Download The Challenge of Volatility

29/09/2015
Michael Keane
Department of Agriculture, Food and the Marine
September 29th 2015






Volatility – market experience
Causes of Volatility
Consequences of Increased Volatility
Public Policy and Volatility
Options available – Private sector
Volatility - The Future

Unique Characteristics of demand for Dairy
(and Food) Commodities i.e. Inelastic Demand

Modest scarcity causes prices to be bid up to
very high levels

Modest surplus causes prices to fall to very
low levels to clear market

Modest scarcity or surplus are frequent
occurrences, especially with lagged
production response
1
29/09/2015










2007 Peak: Strong demand due to growing world
economy combined with modest scarcity due to drought
in Oceania and low to zero stocks
2008/09 Low: Weak demand due to global recession
combined with a modest surplus due to increased
output in Oceania, US and growing stocks
2013 Peak: Strong demand, China, other Asia, etc.
Milk output static NZ
2014/5:Low: Weak Demand, China, Russian embargo,
No EU Quotas, Oceania, USA increased output 2014
“Normal” price variation is desirable. It
reflects changes in demand, supply and
policy and provides price signals to facilitate
efficient reallocation of resources
Extreme volatility is undesirable with many
adverse consequences
Low prices: grave financial problems, reduced
investment, reduced R and D. Ultimately
solvency threatened, farms and dairies
High prices: Substitutes replace dairy
products; fat, protein, lactose
Buyers (ingredient and retail) prefer to do
business with suppliers providing stability,
price and volume
2
29/09/2015
A stated objective in Article 39 of the Treaty of
Rome 1957 was “to stabilize markets”






Target Price for Milk
Intervention and PSA
Export Refunds
Import Tariffs
Subsidised Consumption
Production Quota

Abandonment of Price Stability Policy –
industry directly confronts the market

Much lower “safety net” Intervention prices
(unchanged since 2007), PSA

Direct/Single farm payments for dairying

Abandonment of Production Quotas 2015
High Level group established 2009
Report June 2010
http://ec.europa.eu/agriculture/markets/milk/
hlg/index_en.htm
 The Milk Package 2012
 The September Package 2015


3
29/09/2015
Price Volatility and managing price risk were
key issues
 written contracts – farmer and processor
 New Rules for Interprofessional organisations
(PO)
 Bargaining power re competition
 Milk Market Observatory - transparency
 New tools eg futures markets















Weather risks
Livestock or Plant Diseases Risk.
Financial Risk
Asset Risk (Fire, theft etc)
Policy Risk
Legal Risk
Currency Risk
Market Risk
Price/ Margin Risk
Fixed Price/Margin Contracts
Futures Markets
Options (Put and Call)
Over the Counter (OTC) Contracts
Insurance Products
Mutual Funds
All have considerable risk management benefits, but
also some limitations.
4
29/09/2015




A futures market would have to be a private
initiative in a market oriented environment.
The HLG invites the Commission to consider
facilitating the use of futures markets, in
particular via targeted training
programmes.
Authorities would play a role in training,
supervision and regulation
Supervision and regulation should be dealt
with in overall context (MiFID)
Various Governments have sought to lessen
extreme volatility – learn from them?
USA Policy Trajectory: A step ahead of EU?

From Price Support to Income Support to
Comprehensive Insurance Scheme for
Margin Protection

US Dairy Industry Advisory Committee
2010
“avoid boom and bust cycle”
“build a more stable market for dairy
producers”

2014 Agric. Act: Comprehensive Margin
Protection Program for Dairy


Futures markets are normal in free markets,
they provide various risk management
benefits, but
For success, good public price information,
education for participants and appropriate
regulation are required
5
29/09/2015





Uncertain, but longer term market prospects remain good
Expect occasional extreme price volatility, due to
market fundamentals and demand and supply shocks
Public policy – difficult to control price volatility (EU pre 2003)
with EU budget now primarily for single payment, related
measures, but some alleviation possible
Private sector must respond with all available tools to manage
volatility
Managing farm costs and efficiency to maintain international
competitiveness is vital regardless of volatility
M Keane; D O’Connor
Price Volatility in the EU Dairy Industry: Causes, Consequences
and Coping Mechanisms. EDA October 2009
Dr Michael J Keane
Beechgrove,
Farran,
Co. Cork
Ireland
353-21-7331406
353-87-2704586
[email protected]
6