Grain prices instability and risk management A European point of view Michel Ferret FranceAgriMer / Paris Mexico, 22 / 23 March 2012
Overview of the presentation European Union : Key figures Price instability : definitions Reasons for the growing instability In the world In the EU Risk management tools Final remarks
I-Some facts about the European union
27 Member states (1962 : 6 Member states, 7 successive enlargments ) + Croatia in July 2013 Population 2011 : 500 million inhabitants GNP 2011 : 16 300 billion $; USA : 15 000 billion $ Cereals production : 290 Mt ( 15 % of world production, excl. Rice). (France : 65 Mt) Wheat : 135 Mt Maize : 60 Mt Exports (all grains) : 25 / 30 Mt Import (all grains) : 10 Mt Oilseeds production : 25 Mt
II-Price instability -Fluctuations over a longer period -Volatility, especially since 2007 -A curse for many countries
Price fluctuations : wheat, maize, soyabeans ($/ton, Fob gulf) SRW fob YC 3 fob Soja fob 650 600 550 500 450 400 350 300 250 200 150 100 en $/t 31/10/07 06/12/07 16/01/08 21/02/08 12/07/07 20/08/07 25/09/07 31/03/08 07/05/08 16/06/08 24/07/08 29/08/08 07/10/08 12/11/08 18/12/08 28/01/09 06/03/09 14/04/09 22/05/09 + 29/06/09 05/08/09 11/09/09 19/10/09 24/11/09 31/12/09 08/02/10 16/03/10 22/04/10 01/06/10 07/07/10 13/08/10 20/09/10 26/10/10 01/12/10 07/01/11 14/02/11 22/03/11 27/04/11 02/06/11 08/07/11 15/08/11 20/09/11 26/10/11 472 284 267
Volatility : daily fluctuations in Chicago (July 2007- May 2008) MCE/CBOT
Reasons for the growing price instability in the grain world markets Global supply and demand balance Stocks / consumption ratio Level of tightness of the trade World trade of the cereal / production ratio Weather market La Nina Political interference in the national trade policy (Russia, Ukraine, Argentina..) Growing involvement of financial investors See next slides
Financial investment on the derivatives markets (futures/options + OTC) Outstanding amount on the world s derivatives markets : ~ 700 000 billions $, (world GNP x 12!!) Organised markets (Futures/options) : only ~ 100 000 billions $ OTC : 600 000 billions $ Breakdown of OTC (December 2010, in billions $) : Interest rates : 465 000 Currencies : 57 800 Credit Default Swaps : 30 000 Equities : 5 600 Commodities (all sectors) : 3 000 Others : 39 500 Source : Bank for international settlements
Financial bubble in the grain market in 2007/08 SRW fob YC 3 fob Soja fob 650 600 550 500 450 400 350 300 250 200 150 100 en $/t + 541 336 310 12/07/07 20/08/07 25/09/07 31/10/07 06/12/07 16/01/08 21/02/08 31/03/08 07/05/08 16/06/08 24/07/08 29/08/08 07/10/08 12/11/08 18/12/08 28/01/09 06/03/09 14/04/09 22/05/09 29/06/09 05/08/09 11/09/09 19/10/09 24/11/09 31/12/09 08/02/10 16/03/10 22/04/10 01/06/10 07/07/10 13/08/10 20/09/10 26/10/10 01/12/10 07/01/11 14/02/11 22/03/11 27/04/11 02/06/11
The reasons for price instability in the European union (1) The reforms of the EU Common Agricultural Policy (1992,2000, 2003,2009) The support price («Intervention price» at the wholesale level) has been lowered 180 /t > 101 /t (~235 $/t >130 $/t) More leeway for price instability The direct link between world market (US grain prices) and the EU market The «Fortress Europe» is a myth! Since 2007 : all imported grain enter the EU under a reduced (max. 16 /t) or O levy! A mostly theoretical border protection (< WTO and bilateral agreements)
$/t 15/03/2007 15/06/2007 15/09/2007 15/12/2007 15/03/2008 15/06/2008 15/09/2008 15/12/2008 15/03/2009 15/06/2009 15/09/2009 15/12/2009 15/03/2010 15/06/2010 15/09/2010 15/12/2010 15/03/2011 15/06/2011 15/09/2011 15/12/2011 15/03/2012 A direct connexion between French and US wheat (export prices) 505 450 395 340 285 230 175 120 FCW, fob Rouen US, SRW, fob Golfe Source : CIC/FAM
The reasons for price instability in the European union (2) Increasing competition from the Black Sea «global players» Irregularity of production and export potential «Political interferences» Despite stability of the EU-production!!
Exports by Russia, Ukraine, Kazakhstan (all grains, Mt) : Huge swings 60 50 40 30 20 10 0 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 (prévisions) Kazakhstan Ukraine Russia
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 EU grain production (Mt) : stability and high level of self-sufficiency (> 110 %) Nota : until 2003 incl. : 15 Member states! 319,0 290,0 261,0 232,0 203,0 174,0 145,0 116,0 87,0 58,0 29,0 0,0 Toutes céréales Blé Maïs Source : CIC
Wheat imports needs, by region 2011/12 5% 7% 51% 5% 22% 10% 1%
III-Risk management against price instability in the EU
Risk management tools against price instability in the EU «Intervention» (= public purchases) : no longer effective Derivatives markets : futures and options contracts Other tools
Derivatives market : NYSE Euronext futures exchange, Paris ; Futures and options exchanges for milling wheat, maize, malting barley, rapeseed, milkpowder A growing interest in France for the futures and options markets, especially since 2006 Number of contracts in milling wheat is skyrocketting All wholesale traders (merchants and coops) and grain processors resort to this instruments Producers are cautious See next slide The French contracts have become European contracts (wheat, rapeseed) Strong interest in the EU for Paris contracts EUREX Francfort contracts for Ag. Commodities not representative Interaction with Chicago (CME-CBoT)
2000 2001 2002 2003 2004 2005 2006 2007 2088 2009 2010 2011 Futures contracts in Paris (NYSE-Euronext) in 1000 contracts ( 50 tons) MAIS BLE COLZA 6000 5500 5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0 + 5 688 1 908 402
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Futures contracts in Chicago and NY Exchanges (1000 contracts) MAIS BLE SOJA SUCRE 80000 75000 70000 65000 60000 55000 50000 45000 40000 35000 30000 25000 20000 15000 10000 5000 0 + 69 841 35 36 759 934 29 230 23 090
.. But the futures and options markets are not a Panacea Chicago : good governance, but.. Is the SRW contract representative? (HRW, Kansas City better suited?) Problems with convergence between «physical/cash» price and futures price for wheat Paris : good governance, but.. No Commitment of Traders (= impossible to know the weight of «speculators») No daily Limit up / Limit down (= high daily volatility possible) No real position limits Reforms of derivatives markets in progress USA : Dodd-Franck Act EU : Overhaul of Directives MIFID and MAD EU lags behind London reluctant
Other tools Crop / income insurance ; The EU Commission tries to promote these tools, on the US model Spain : a certain success France : little success Tax policy (for ex. France) Provision for future income losses (due to bad crops) Action plan on Storage (France, private sector)
IV-Final remarks
The greater picture : «General» tools Increase productivity Improve market knowledge (statistics and analysis) The AMIS system Tool box < G 20 Action plan (2011)
Thank you for your attention