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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