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06/12/2016

Agricultural market volatility is ‘here to stay’

Agriculture & Food

Agricultural market volatility is ‘here to stay’

Mock funeral for dairy farmers. Brussels, 7 September.

[Joel Schalit/Flickr]

SPECIAL REPORT / The farmers’ protests that paralysed Brussels on 7 September, and hit Europe over the summer, are the result of agriculture prices volatility, which experts say “is here to stay”. EurActiv Italy reports.

Dairy farmers formed the majority of the protestors, due to a collapse in farm gate prices, which according to the European Commission’s Milk Market Observatory have fallen from 40 to 30 cents per litre on average, losing 25% in value since last year.

Faced with falling meat and dairy prices, exacerbated by Russia’s embargo on EU products, which are affecting producers in many member states, the European Commission decided to authorise aid totalling €500 million, to help, among other things, with the private storage of cheese, powdered milk and pork. 

>>Read: Commission proposes ‘flexible’ use of new agriculture aid

According to Czes?aw Adam Siekierski (EPP), chair of the European Parliament’s Agricultural and Rural Development Committee, these measures represent a step in the right direction, but are not enough to alleviate the impact of the price drop, or to stabilise European food production.

In this view, the crisis could be just another example of the apparent instability of the agricultural markets, which began in 2007-2008, and shows no signs of abating.

But, the so-called “volatility”, which goes beyond normal price fluctuations, is one of the main concerns for the sector.

The damage being done to the dairy sector, fruit and vegetable producers and the meat sector (in particular pork producers), seem to be episodes that are doomed to repeat themselves.

Siekierski added that it was a good thing that the European Commission had finally put forward a proposal, but that the package runs the risk of looking ineffective in the absence of actual action. 

Mostly this is a reference to the request made by the agricultural ministers of, among others, Italy, France, Portugal and Spain to increase the intervention price of powdered milk, which the Commission rejected.

“Mitigating the impact of extreme volatility remains an issue that needs to be addressed,” said Copa-Cogeca, the European farmers and agri-cooperatives organisation.

Commission analysts from the Directorate General for Agriculture (DG AGRI), as well as their counterparts in the FAO and USDA, agree that agricultural market volatility is here to stay.

What the reform means

To cope with the new scenario, several risk management tools were adopted in the reform of the Common Agricultural Policy (CAP). Firstly, there are provisions that allow the Commission to act quickly, to avoid a repeat of the milk crisis of 2009, in which “aid arrived late, when it was over and when many companies had already been forced to close,” admit Commission sources.

The emergency measures normally used include aid for private storage, applicable to dairy and meat products, and for market withdrawals or free distribution, as in the case of fruit and vegetables. These “safety nets” are activated when prices fall below and pre-determined level.

The new CAP includes a “crisis reserve”, which can be drawn on in case of need. Worth roughly a noncumulative €400 million a year, the reserve is financed by the cut of Direct Payments exceeding the €2,000 per year threshold. For this very reason though, the institutions are unwilling to dip into it.

In fact, up to now the reserve has not been used. Then there are interventions that support the underwriting of insurance policies, such as the Single CMO Regulation (Reg. 1308/2013).

Lastly, the CAP 2014-2020 strengthens risk management tools, which were introduced into the common agricultural policy in 2009 without much success. Now they have been transferred from the direct payments pillar to the rural development pillar and they are of three types. Firstly, policies that insure against bad weather and animal and plant diseases. Secondly, the mutual funds, with contribution to the creation of direct funds that compensate farmers for the aforementioned risks. Thirdly, the Income Stabilisation Tool (IST), which is intended to help farmers that suffer 30% losses over three years.

What is the volatility?

“A certain amount of volatility on the agricultural markets is normal,” explains Felice Adinolfi, Professor of Economics and Rural Appraisal at the University of Bologna, “because agriculture is subject to good and bad years”.

It is a sector in which adaptation to the markets often takes longer, partly because of the characteristics of the production cycles. Basically, cows are not milk taps and apple trees cannot be convinced to produce their fruit within a certain time period.

Experts point out that the agri-food business has a particular setup, which dictates the speed at which price signals are transferred from the consumer and the retailer to the producers. In North America, financial instruments have been used to cover risks, such as futures and options.

Professor Adinolfi goes on to add that in the last few years, volatility has increased and has become a constant source of risk for farmers, in the meantime, Europe has dismantled much of the safety net that has traditionally protected farmers, such as production quotas.

This has heightened the risk of competition in a sector which has seen the prevalence of commodities production and which today, more than ever, shows potential to reduce costs and be more competitive.

In the current crisis, for example, European farmers take larger issue with the increased production of milk in New Zealand, more than the over production that they are themselves responsible for, said Adinolfi.

Is it therefore more a question of internal changes to European agricultural policy? Not just that, says Adinolfi.

In the globalised world, the risk factors have multiplied and diversified. They are no longer just economic, but political. Import embargos are an example.

Russian backlash

When Russia implemented its 2014 ban on agricultural imports from the EU, in retaliation to the Union and its allies imposing sanctions on Moscow, European companies lost one of its main customers. This situation is completely motivated by politics, not economic concerns.

Another case is the 2011 outbreak of E.coli, in which inaccurate information about its provenance led to a collapse in demand for fruit and vegetable products.

Adinolfi also points out that, “Agriculture is particularly vulnerable to climate change, especially the decrease in rainfall in certain regions and the increased frequency of extreme atmospheric conditions, such as droughts, floods and heat waves. It is a scenario of extreme uncertainty.” A scenario that brings with it even greater risks, and acts as an obstacle to new investment.

The debate surrounding intervention price

“One has to continue along the path of production organisation. An important step could be stimulating, at a European level, increased awareness of the risk management instruments, but also adjusting the thresholds for safety nets, which are sometimes activated too late for some manufacturers,” Adinolfi concluded.

Increasing the “intervention price” (the minimum threshold that obliges the Commission to intervene) of the milk sector is a widely debated issue. Many European governments and agricultural organisations have asked the Commission to do so.

Farm Europe, an agricultural think tank, contends that ‘intervention price increase’ is “neither a dirty word, nor a magic wand”.

“In the last few years, the intervention price has been used to prevent a crisis from deteriorating beyond a certain point. This means that the intervention price is not just a financial instrument, but that it also plays a psychological role.” For this reason, Farm Europe believes that it could be opportune to “slightly modify the intervention price by at least taking into account inflation accumulated since 2007, when it was set at 21.7 cents a litre, increasing it to 25 cents”.

“This is not the appropriate policy response to the current situation,” insisted Commission Vice-President Jyrki Katainen during the Extraordinary Agriculture Council on 7 September, while farmers were demonstrating outside.

“At a time when there is a clear market imbalance, increasing the price paid for public intervention will do nothing to restore market balance but would instead create an artificial outlet for EU dairy products,” said Katainen.

Background

The lifting of EU milk quotas in March, combined with declining Chinese demand, changing dietary habits, and a Russian embargo on Western food products, have combined to push down the prices of beef, pork and milk.

The European Commission unlocked €500 million in aid to farmers, as angry protestors took the streets of Brussels.

>>Read: EU throws lifeline to farmers as protests bring Brussels to a standstill

The details of the 'flexible aid package' were unveiled last week (15 September) by Commissioner Phil Hogan.

>>Read: Commission proposes 'flexible' use of new agriculture aid

Further Reading