Financial speculation and volatile prices

There has been increasing discussion recently about the link between financial markets such as those dealing with futures and derivatives and volatlity in farm prices. The subject has been highly contested and there is no consensus view.

This viewed is shared in a leaked draft of a Commission communication which concludes that there is no conclusive evidence on the causality between activity in derivatives markets increased volatility & price increases in the underlying physical markets.

The draft version suggests unsurprisingly that agricultural commodity prices are expected to stay higher than their historical averages reversing their long-term downward trend, with producer margins increasingly squeezed due to higher costs.

Similarly price volatility is expected to remain high, although 'uncertainties with respect to its causes and duration persist'. Referring to the ‘CAP Towards 2020’, it notes that food security has been identified as one of the main drivers for future reform in EU policy, underlining that a 'strong agricultural sector is vital for the highly competitive food industry to remain an important part of the EU economy and trade and a major contributor to international markets'.

Commenting yesterday on a decision to defer its publication, the Commission spokesperson outlined that there is 'no doubt about the links between the physical & financial markets', but that there is a 'need for more time to look at the specifics at play between the financial markets and markets that are not closely regulated' such as Over-the-Counter (OTC) derivatives. The Commission now intends to 'refine the analysis' on the reasons why markets fluctuate and seek greater clarity on the interaction between speculation and markets.