A policy brief has been published by UNCTAD, arguing that in a context where ‘the volume of exchange-traded derivatives on commodity markets [is now] 20 to 30 times larger than physical production’, the root cause of commodity price volatility is the financialisation of commodity markets. It argues that ‘the influence of financial markets has systematically transformed these real markets into financial markets,’ and maintains that this financialisation of commodity markets means that ‘the price discovery market mechanism is seriously distorted. Prices can move far from levels justified by the fundamentals for extended periods.’ This, according to the brief, ‘impairs the allocation of resources and has negative effects on the real economy’.
The analysis, which contributes to a hotly contested area of public policy, argues that ‘strong and prompt policy and regulatory responses in the financial markets, rather than in the physical markets’ are needed to address the root cause of commodity price volatility (see Agritrade article ‘Draft report leaked on possible response to food price volatility’, 2 May 2011). The policy prescriptions for mitigating adverse effects of volatility are as diverse as the analyses of its causes. One industry site, for example, questions the effectiveness of the G20 initiatives to establish the Agricultural Market Information System (AMIS) and the Rapid Response Forum, both of which are aimed at promoting better coordination of policy responses to price volatility. Thedairysite.com argues that ‘while the sources of the problems have been recognised, there appears to be a lack of concerted willingness in every country to take action to keep global food prices stable.’ This in part appears to be alluding to the issue of the financialisation of agricultural commodity markets dealt with in the UNCTAD paper.
The relative importance of the ‘financialisation’ of commodity markets in explaining the price surges of the past 4 years is hotly contested. The Inter-Agency Task Force report to the G20 Heads of State (see Agritrade article ‘ Draft report leaked on possible response to food price volatility’, 2 May 2011) declined to come down on one side of the fence or the other.
While the UNCTAD policy paper needs to be read in this context, it provides a clear and succinct summary of the view that prices are increasingly driven by financial investors, rather than by the producers and users of physical commodities. However, other analysis suggests that such speculation had little or no effect on the 2007–08 food price rises. The controversial nature of this issue therefore needs to be constantly borne in mind.
Nevertheless the discussions around this issue have implications for ACP agricultural producers and consumers in several areas. One relates to the governance of trade finance. To the extent that financialisation has an impact on global price formation, any international governance that is agreed (and there is not much on the agenda at present) will involve negotiations between ministers of finance rather than agriculture. Given their size, most ACP states are marginal players in such negotiations – but the weaker a country’s hand, the more important it is that their cards are played in the best possible way. Within ACP states, ministries of agriculture, trade and finance need to be consulting now to identify their country’s interests.
On another level, the financialisation of markets adds an extra ‘filter’ between ACP farmers and the ultimate consumers of their goods. Relative movements in exchange rates have for some time affected the commercial profitability of trade in any given state of supply and demand. The fact that prices are increasingly likely to overshoot and undershoot price levels which would correspond simply to the relative balance between production and stocks on global demand, is likely to pose new challenges for ACP exporters in maximising revenues from export sales.
This, in turn, increases the range of circumstances in which the textbook assumption on commodity cycles may not apply (i.e. the assumption that while high agricultural prices may cause problems for consumers, they benefit producers). This could create a situation where ACP countries face higher prices for consumers without necessarily seeing producer incomes rise correspondingly.