Price fluctuations (volatility) of agricultural commodities
In recent years, price fluctuations and price spikes on global commodity markets have increasingly come to the forefront of public attention. Extreme price volatility means insecurity and financial risks for all the commercial operators involved.
Particularly in developing and emerging countries that are dependent on imports, extreme price fluctuations can put food supplies at risk during times of low supply and high demand.
Properly functioning agricultural futures markets are increasingly important for both consumers and producers alike. They make it possible to hedge against price fluctuations while providing useful signals about expectations regarding future price developments. Any regulation of the agricultural futures markets must not be allowed to undermine these characteristics. This is why the following aims are being pursued:
- strengthening the ability of the agricultural futures markets to function properly
- preventing market abuse
- ensuring that agricultural futures markets do not threaten world food security as a result of unwelcome developments
Reasons for price volatility
Since 2007, the agricultural commodity markets have experienced extreme price fluctuations more and more frequently. This often caused severe supply problems, especially in the least developed countries. The main reasons for this were changes in fundamental supply and demand factors. These include the population growth rate, and changed dietary habits (especially in emerging countries) along with the resulting increases in the consumption of feed grain and food. Weather-induced harvest losses in important producing countries - such as the 2012 harvest in the USA - have a major impact on price development. The extent to which speculations by financial investors are responsible for the development on the agricultural futures market is the subject of debate. The proportion of investors with no direct commercial link to agricultural commodities has increased significantly in the last decade.
Consequences of price volatility
Increasing price fluctuations mean insecurity and financial risks for all market participants. In-house risk management will thus gain in importance. The establishment and utilisation of futures exchanges in agricultural markets must be regarded as an important instrument for price hedging and something that will continue to gain significance due to the above-mentioned developments.
Price volatility is not a problem as long as the price fulfils its central regulating function and prices cannot be abused or manipulated through speculation. Financial markets with the ability to function properly are a fundamental prerequisite for this. It is important for this to be guaranteed via an adequate legal framework and financial supervision.
Strengthening the risk protection capabilities of financial markets - preventing abuse
The financial crisis revealed the risks of insufficiently-regulated markets. The potential for abuse thus needs to be prevented. This is an international task. Against this backdrop, the G20 leaders reaffirmed in November 2011 their decision to ensure transparency and appropriate regulation on the financial markets.
The EU has already adopted a Regulation on over-the-counter trading. It will provide for reporting requirements and the lodging of securities in the hitherto barely-regulated OTC trade. In addition, with the adoption of the new Market in Financial Instruments Directive (MiFID) in summer 2014 the EU implements the decisions made by the G20 heads of state and government to strengthen transparency and to have an appropriate regulation of agricultural futures markets. The necessary implementation rules are currently being developed by the Commission and the EU financial supervisory authority ESMA. Implementation is planned for January 2017. The Federal Ministry of Food and Agriculture (BMEL) is actively involved in the elaboration in the area of agricultural raw materials.
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