Price fluctuations (volatility) on commodity futures markets for agricultural raw materials
Price fluctuations and price spikes on global commodity markets have increasingly come to the forefront of public attention since the beginning of Russia’s war of aggression against Ukraine. Food supply is massively at risk at times of high uncertainty due to low supply and high demand as well the resulting high prices, especially in countries of the Global South that are dependent on imports. In Germany and the EU, food prices have also significantly increased as a consequence of the war in Ukraine.
Large and unexpected price fluctuations mean insecurities for all stages of the food supply chain, from farmers to the different stages of processing and trading. These insecurities can lead to disruptions in supply and to the introduction of increased price mark-ups as protection against the higher risks. Commodity futures markets are an important tool for price hedging. They reduce price fluctuations and generally help improve the security of supply. For commodity futures markets for agricultural raw materials to play their role, they must be liquid. The necessary capital is provided, to a large extent, by financial investors whose trading activities contribute to liquid commodity futures markets.
However, any form of concealment, lack of transparency or disproportionate speculation on futures markets, which leads to the main focus no longer being on the physically traded commodity, is a potential cause for concern. Disproportionate speculation and a lack of transparency accelerate price developments and, in the short or medium term, can lead to extreme price volatility with adverse consequences for producers or manufacturers of the physical commodity.
The revisions of the EU’s Markets in Financial Instruments Directive (MiFIR) and the Markets in Financial Instruments Directive II (MiFID II), which entered into force in 2018, limited (speculative) positions in the EU with derivatives on food through so-called position limits and established notification requirements for financial investors on commodity futures markets for agricultural raw materials. This has significantly increased transparency on European commodity futures markets. The regulations of the MiFID II Directive apply throughout the EU and can only be amended at EU level. By international standards, the EU thus has a relatively strict regulatory framework.
Commodity futures contracts for potatoes and milk products are negotiated at the European Energy Exchange (EEX) in Leipzig. In the EU, the trading of commodity futures for grains (wheat, maize and rapeseed) is mainly carried out at the MATIF (Marché à Terme International de France) in Paris. The commodity futures markets for grains in the EU are, compared with those in the USA or Asia, relatively small. However, thanks to the existing position limits and notification requirements for financial investors, they are regulated in a much more transparent way.
During the revision of the regulatory framework in MiFIR and MiFID II, which was completed in March 2024, the BMEL successfully solicited at European level for the existing position limits and position management regimes to be reviewed.
The European Commission has been mandated to submit various reports for a comprehensive assessment of the markets for commodity derivatives, emission allowances and emission allowance derivatives. Under this mandate, the Commission has also been tasked with assessing the contribution made by the regulations for position limits and position management controls to the liquidity and proper functioning of the Union's commodity derivatives markets.
