Panel Discussion | Price Volatility: Supporting Effective Agricultural Risk Management in Developing Countries

Panel Discussion at the FARMD Annual Conference: Price Volatility and Climate Change, Implications for the Ag-Risk Management Agenda. Zurich, June 9-10, 2011.
 

Introduction

This panel touched on the implications of price volatility in  developing countries and the mechanisms to address it. The discussants presented a broad panorama on  the situation on the ground and on what is needed to overcome future crisis.

Moderator:

• Alexander Sarris. Professor. Department of Economics. University of Athens.

Panelists included:

• Brian Wright, Professor and Chair of the Department of Agricultural and Resource Economics at the University of California, Berkeley;
• Shukri Ahmed, Senior Economist, Trade and Markets Division of the Food and Agriculture Organization of the United Nations (FAO);
• Franck Galtier, Senior Economist, CIRAD;
• Samuel Gayi, Head Special Unit on Commodities, United Nations Conference for Trade and Development (UNCTAD); and,
• Steven Schonberger, Regional Economist for Western and Central Africa Division, International Fund for Agricultural Development (IFAD).

Below are some highlights of the discussion. To hear the speakers comments and responses in detail, click on to watch the videos.

Perceptions on areas on which developing countries should focus their efforts

Professor Brian D. Wright presented perspectives in the crucial issues that, in his view, need to be addressed by developing countries in order to effectively respond to the issue of high and volatile food prices.

• Education on the ways commodity exchange markets operate. To illustrate his point, Wrights cited the example of Peru's involvement in heading its silver production. Things went wrong, Wright recalled, because, among other things, Peru did not take into account foreign exchange risk and had not hedged interest rate risk. The country soon found out that hedging is quite complex. You need to have well-educated people involved in these things, said Wright and it can be much more dangerous to get involved in these markets and operate them badly than not to be involved in them at all.
• Sustained investment in agriculture. Agriculture investment is the long-term side of the coin of what we are talking about here. We need sustain attention to yield increasing technologies. You should not stop investment when prices go down, emphasized Wright. The problem with agriculture investment is that you don't get anything in less than ten years. You need sustain investment, said Wright. This is not a year after year; this is a decade to decade.
• Avoid diverting into other agriculture assets. Developing countries should be very wary in getting into diverting the agricultural assets away from food production and into biofuels and other sideshows. They could look good in the short run, but very bad in the medium to long run.

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Shukri Ahmed, from FAO, put an emphasis on information and transparency to understand better the impact of global market changes in developing countries.

• Getting the information right. Ahmed highlights the importance of gathering information of countries in several markets whenever something happens at a regional level or international level we have to know how does that affect other countries…..It is interesting to see that there is a lot of instances in which all these price rises are not actually reflected at domestic levels.
• Transparency. The more we get it right, the better, said Ahmed. We try to get as much data and information and out there so that people for themselves see how things are moving, said Ahmed. Referring to FAO, he said that the organization now has a database following and tracking food and agriculture policies that government have started to take since 2007.

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Franck Galtier, of CIRAD, began asking if the market tools were efficient to overcome crisis and protect consumers and small stakeholders.

• Could we rely only on private storage and private trade and future markets and hedging tools to solve the problem of food price instability in developing countries? The answer is no, the consumers don't have a way to protect themselves to hedge on such markets, affirmed Galtier. Some kind of state intervention is necessary.
• In terms of policy, Galtier recommended, that because safety nets in times of emergency are not sufficient some kind of pre-annual safety nets in needed in order to increase the capital of vulnerable households and their resilience to the next crisis.

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Samuel Gayi, from UNCTAD, talked about the deficiencies of domestic markets and what is needed to lift them to a standard in which they can play more fairly in global markets.

We need to improve infrastructure, transportation. We need to look at post harvest loses, said Gayi, and added that the issue of waste and utilization of food should amongst the priority as well.

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Steven Schonberger, from IFAD, focuses on the improvements that could be made to make small scale producers less vulnerable to risk. Highlighting the importance of:

• Investing on infrastructure; the need for policy consistency; embrace the opportunities offered by regional trade; stimulating foreign and domestic investment; and supporting farmers organizations

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Comments from the floor: exchanges and domestic market variability

After the speakers' brief presentation, professor Sarris reflected about the cases of countries that have faced seasonal price volatility for many years, as it is in Africa. Will that be reduced if there is more market development? Asked Sarris. Does the introduction of exchanges help reduce the domestic market variability?

If you look at the countries around us, said Gravelet-Blondin citing a study about the volatility of the prices; particularly in white corn volatility is much more in the countries around us than what it is in South Africa, where commodity exchange operates. And the primary reason for that is not drought or a natural phenomenon; it is inconsistent policies that have caused that volatility.

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Perceptions on the role of futures and commodity exchanges in developing countries

What role can commodity exchanges play in developing countries to offer risk management and financing solutions to small and medium enterprises, to farm organizations, to different actors in the value chain? What are the possibilities to start commodity exchanges in developing countries? Some of the views expressed by the panelist in this regard include:

• There is a crisis of confidence in these exchanges right now,  until developed countries do not get together to regain the confidence on these markets, it will be difficult to replicate the successful experience of South Africa.
• One should be careful about being overoptimistic about the extent at which one can proliferate these exchanges around the world, as they require a lot of liquidity, a lot of trade volume to work. Starting with warehouse receipts and other alternatives first without the need to go to full exchanges.
• Getting rid of corruption and the other unnecessary roadblocks, will help the development of financial and futures markets.
• Most exchanges in Africa are donor-funded or donor-driven; there are issues that need to be addressed before moving forward with commodity exchanges: They are problems in the system, the regulatory/legislative framework and institutions are very weak, etc. Until those issues are address, it is very difficult to have exchanges working the way they should…and that require large investments in capacity building if these mechanisms are going to succeed.
• In the context of price volatility that persist in the long-term, one could argue that future markets are not the best mechanisms to address this.

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