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 last year and since the beginning of Russia’s war of aggression against Ukraine. Food supply is massively at risk at times of insecurity 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 make a significant contribution to improving 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 (MiFID) and the Markets in Financial Instruments Directive II (MiFID II), which entered into force in January 2018, limited (speculative) positions with agricultural commodity derivatives by position limits and established notification requirements for financial investors on commodity futures markets for agricultural raw materials. This has led to an increase in 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 has a relatively strict regulatory framework.

Commodity futures contracts are negotiated for potatoes and milk 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. In comparison to commodity futures markets for grains in the USA or Asia, the ones in the EU are relatively small. However, thanks to the existing position limits and notification requirements for financial investors, they are regulated in a much more transparent way.

At the end of June 2022, at the peak of insecurity due to the war in Ukraine, a technical exchange with the European Securities and Markets Authority (ESMA) and the German Federal Financial Supervisory Authority (BaFin) showed that neither of these two supervisory authorities thought that there were, at that point in time, any signs of a significant growth in the activities of financial investors. Since mid-2022, the prices on the commodity futures markets for grains have significantly decreased and are in some cases below the level before the beginning of the war in Ukraine in February 2022.

Within the scope of the ongoing revisions of the regulatory framework in MiFID and MiFID II, the BMEL is advocating a review of the existing framework for position limits and position management at European level.

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