The unpredictability of the weather we all take for granted, but price volatility has become a major issue in agriculture, even for once-stable dairy products. Governments and the European Commission would like to curb this, but finding a way to do so is all but impossible.
Swings in prices are influenced by a lot more than supply and demand. Thanks to the speed of communications there is more information available than ever in history, and more people are using that to speculate, with food commodities just one of many products they target.
Whether these are traditional or derivative traders – speculators – they have a big impact on markets, and the result is volatility. For them it drives profits and losses but for farmers it makes planning and budgeting all but impossible. People are still trying to factor in what impact events in Ukraine will have on grain prices – and that is on top of weather, Chinese demand, an easing global recession and scores of other factors that influence supply and demand.
In the final session of the European Parliament, MEPs voted to back curbs on speculating in the major food commodities. This is what so-called derivative traders do to make a profit. Unlike traditional traders they are not dealing in physical stocks but gambling on market positions. If they did not exist trade would continue perfectly well without them.
MEPs voted in support of calls from the G20 group of the world’s main trading countries. But the plans for legislation are complex and it’s doubtful if they will curb the activities of those whose track record is one of getting around rules.
More potentially successful are European Commission plans to launch what it is describing as a ‘milk market observatory’. This is to try to reduce volatility after milk quotas end next year. It is needed because once-stable dairy markets are now matching grain and other commodities for price swings. The aim is to increase transparency by making available production, processing and market information from Member States and the global market.
On the theme of trade, if China ever turned off its economic tap the rest of the world would be plunged back into recession. Farmers are enjoying high milk prices on the back of China’s insatiable demand for milk powders; the picture is similar for cereals, all meat and even agricultural expertise, which is needed by China to achieve some level of food self-sufficiency.
While China has a vast population, that is only partly what is driving demand. For key products that are in the luxury class, such as red meat, the demand is coming from a rapidly growing and prosperous middle class. This is why China is such a good market for luxury car brands. On the red meat side, China is driving the global market, so some big global exporters, such as South America and Australia, have their sights set there rather than on Europe.
However the latest figures from the COPA, the umbrella body for European farm unions, suggest that Chinese demand is a bright spot in a market under pressure now and for the foreseeable future. The picture is one of declining demand and production. There is also an expectation that imports will grow. The COPA position is that these should be the valve that matches supply to demand, rather than allowing EU production to fall. It is also calling for more transparency about trade deals, claiming their potential impact on the beef industry in particular needs to be known before these are signed.
That’s probably something of a forlorn hope. The European Commission can only see the advantages from trade deals – not least one with the Mercosur countries of South America, which include Brazil and Argentina. It sees these as helping the still ailing eurozone economies, and it is not going to let their impact on agriculture be a stumbling block.