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Tackling the challenges in commodity markets and on raw materials

Pierluigi Londero

DG for Agriculture and Rural Development

European Commission

2

Outline

• Background of the Communication

• Main messages

• Focus on EU agricultural markets

• Analysis of price volatility

3

Background of Commission Communication

• Strong turbulence on commodity markets since 2007

• Increased volatility in commodity prices

• Changes in global demand and supply

• “Financialisation”

• Resulting in calls for policy response

• Follow up of previous initiatives

– 2008 raw material initiative / resource efficiency and recycling

– Commodity markets: food supply chain / improved regulation, integrity and transparency of financial markets

4

Objective of Communication

• Provide an overview of – what has been done in each of these areas

– What are the next steps

• This work: – is part of the Europe 2020 strategy to ensure smart, sustainable

and inclusive growth

– Will feed into the work of the G20

5

Agriculture commodity markets

• Characterised by a certain degree of variability (seasonality, weather, delay in supply response, etc)

• Other structural factors increase tension (demographic growth, pressure on agricultural land, climate change)

• Price volatility has increased in recent years– In futures and spot markets– In world markets

– In the EU, as CAP reforms enhanced linkages with world markets

• Trade in options and over-the-counter derivatives is also growing

6

Agriculture commodity markets

• These factors explain partly the increased activity in European-based exchanges

• Raise two issues in particular:– Security of food supply (CAP reform, DDA)

– Increased transparency on agriculture derivative markets

• Growing interdependence of commodities and related financial markets

7

Agriculture commodity markets: policy response

• Physical markets:– Market information is good

– But improvement needed on quality and timeliness of • Stocks

• Projections of demand and supply

– G20 mandate to World Bank and other institutions

– EU doing its share:• Publication of main EU market prices

• Eurostat Food Prices Monitoring Tool

• Medium-term prospects for EU agricultural markets

• Food Supply Chain Forum

• Development policy

8

Agriculture commodity markets: policy response

• Financial markets

– Proposal for regulation on OTC trading

– Review of market abuse directive (MAD)

– Review of packaged retail investment products (PRIPS)

– Alternative investment fund management directive

– Review of the market in financial instrument directive (MIFID)

– Creation of European Securities Market Authority (ESMA)

9

Analysis

10

Four basic questions to understand high and volatile commodity prices

1. Is price volatility higher than in the past?

2. Is this driven by higher yield variability?

3. Is it due to a sharp increase in food demand?

4. Are agricultural prices more sensitive to stock changes?

11

1. Is price volatility higher than in the past?

The analysis over the last 50 years shows:

– Price volatility higher in recent decade for most products

– Exception only for beef, poultry, sugar (higher in the 70s)

– EU price volatility was higher than at world level (CAP reform process of market orientation)

12

Long term price developments for key agricultural commodities

Source: World Bank

USD/mt in current USD

0

200

400

600

800

1 000

1 200

1 400

1 600

1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008

Wheat (HRW) Soybeans Maize Soybean oil Rice

13

Coefficient of variation for selected products, long-term price series

Source: World Bank

0%

10%

20%

30%

40%

50%

60%

70%

80%

Palm oil Soybeans Soybean oil Soybeanmeal

Maize Rice Thai5%

US HRWwheat

Beef Chickenmeat

Sugar

1961-1972 1973-1984 1985-1996 1997-2008

14

Coefficient of variation for comparable products, 1997-2003 vs 2004-2010, EU and World

Sources: Agriview and World Bank

0%

5%

10%

15%

20%

25%

30%

35%

40%

1997 -2003

2004 -2010

1997 -2003

2004 -2010

1997 -2003

2004 -2010

1997 -2003

2004 -2010

1997 -2003

2004 -2010

1997 -2003

2004 -2010

1997 -2003

2004 -2010

Barley Wheat (Int. SRW,EU Bread)

Maize Butter SMP Chicken Beef

EU (Agriview) World (WB)

15

2. Is higher price volatility driven by higher yield variability?

The analysis shows:

– No straightforward conclusions can be drawn

– Different between countries and commodities

16

Yield variability for 12 years - World

Sources: USDA, FAO

0%

2%

4%

6%

8%

10%

12%

14%

16%

Wheat Maize Rice Soybeans Sugar cane Sugar beet

1961-1972 1973-1984 1985-1996 1997-2008

17

Yield variability for 12 years - Wheat

0%

5%

10%

15%

20%

25%

30%

Argentina Australia Brazil China EU USSR-FSU USA India World

1961-1972 1973-1984 1985-1996 1997-2008

Sources: USDA, FAO

18

Yield variability for 12 years - Maize

0%

5%

10%

15%

20%

25%

30%

Argentina Australia Brazil China EU USSR-FSU USA India World

1961-1972 1973-1984 1985-1996 1997-2008

Sources: USDA, FAO

19

Yield variability for 12 years - Rice

0%

5%

10%

15%

20%

25%

30%

Brazil China EU USSR-FSU USA India World

1961-1972 1973-1984 1985-1996 1997-2008

Sources: USDA, FAO

20

Yield variability for 12 years - Soybeans

0%

5%

10%

15%

20%

25%

30%

Argentina Brazil China USSR-FSU USA India World

1961-1972 1973-1984 1985-1996 1997-2008

Sources: USDA, FAO

21

Yield variability for 12 years - Sugar

0%

5%

10%

15%

20%

25%

30%

Australia(cane)

Brazil (cane) China (cane) EU (beet) USSR-FSU(beet)

USA (cane) India (cane) World (cane) World (beet)

1961-1972 1973-1984 1985-1996 1997-2008

Sources: USDA, FAO

22

3. Is higher price volatility driven by sharp increase in food demand?

The analysis shows:

– Agricultural products: Demand growth has decreased over the last 50 years for most products and countries (exception veg. oils and dairy products)

– Energy and minerals/metals: Demand growth is on the increase since mid 80s (iron, aluminium) and mid 90s (crude oil)

23

Is demand growing faster?

-4%

-2%

0%

2%

4%

6%

8%

10%

Grains Grains forfeed

Vegetableoils

Meats Dairyproducts

Iron ore Aluminium Crude oil

1961-1972

1973-1984

1985-1996

1997-2008

Growth rates for main agricultural products, crude oil and selected minerals/metals

World per capita demand growth for agricultural commodities, USDA, FAO. World production growth for crude oil (International Energy Agency) and Metals/minerals (U.S. Geological Survey)

24

4. Are agricultural prices more sensitive to stock changes?

The analysis shows:

– The relationship between stock-to-use and world prices did not change much over the last 50 years.

– A certain increase in responsiveness can be observed for the main crops (wheat, maize, soybean) in the two past decades.

– Sugar prices on the other hand were more sensitive to stock changes in the 70s and 80s than recently (link with oil price).

– No significant linkage for rice and vegetable oils.

25

Changes in stock to use and prices - Maize

Source: World Bank, season prices, USA Y2, and Informa Economics World Balances

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

1961

-62

1963

-64

1965

-66

1967

-68

1969

-70

1971

-72

1973

-74

1975

-76

1977

-78

1979

-80

1981

-82

1983

-84

1985

-86

1987

-88

1989

-90

1991

-92

1993

-94

1995

-96

1997

-98

1999

-00

2001

-02

2003

-04

2005

-06

2007

-08

2009

-10

Change in World prices Change in stock to use

26

Changes in stock to use and prices - Soybeans

Source: World Bank, season prices Roterdam CIF, and Informa Economics World Balances

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

1961

-62

1963

-64

1965

-66

1967

-68

1969

-70

1971

-72

1973

-74

1975

-76

1977

-78

1979

-80

1981

-82

1983

-84

1985

-86

1987

-88

1989

-90

1991

-92

1993

-94

1995

-96

1997

-98

1999

-00

2001

-02

2003

-04

2005

-06

2007

-08

2009

-10

Change in World prices Change in stock to use

27

Changes in stock to use and prices - Wheat

Source: World Bank, season prices, USA SRW , and Informa Economics World Balances

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

1961

-62

1963

-64

1965

-66

1967

-68

1969

-70

1971

-72

1973

-74

1975

-76

1977

-78

1979

-80

1981

-82

1983

-84

1985

-86

1987

-88

1989

-90

1991

-92

1993

-94

1995

-96

1997

-98

1999

-00

2001

-02

2003

-04

2005

-06

2007

-08

2009

-10

Change in World prices Change in stock to use

28

Changes in stock to use and prices - Rice

Source: World Bank, season prices, FAO balances (from 2008 OECD/FAO Outlook 2010-2019) for stock changes to use

-40%

-20%

0%

20%

40%

60%

80%

100%

1961

-62

1963

-64

1965

-66

1967

-68

1969

-70

1971

-72

1973

-74

1975

-76

1977

-78

1979

-80

1981

-82

1983

-84

1985

-86

1987

-88

1989

-90

1991

-92

1993

-94

1995

-96

1997

-98

1999

-00

2001

-02

2003

-04

2005

-06

2007

-08

2009

-10

Change in World prices Change in stock to use

29

Changes in stock to use and prices – Vegetable oils

Source: World Bank, season prices production weighted average between palm oil and soybean oil, FAO balances (from 2008 oilworld annual 2010) for stock changes to use including palm oil, soybean oil, sunflower oil and rapeseed oil

-50%-40%-30%-20%-10%

0%10%20%30%40%50%60%70%80%90%

100%

1961

-62

1963

-64

1965

-66

1967

-68

1969

-70

1971

-72

1973

-74

1975

-76

1977

-78

1979

-80

1981

-82

1983

-84

1985

-86

1987

-88

1989

-90

1991

-92

1993

-94

1995

-96

1997

-98

1999

-00

2001

-02

2003

-04

2005

-06

2007

-08

2009

-10

Change in World prices Change in stock to use

30

Changes in stock to use and prices – White sugar

Source: ISO

out of scale 208% out of scale 202%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

1969

-70

1970

-71

1971

-72

1972

-73

1973

-74

1974

-75

1975

-76

1976

-77

1977

-78

1978

-79

1979

-80

1980

-81

1981

-82

1982

-83

1983

-84

1984

-85

1985

-86

1986

-87

1987

-88

1988

-89

1989

-90

1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

2009

-10

2010

-11

Change in World prices Change in stock to use

31

Expected agricultural price developments

What do we expect for the future?

– Prices to stay higher than their historical averages

– Price volatility also higher than in the past

– Input prices increase more than historical trends / output prices

32

Expected agricultural price developments

Policy implications:

– Higher prices for agricultural commodities will not necessarily result in higher income for farmers, especially if their margins are squeezed by increased costs

– With higher output prices expected, there is less and less scope for "traditional" intervention tools, such as price support

– Excessive price volatility affects profitability and hinders investments in the agricultural sector

33

Thank you