Download Carmel Cahill

Policy Round Table:
Managing vulnerability and risk
Market volatility aspects
Carmel Cahill
OECD Trade and Agriculture Directorate
FAO, CFS, Rome
October 13th 2010
INDEX OF COMMODITY PRICES (Jan04=100)
Meat
Dairy
Cereals
Rice
Crude Oil
Index
500
450
400
350
300
250
200
150
100
50
0
2004
2005
2006
OECD Trade & Agriculture
2007
2008
09..
2
Causes of the food price spikes
Temporary /Short-term
Factors
Long-term factors
Unknown or uncertain
factors
Weather problems,
Drought
Increase in use of
agricultural feedstocks for
bio-fuels
•Speculation on commodity
derivative markets
•Hoarding
Export restrictions
Increase in demand for food
and animal feed from
emerging countries
Effects of climate change
Water scarcity
Exchange rate fluctuations
Historically low stock levels
Technology, Yields
OECD Trade & Agriculture
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Consequences of market volatility
Adage – One man’s meat is another man’s poison
The impacts of market volatility differ:
•
between consumers and producers
•
by level of development
•
between crop and livestock producers
•
between importers and exporters
•
between the upside and downside
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Will the future be more volatile?
Factors for and against
• De-regulating reforms
New technologies
increasing resilience
• Low stocks
• Links to energy markets
• More open trade leading
to less thin markets
• Production moving to less
resilient areas
• Better information flows
• Climate change increasing
the frequency of extreme
events
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Most commodity prices at higher average levels
Percentage change in world prices in real terms relative to 1997-06
160
2007-08 average
2010-19 average
140
120
100
80
60
40
20
0
-20
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Vulnerability and risk
•
Devastating effects of high prices on the poorest
consumers
•
Unambiguous for the urban poor but potentially
devastating also for rural households many of whom
both produce agricultural commodities and buy from the
market
•
Producers – depends on scale, depth of downside risk,
risk management capacity
•
Long term impact on investment decisions
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Policy responses at international level
• Improve disciplines on export restrictions
• Improve information systems and transparency especially
concerning stocks
• Improve emergency response capacity
• More stable and predictable financing framework for
international response
• Financial mechanisms for the poorest net importing countries
(Stabex, Marrakech decision, etc)
• In the long term free up trade (conclude the DDA) so that the risk
of excessive volatility associated with « thin » markets is reduced
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Policy responses at national level
• In the short-term, targeted emergency measures,
safety nets for the most vulnerable
• Develop stockholding mechanisms with welldefined operational rules
• Re-think biofuels policies
• Invest in agriculture to improve productivity and
resilience
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What solutions for producer risk?
Integrate volatility into a wider risk management
strategy
• Diversification at the entreprise and household level
• Smoothing mechanisms – save in good years with
the help of the tax system, or tailored schemes
• Use market instruments – futures, insurance
• Catastrophic situations call for government intervention,
but with well defined conditions and terms
OECD Trade & Agriculture
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Three risk layers with different policy implications
0.3
Catastrophic
Layer
Market
Layer
Risk Retention Layer
0.25
Probability
0.2
Low
High
0.15
floods
and
0.1 droughts
0.05
Medium
Medium
High
Low
Frequency
Damage
specific perils
(hail, larger
price
variations)
with potential
for market
instruments
normal weather variations
and changes in
market conditions
Examples
0
47
59
72
84
97
109
121
134
Distribution of farm income
OECD Trade & Agriculture
146
158
11
OECD Trade and Agriculture
www.oecd.org/agriculture
Contact
[email protected]
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