1. Ⓒ Olof S. Tackling the challenges in commodity markets and on raw materials Pierluigi Londero DG for Agriculture and Rural Development European Commission

2. 2 Outline Background of the Communication Main messages Focus on EU agricultural markets Analysis of price volatility

3. 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. 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. 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. 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. 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. 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. 9 Analysis

10. 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. 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. 12 Long term price developments for key agricultural commodities Source: World Bank

13. 13 Coefficient of variation for selected products, long-term price series Source: World Bank

14. 14 Coefficient of variation for comparable products, 1997-2003 vs 2004-2010, EU and World Sources: Agriview and World Bank

15. 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. 16 Yield variability for 12 years - World Sources: USDA, FAO

17. 17 Yield variability for 12 years - Wheat Sources: USDA, FAO

18. 18 Yield variability for 12 years - Maize Sources: USDA, FAO

19. 19 Yield variability for 12 years - Rice Sources: USDA, FAO

20. 20 Yield variability for 12 years - Soybeans Sources: USDA, FAO

21. 21 Yield variability for 12 years - Sugar Sources: USDA, FAO

22. 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. 23 Is demand growing faster? 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. 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. 25 Changes in stock to use and prices - Maize Source: World Bank, season prices, USA Y2, and Informa Economics World Balances

26. 26 Changes in stock to use and prices - Soybeans Source: World Bank, season prices Roterdam CIF, and Informa Economics World Balances

27. 27 Changes in stock to use and prices - Wheat Source: World Bank, season prices, USA SRW, and Informa Economics World Balances

28. 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

29. 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

30. 30 Changes in stock to use and prices – White sugar Source: ISO

31. 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. 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. 33 Thank you