Agricultural Trends
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What are wheat, corn and soy worth?

In 2008, food prices suddenly and surprisingly soared worldwide. Since then, global food price fluctuations have increased significantly. Developments like these pose a problem, especially for poorer populations who are forced to spend the majority of their income on food. Food speculation could have been a reason for this development.

When a farmer sows seed, he or she does not know the size of the harvest it will yield. On the one hand, the weather has a big impact on the quality and amount of the products, and, on the other, prices are determined by supply and demand. It is precisely supply than can fluctuate strongly, since it depends on the weather and the operational decisions of all farmers. Farmers must, however, make investment decisions early on. The issue of planning security thus plays a central role for them.
To mitigate the risk of fluctuating prices, commodity futures exchanges were created. Here, farmers and subsequent supply chain participants can protect themselves against price fluctuations by trading commodity derivatives. Commodity derivatives are agreements on future deliveries at a fixed price. An example: A farmer wants to protect him or herself against the risk of grain prices falling in the future, but a miller, on the other hand, wants to protect him or herself from rising prices. A grain dealer is stuck in the middle: Depending on how much he or she has just sold or bought, the position to be protected changes. Traders can gain a security either by trading the commodity on a physical market or through the consistent trade with commodity derivatives.
Commodity futures exchanges are also open to participants who are not part of the supply chain – for example, banks and investment funds. Without these additional participants, the commodity futures markets would not have the liquidity necessary to function smoothly. For investors, these markets – especially when interest rates are low – are attractive as a risk distribution method. But after the price jump in 2008, it was suspected that these investors artificially drove up prices for raw materials just to optimise their portfolios, and therefore were responsible for the strong fluctuations.

If in the past many people were left to hunger if the weather in their region was unfavourable for the harvest, today, food from all over the globe can be traded and distributed. If the harvest in a certain region is poor, the products from another region are imported. Together with the ongoing advances in plant cultivation, this also allows for a growing global population to be fed. This is why today the prices for raw agricultural materials are based less on regional harvests but on global supply and worldwide demand. Here, the commodity futures exchanges provide an orientation for price setting.
However, the prices for raw agricultural materials are very volatile. This is because supply and demand are limited in their ability to respond to price changes. Due to long production cycles and weather and climate-related limitations, it is impossible to adjust the production volume to a different price level at short notice. But consumers need food daily, even if prices go up. This means that producers and consumers need to initially live with price fluctuations. Prices, on the other hand, react strongly to changes to the expected production volumes.
Critics suspect that speculators, who stand to make a profit from these price changes, drive prices on the commodity futures exchanges in a certain direction or cause speculation bubbles. In response, the G20 member states passed an action plan in 2011 aimed at stricter regulation of commodity futures exchanges and strengthening agricultural production.
The European Union issued rules over the last few years governing how commodity derivatives should be traded in the future. However, these directives and regulations, named EMIR (European Market Infrastructure Regulation), MAR (Market Abuse Regulation) and MiFID II (Markets in Financial Instruments Directive II), do not only affect financial players, but the entire food supply chain from the farmer to the manufacturer. These regulations are intended to prevent market abuse and speculation bubbles without limiting the functionality of the agricultural commodity futures exchanges. In early 2017, the implementing rules for MIFID II, which are aimed at defining and ensuring position limits for commodity futures exchanges so that speculating players are inspected more closely, were decided. The new regulations come into effect in January 2018. The European commodity futures exchanges, the French MATIF, the London LIFFE and the German EEX in Leipzig are all subject to European law. However, the largest and most influential commodities exchange in the world, the Chicago Board of Trade (CBOT), is regulated by American law. At the CBOT, algorithm-based trade using self-controlled software and high-frequency trade in the millisecond and nanosecond range are on the rise, which can aggravate short-term volatilities. This was the case for soy meal in 2016, for example: Prices fluctuated up and down like never before. Depending on which derivative or supply chain trend was bid on, a significant profit or a loss could be made in minimal time. These price developments, which can become a problem for supply chain participants, are not necessarily felt by consumers. Generally, it must be assumed that in the middle term and long term prices are based on actual conditions, the so-called fundamentals. This is how the global record harvests of the last three years, for example, resulted in respective low prices – which is essentially decisive for consumers all over the world.

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Markus Ferber

Three questions for Markus Ferber MEP, Markets in Financial Instruments Directive II (MiFID II) correspondent:

What role does the EU play in regulating commodity futures exchanges?
Today, financial markets and commodity futures exchanges work across boarder lines. This means that these markets are regulated at the European level. This regulation ranges from provisions regarding market infrastructure (EMIR) to the question of position limits for raw materials derivatives which were addressed in the context of MiFID II. National lawmakers only implement these EU provisions in national law. The central decisions are made at EU level, however. 

What is the purpose of MiFID II?
The Markets in Financial Instruments Directive MiFID II is the European answer to the 2008/2009 financial crisis. It implements the decisions made at the G20 summit in Pittsburgh in 2009 which draw on lessons learned from the financial crisis. The central message in Pittsburgh was that there should no longer be any unregulated markets or any unregulated financial products. These decisions also included the implementation of measures to limit the volatility of raw materials prices and, especially, to reduce food speculation. MiFID II implements these provisions in EU law.

What was the biggest challenge when it came to regulating commodity futures exchanges?
For me, it was always important to find the right balance for the regulation of commodity futures exchanges. We had to effectively stop excessive speculation with staple foods but, at the same time, abstain from unnecessarily complicating legitimate hedging operations. Unfortunately, the debate was very ideological at the time. Some fractions would have preferred to entirely ban the trade in raw materials derivatives. In the end, in my role as rapporteur, I came up with a compromise which allows for an effective approach to fighting food speculation without trade on the raw materials markets grinding to a halt.