Volatile prices for agricultural commodities have serious repercussions for both consumers and producers. The revenues of these latter fluctuate dramatically as a result. The 2007-2008 food crisis has highlighted the need for instruments to manage instability. In the absence of methods to tackle volatility head on, attempts are being made to cushion the effects using tools to regulate prices for farmers and consumers alike.

For a long time, issues linked to production were held to be the prime cause of food crises. Causes likely to be examined included poor climatic conditions (such as drought or floods) and the proliferation of pests leading to disappointing harvests and a subsequently inadequate supply of food to satisfy consumer needs. This approach gave rise to the creation of various networks offering early warning and surveillance systems for weather conditions as well as monitoring services for harvests. Most of these are largely effective. Among them are FAO’s Global Information and Early Warning System (GIEWS), USAID’s Famine Early Warning System (FEWS) and the locust surveillance system.

However, the food crises of 2007 and 2008 highlighted the leading role played by other destablising factors. Whilst the soaring prices witnessed in 2007 had their origin in drought which led to a simultaneous collapse in the output of the world’s major cereal producers (Australia, Canada, EU and USA) at a time when global stocks were already at record low levels, the new requirements created by the emergence of the biofuel industry (as a result of oil price hikes) and changes in the eating habits of the Chinese led to increased demand for certain commodities. Other causes for the crises had nothing whatsoever to do with the agrifood sector. One case in point is the speculation unleashed on raw materials when the property and stock markets began crumbling beneath the effects of the financial crisis. Another is the sharp rise seen in the cost of shipping freight, caused by soaring oil prices and lack of available cargo capacity due to strong demand from China.

A dramatic price rise

The 2007 crisis caught many by surprise given that for the past 15 years, cereal prices had remained relatively stable. Its impact was sudden, with the price of wheat more than doubling in the space of a year, between March 2007 and March 2008, whilst that of rice tripled during the first six months of 2008. This crisis sparked a swift response from exporting and importing countries, keen to protect the most vulnerable members of society and avoid hunger riots, which threatened to explode into political crises.

Some exporting countries decreased or even halted foreign sales of basic commodities, especially rice, in an attempt to secure supplies for their domestic markets. With this strategy they often managed to restrain price rises, albeit at the cost of aggravating inflation on world markets. Powerless to do anything to contain global prices, importing countries attempted to help consumers live with this instability. ACP countries used a number of instruments: reduction or temporary removal of import taxes on basic food products; subsidies for processors (mainly millers and bakers) to discourage them from passing the entire rise in the cost of supplies on to the final product; drawing on strategic stocks so as to increase supply and hence bring down prices; clamping down on speculation and, lastly, offering targeted food aid to the worst affected sectors of the community.

A wide array of tools

These measures are part of a wide array of tools available for tackling price instability and its impact. For, while it is crucial to offset the effects of price volatility on consumers, it is also important to safeguard and regulate producers’ incomes. Various mechanisms have been developed and used in an effort to do this. For three decades or so, agencies known as Caisses de stabilisation or Boards guaranteed a fixed purchase price to farmers of major cash crops (coffee, cocoa) until they were dismantled at the end of the 1990s. On a more global scale, since the 1960s, attempts to regulate markets and reduce price volatility have been made by means of international accords on basic commodities - sugar, coffee, cocoa, rubber - in such a way as to guarantee stable revenues to producers and stable purchase prices to consumers.

In the 1980s, liberal economists called this system into question, on the grounds that any artificial support to prices would have negative consequences.

Innovative instruments for regulation

These days, the instruments used are directly inspired by those developed for operators on the financial markets to guard against the volatility of share or currency prices. Farmers facing price instability are encouraged to manage their “harvest capital” just as a banker manages his portfolio of shares and currencies, using a range of protective instruments designed to deal with unexpected and unpredictable market developments. The World Bank is particularly active in this field. It has set up a special department with the task of improving access to risk management instruments and training farmers from developing countries in their use - the Commodity Risk Management Group (CRMG). The main instruments used are: options grain markets, index-based insurance for climate and harvests, annual or multi-annual sales contracts with professional users (wholesalers, exporters, processors…) as well as the warehouse receipt system. (Spore 124 pp. 1 and 2). Trials are under way in ACP countries (mainly with fruit and vegetable producers in the Caribbean and Pacific regions) as part of the EU All ACP Agricultural Commodities Programme (AAACP). Meanwhile, the Caribbean Catastrophe Risk Insurance Facility (CCRIF) was launched recently to offer coverage against damage to crops by the hurricanes which periodically strike the region. This institution is the world’s first ever regional insurance mechanism against disasters. Fifteen Caribbean countries have signed up. By grouping together their risks through this fund, the member countries are expected to cut their respective insurance premiums by about 40%.

Mutual insurance companies are also being set up in various ACP countries to offer surety against harvest losses due to drought. The compensation mechanism is activated as soon as rainfall levels drop below the minimum threshold fixed by the insurance company. The same system can be applied to fluctuations of product prices on international markets: a floor rate triggers payment of compensation by the insurance company with whom the producer has a policy. All these methods can be used on their own or together. For the time being, few producers are taking advantage of such mechanisms, partly because of their technical complexity. Added to this is the fact that banks and insurance providers are often reluctant to approach what is widely seen as a high risk sector. But this does not prevent more and more producers from making their own arrangements to protect themselves against market volatility by taking out insurance policies. As for consumers, the crisis of 2007 showed that state intervention is essential and that there is therefore a strong need to set in place safety nets in order to cushion the effects of the crisis on the poorest members of society.



 
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