Volatile markets and prices-do CAP need to handle this challenge?

Transcription

1 Volatile markets and prices-do CAP need to handle this challenge? Torbjörn Iwarson, ,

2 EU-15 Raw Cow Milk Price EU-15 Raw Cow Milk Price, EUR/100 kg 2

3 Raw Cow Milk Price vs. the US Futures Price EU-15 Raw Cow Milk Price, EUR/100 kg CME Class III Milk futures, EUR/100 kg 3

4 Wheat Prices in the EU De-Regulated Themselves in 2006 by Rising Above 101 EUR/ton (intervention level) Matif (EUR/ton) Chicago (world market, EUR/ton) 4

5 jan-05 aug-05 mar-06 okt-06 maj-07 dec-07 jul-08 feb-09 sep-09 apr-10 nov-10 jun-11 jan-12 aug-12 mar-13 okt-13 maj-14 dec-14 jul-15 feb-16 sep-16 Sugar is the Last One to be Deregulated Price of white sugar in EU (EUR/ton) White sugar futures in London (EUR/ton) 5

6 Market Risk is the worst, Irish Farmers say Source: Joughrey, Thorne, et al, The Market Risk Perceptions and Management of Irish Dairy Farmers, WP presented at the AES Annual Conference, April

7 maj-15 jun-15 jul-15 aug-15 sep-15 okt-15 nov-15 dec-15 jan-16 feb-16 mar-16 apr-16 maj-16 jun-16 jul-16 aug-16 sep-16 okt-16 nov-16 dec-16 jan-17 feb-17 Futures Open Interest at EEX, the Milk Product Exchange in Leipzig OI Butter OI SMP 7

8 Stdev% Variability of yield and of price in Southern Sweden 45% 40% 35% Yield/ha volatility Price volatility 30% 25% 20% 15% 10% 5% 0% Yield / ha volatility 10 yr average 26% Price volatility 74% 8

9 Hedged and unhedged farm Return Farm, hedged Risk free rate Farm, unhedged Risk Hedging reduces risk & makes it more attractive to farm More food is produced Food price becomes lower 9

10 Income Variation Income = price x volume + support Risk Risk 10

11 Risk management methods in the US Corn Belt US Grain Farmers use the following methods: 40% forward contracts 25% futures contracts 70% saved cash 37% diversified business Source: Joy Harwood, Futures Markets and Risk Management, A US Perspective, OECD workshop on Income Risk Management, Paris, May

12 Forward contracts are not a recent invention Confirmation on a forward contract on Barley Delivery point: Mesopotamia, Anum-pisha and Namransharur s warehouse. Delivery date: Month of Ulul, 19 :th day, the year when King Abieshuh finished a statue of Entemena as god (1700 BC) Ulul = August/September. Source: Building the Global Market A 4000 Year History of Derivatives, Edward Swan, Kluwer Law,

13 Commercial net position and the wheat price Wheat Commercial net position, futures 13

14 Two roads diverged in a yellow wood Government insurance Can only provide insurance. No market signals Must be offered at a discount (taxpayer pays more) Sometimes have to pay up, to cover damages (volatile CAP budget) Futures Risk management The only way to be able to offer a fixed price to clients Closeness to market signals. Potential to increase profitability Every part of the food chain can take part 14

15 ULYSSES is a 3- year project (running from August 2012 to August 2015) co-funded by the European Commission under the Framework Programme 7 (FP7), addressing the Strategic theme: KBBE "Volatility of agricultural commodity markets" 15

16 Recommendations from the Agricultural Markets Task Force (AMTF) s report Farming the Future a) Require/encourage Member States to make funding available for practical training for farmers/cooperatives on how to use futures. b) Initiate and facilitate cultural change by rolling out information and promotion campaigns that aim to level-headedly provide information about futures (counteracting the simplistic tendency to see futures as a complex financial tool benefitting mainly speculators). c) Provide technical advice concerning the risks that too restrictive financial regulation and regulatory technical standards can have on the prospects and viability of futures markets. It is important to bring actors together and to share best practices. d) Encourage commodity exchanges to put in place market maker programmes so as to stimulate liquidity in the early days of a new futures contract. e) Promote the setting-up of credit or guarantee funds in Member States to facilitate access to futures for farmers/cooperatives which would experience difficulties in covering the margin calls f) Ensure that price monitoring systems promote the identification and timely dissemination of representative market spot prices 16

17 Volatile markets and prices -do CAP need to handle this challenge? No, not really. That is the recommendation from the AMTF. Futures markets and contractualisation can provide good risk management as well as a competitive advantage in marketing, that can affect profitability and the price level too. Tax averaging is another cost effective method, on a national level. Outside CAP Article 57 and 58 in MiFID2: Delete all of it, not just the previously stated purpose (now deleted) and excempt agribusiness from the ancillary business regulation. Excempt commodity derivatives from EMIR. If you want to help farmers, encourage natural insurers, like pension funds, to carry their risk. 17

18 Thank you for your attention!