Steps Toward The Regulation of Agricultural Futures Markets
The G20 met in Paris to deal with food price volatility and the regulation of agricultural futures markets. Rising commodity prices have allowed many farmers to be back in the black, but the pace of hikes though has hurt many citizens from around the world, creating havoc in the developing world. In many impoverished regions of the world, riots were triggered by price hikes that exceeded 90% over only a few days. Thus, the time was ripe for the G20 to address this vital issue for the sake of low-income, food deficit countries.
Price volatility of agricultural commodities is certainly the right target for the G20, but the solution to mitigate its impact on our modern society is multifaceted. We first need to accept that price volatility is part of the normal course of the exchange process between supply and demand. In economics, the cure for high prices is high prices, simple. It is usual, structural and reflects the very nature of how weather and climate affects agricultural production and inventories around the world. At times, political interventions such as embargoes or taxes on imports can enhance market cycles and make matters worse for many. Any regulations should take these potential negative effects into account.
Excess speculation has also played a role in commodity price hikes in recent years. The issue though is not pure speculation itself. Speculative strategies are an integral part of the ordinary course of business and trades. Indeed, farmers themselves are arguably the biggest speculators in the investment world. The problem with speculation has been with price manipulators. Markets have been invaded by operators who have adopted harmful behaviours to merely influence prices instead of taking customary risks like any other investor. New regulation would need to separate speculators from manipulators. Although speculation may be difficult to distinguish from acts of hedging, at the very least, mandatory reporting of volumes and positions (long and short) by type of operator should be implemented. Any preventive measures which would not allow an operator to have a significant position on an open future contract are desirable. In this scenario, no operator would then have power over price. The United States and France have recently moved on this issue and other countries, like Canada, should follow suit.
Finally, mostly due to emerging markets and new energy policies, the world has radically changed in recent years. Most industrialized countries, like Canada, are mature markets and the consumption of food has, if not dramatically, changed. Even so, the food for fuel agenda has affected the agricultural landscape. American-based policies, for example, have skewed prices of corn over the last few years. As such, demand for certain crops has increased due to the evolution of eating habits in emerging markets and national energy plans in certain developed countries. More research should be conducted in order to anticipate abrupt price fluctuations caused by a combination of economic and political factors. The functioning of modern agricultural futures markets is largely misunderstood, but because of how our country performed during the last global recession, Canada is poised to play a leadership in addressing market volatility related to agricultural commodities.
We are often astounded by sudden market fluctuations. To properly address the issue of global food security, these occurrences should be anything but unexpected. Almost one billion people on our planet who suffer from hunger count on it.
Dr. Sylvain Charlebois
Associate Dean - Research and Graduate Studies/
Vice Doyen - Recherches et Études Supe'rieures
Professeur Titulaire (Distribution et politiques alimentaires)
College of Management and Economics/
Collège de Management et d'Études Économiques
University of Guelph/
Universite' de Guelph
50 Stone Road East
N1G 2W1 Canada
Ph. : 519-824-4120 ext. 56808
sylvain.Email address removed