this gap, the empirical evidence to blame or exonerate speculation is sparse and often contradictory. Finally, considering the precautions imposed by the two previous points, the temporary and fragile idea seems to prevail that derivatives markets are at least partly responsible for the increase of instability.

    Agricultural Products Price Increase (Part 1)

    What have we learned from the crisis? Speculation is only one factor among several that researchers and international institutions have identified as causal agents of the increase in prices and the volatility of commodity markets after It is also the focus of the media today.

    The rising profile of the subject is due firstly to the hesitancy of economists themselves who, all things being equal, are unable to definitively measure the contribution of one variable in isolation from others, so that today we are still no closer to establishing the hierarchy of causes that has led to the tripling of prices for some products.

    Secondly, the general denunciation of "speculation" following the bursting of the US financial bubble, has mean that both subprime speculation and the very ordinary type on wheat or soy futures prices have been tarred with the same brush. At the heart of the Masters and White argument is the fact that the proportion of positions taken by index speculators on futures markets has experienced an unprecedented rise between and , during the "spike" in prices. In , the proportions were reversed.

    Factors Influencing Price of Agricultural Products and Stability Countermeasures

    There were 2. According to Masters and White, there has clearly been a bubble. Correlation doesn't prove causation All is not straightforward though. To paraphrase the cautionary language of the Commission, the findings of Masters and White demonstrate correlation, but not causality. Work of the French Ministry of Agriculture has stressed in particular that the arrival of index speculators precedes the rise in prices by nearly two years, and also that the number of open positions unsettled purchase contracts remained unchanged during the increase.

    Some econometric work on the futures market of the Chicago Board of Trade suggest a causal relationship between index speculation and price inflation in the case of soy - but only for soy, thus concluding overall that there is only limited evidence that index speculation has caused changes in commodity prices between and An objective weakness of these works is to associate "speculation" with a particular market player - the "non commercial" speculator, as opposed to "physical hedgers" that supposedly buy and sell futures without "speculating".

    Buying or selling futures, whether these operations are accompanied by a transaction in the physical market or not, are inherently "speculative", reflecting a bet or a belief about the future development of prices. Thus, systematically "long-only" investor positions have met systematically "short-only" investor positions, the fact that the latter are "hedgers" or "commercial" does not exclude them from having the intention to speculate.

    We can just about infer that a systematic purchase position, such as that taken by the index investors between and , makes the demand for contracts insensitive to price - in economist jargon, demand becomes "rigid". It is known that a rigid demand has a particular ability to make the market overreact, because adjustment is no longer made through quantities demand for quantities does not vary, whatever the price but through prices.

    A last, more intuitive, element can help comprehend the role of speculation. In the current episode of rising commodity prices, a number of causal or supposedly causal factors that were present in are absent or seriously attenuated, such as: there is presently no particular tension regarding oil, there remains no drastic increase in demand from emerging countries or for biofuels, and there are no particular fears that a speculative bubble in the assets markets will burst.

    If there is only one causal factor present again this time, it is "speculation", and perhaps this is indeed the culprit. Instead of reaching this conclusion through intuition, it would have been better if we could rely on more consistent evidence. Ahead of the next crisis, it is vital that economic science, which was caught out this time, makes itself useful in a debate that completely evades it at present. Are the causes of instability really so elusive that we can justify only focusing on its effects? There exists an economic challenge to deal with the causes - according to the efficiency argument, any "problem" must be treated at its root.

    The ability to deal with the effects is also morally justified, because the poorest are most at risk. It therefore seems that the G20 agriculture ministers choose to favour coordination for moral reasons of justice, more than for efficiency. Our literature review shows that there is a realistic preconception behind such a choice. Indeed, no studies have isolated one single factor from amongst several, as responsible for the bursts of instability experienced by the agricultural markets.

    However, there is no reason to exclude the political "disturbances" that the support policies for biofuels constitute, especially in North America, or the deregulation policies of the agricultural financial markets since the s, especially when the rationale behind the current governance of agricultural trade i.


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    • The provisional result of the agricultural G20 is inconsistent in this respect. Regarding biofuels, as for the agricultural futures markets, the systematic purchase of positions has created the conditions for price instability: anticipation errors were compounded by a demand that has somehow become more rigid. The globalization of trade and the financialisation of markets should have made this demand more elastic to the price than it was previously - the agent benefiting from increased opportunities for arbitrage, buying or selling according to market variation.

      However, index speculators have systematically been buyers. As were the ethanol producers due to the subsidies allocated to the sector.

      The rigidity of demand has amplified the few imbalances in production, which in retrospect, were not exceptional and did not justify such price movements. Estimations of the scope of the effect of increased US biofuel production on cereal prices Show Media. A growing role that can only enhance the rise in agricultural prices.

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      Show Media. FR EN. Instability in agricultural prices: a comfortable truth Date: Regions: World. Download PDF 6. Article Index. Agricultural prices are unstable, so what? Does trade liberalization make markets more…. Are biofuels responsible? Is speculation irresponsible? G20 agriculture ministers' responses to market…. Measurement of price volatility. Estimations of the scope of the effect of….