Volatile markets and prices-do CAP need to handle this challenge? Torbjörn Iwarson, +46-76-050 83 65, torbjorn.iwarson@svenskacommodities.se twitter: @TorbjornIwarson
1977 1978 1980 1982 1983 1985 1987 1988 1990 1992 1993 1995 1997 1998 2000 2002 2003 2005 2007 2008 2010 2012 2013 2015 EU-15 Raw Cow Milk Price 45 40 35 30 25 20 15 10 5 0 EU-15 Raw Cow Milk Price, EUR/100 kg 2
1977 1978 1980 1982 1983 1985 1987 1988 1990 1992 1993 1995 1997 1998 2000 2002 2003 2005 2007 2008 2010 2012 2013 2015 Raw Cow Milk Price vs. the US Futures Price 45 40 35 30 25 20 15 10 5 0 EU-15 Raw Cow Milk Price, EUR/100 kg CME Class III Milk futures, EUR/100 kg 3
Wheat Prices in the EU De-Regulated Themselves in 2006 by Rising Above 101 EUR/ton (intervention level) 500 450 400 350 300 250 200 150 100 50 0 Matif (EUR/ton) Chicago (world market, EUR/ton) 4
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 800 700 600 500 400 300 200 100 0 Price of white sugar in EU (EUR/ton) White sugar futures in London (EUR/ton) 5
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 2014 6
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 3500 3000 2500 2000 1500 1000 500 0 OI Butter OI SMP 7
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% 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 Yield / ha volatility 10 yr average 26% Price volatility 74% 8
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
Income Variation Income = price x volume + support Risk Risk 10
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 2000 11
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, 2000 12
Commercial net position and the wheat price 1400 1200 1000 800 600 400 200 0 100000 80000 60000 40000 20000 0-20000 -40000-60000 Wheat Commercial net position, futures 13
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
http://www.fp7-ulysses.eu/publications/chapter%20pdfs%20-%20full%20text%20with%20cover/chapter15.pdf 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.2012.1.4-05 "Volatility of agricultural commodity markets" 15
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
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
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