Recent years have seen rising food prices and intensifying price fluctuations on commodity markets. A variety of factors are causing this development. These include droughts in certain regions as well as longer-term trends such as a growing world population, climate change, the production of biofuels, changing dietary habits in emerging economies, and insufficient transport and storage capacity in certain producer and consumer countries.
Ensuring comprehensible pricing, combating speculation
Policymakers and other stakeholders are examining the extent to which events on commodity futures markets are also having an impact on food prices. Scientific studies on this issue come to various conclusions. The German government takes the view that long-term price trends for agricultural commodities are driven primarily by fundamental factors such as exchange rates and rates of economic growth. In the short term, however, isolated events can sharply increase the volatility of prices on agricultural futures markets.
Both agriculture and industry need to be able to hedge against medium-term price fluctuations in order to plan harvests or output with a certain amount of security. This is what commodity futures markets are for. Producers are willing to assume the risks of long-term investments only if they are able to plan, to a certain extent, the cost of production factors as well as anticipated sales revenues. Farmers and industrial producers need smoothly functioning futures markets for these types of hedges.
Regulation and transparency
Basic foodstuffs cannot and should not be excluded from market-based pricing mechanisms. At the same time, however, speculation on insufficiently regulated markets should not be allowed to cause excessive price fluctuations. For this reason, the German government advocates having a regulatory system at European level that will serve to curb excessive trading activity. Strict regulations and transparency requirements will prevent destabilising effects on food prices without impeding the ability of commodity derivatives markets to hedge against risk.
To prevent distortions on futures exchanges and to counteract market abuse, market transparency needs to be enhanced through regular reporting on the market positions taken by all market participants, and supervisory bodies need to be given the appropriate authority. To this end, at the Cannes summit in November 2011, G20 leaders pledged to provide financial supervisory authorities with far-reaching powers of intervention that will enable them to limit the market power of individual traders on agricultural futures markets. The aim here is to prevent market abuse and to contribute to orderly conditions for pricing and settlement.
Whether on-exchange or off: ensuring an orderly framework for all transactions
Numerous regulatory initiatives have already been adopted or are under consultation at EU level. For example, under the EU Regulation on OTCOver-the-counter derivatives, central counterparties and trade repositories (known as “EMIR” and adopted in July 2012), details on all derivative transactions must be reported to trade repositories. This will significantly enhance the transparency of these types of transactions. In addition, OTC derivative transactions will be subject to stricter collateral requirements, which will also curb the scope for speculative activities.
The German government strongly supports the G20 resolutions aimed at ensuring, to the greatest possible extent, that all standardised OTC derivatives are traded on exchanges or electronic trading platforms. The G20 resolutions to regulate OTC derivatives will boost the integrity and transparency of markets for agricultural commodity derivatives.
Likewise, the draft revision of the Markets in Financial Instruments Directive (MiFID), which is currently under deliberation by the European Council, contains in-depth reporting requirements for commodity derivatives. This will improve the ability of market participants and observers to assess developments on agricultural and other commodity derivatives markets. In addition, the creation of “organised trading facilities” (OTFs) will enhance the transparency of certain financial transactions that used to occur outside of regulated markets, because OTFs will be subject to specific licencing criteria as well as extensive market transparency and integrity rules. There are also plans to introduce binding position limits for commodity derivatives, thereby restricting possibilities for building up large speculative positions in order to influence prices. Supervisory authorities will strictly monitor compliance with the rules and take more far-reaching measures if necessary.