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. 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 have become increasingly important for consumers and producers alike. They tend to limit price fluctuations while providing useful signals about expectations regarding future price developments. Speculation is an essential driver of smoothly functioning commodity futures markets. Commodity futures markets would not be operational without financial investors and their speculative expectations about future market developments, as liquidity required for the conclusion of contracts would be lacking. However, any form of concealment, lack of transparency and excessive speculation on futures markets that makes the interest in the physically traded commodity become secondary is a potential cause for concern. Excessive speculation and a lack of transparency accelerate price developments and, in the short or medium term, can lead to extreme price volatility connected with adverse consequences for producers or manufacturers of the physical commodity.
Since 2007, individual agricultural commodity markets have experienced extreme price fluctuations, with an upward trend. This has 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 also have a major impact on price development.
Increasing price fluctuations mean insecurity and financial risks for all market participants. In-house risk management is thus gaining in importance. The establishment and utilisation of futures exchanges in agricultural markets must be regarded as an important instrument for price hedging which will continue to gain significance. 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. Properly functioning financial markets are a fundamental prerequisite for this. It is vital to guarantee their smooth functioning by establishing an adequate legal framework and ensuring their financial supervision.
The financial crisis has revealed the risks that may arise in insufficiently regulated markets. It is therefore necessary to prevent possible abuse – a task that needs to be fulfilled at international level. Against this backdrop, the G20 leaders have agreed on ensuring transparency and appropriate regulation of financial markets.
The EU has meanwhile adopted relevant regulatory measures, such as the revision of the MiFID (Markets in Financial Instruments) Directive, which has been in force since January 2018. The BMEL proactively accompanied the revision process. Key aspects of the revised directive include the newly-introduced position limits (maximum thresholds for quantities traded), which only apply to financial investors, but not to actors trading with the physical commodity, as well as reporting requirements regarding the positions held, imposed to help increase transparency of commodity future markets and to prevent abuse and manipulation.