by Yium Tavarolit Chief Secretary and Economist International Rubber Consortium Limited (IRCo)

at International Rubber Technology and Economic Congress 11 October 2012 One World Hotel, Petaling Jaya, Selangor, Malaysia

The Outline of Presentation

What Is Volatility ? What Causes Volatility ? How To Address Price Volatility ? I. International level II. National Level Conclusion
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What is volatility?
Volatility is a measure of price variation from period t-1 to period t. If there is a large price variation from period t-1 to period t then the return (Rt) is large without regard to whether it is positive or negative). Variations in prices become problematic when they are large and cannot be anticipated, and they do not reflect market fundamentals.
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What is volatility? (cont)

As a result, they create a level of uncertainty which increase risk for producers, processors, traders, consumers, governments, and they can lead to incorrect decisions.
Former World Banks President Robert Zoelick declared on 19 February 2011 that the price spike that occurred between June and December 2010 pushed 44 billion individuals below the extreme poverty line worldwide.
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What causes volatility?

Growing Population and Income in Emerging Countries FAO reported recently that agricultural productivity and low stocks in the coming decades will grow at a slower pace than demand for food that will result in volatility around the uptrend.
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What causes volatility? (cont)

A Conflict between Demand for Food and Feed Crops for the Production of Bio-fuels As demand for oil and its price has increased rapidly in tandem with a rapid growth in global population and its price has outstripped cost of bio-fuels to some degree, that contributes to volatility in biofuel crops such as sugarcane, tapioca, palm oil etc.
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What causes volatility? (cont)

Rising oil prices
Rising oil prices lead to higher cost of every sector in global economies, including the agricultural sector,
US$/Barrel 110 100

90 80
70 60 50 40 30 68.30

76.17 78.71 78.03 76.22 59.62

42.88

102.93 102.56 94.16 94.07 94.06 93.49 87.93 86.76 85.17

What causes volatility? (cont)

Climate change Changes in climatic and natural conditions such as droughts, heat waves, and floods have caused uncertainty of global food production. A combination of better functioning and deeper markets for agricultural commodities and improved supply capacity and resilience will allow countries in the most vulnerable zones to overcome these problems.
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What causes volatility? (cont)

Exchange Rate Movements U.S. dollar denominated international commodity prices against other currencies usually rise when the U.S. dollar weakens against other currencies. For example, crude oil futures on New York Mercantile Exchange will fall if the U.S. dollar strengthens.
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What causes volatility? (cont)

An Increase in Investment in Financial Derivative Markets for Agricultural Commodities There are still the pros and cons of an increase in investment in financial derivative markets for agricultural commodities. Some analysts argue that non-commercial actors such as hedge funds, swap dealers, and money managers sometimes amplify short-term price swings, while many analysts say well functioning derivative markets for agricultural commodities could play a significant role in reducing or smoothing price fluctuations.
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What causes volatility? (cont)

The Nature of Market Structure Focusing on agricultural products, there are some natural characters that cause price volatility as follows:-

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What causes volatility? (cont)

The Nature of Market Structure

1. Inelastic supply: means a market situation in which any increase or decrease in the price of a good or service does not result in a corresponding increase or decrease in its supply;
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What causes volatility? (cont)

The Nature of Market Structure
2. Production period: agricultural production normally takes considerable time. Supply cannot responds much to price changes in the short-term, though it can do so much more once the production cycle is complete;
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What causes volatility? (cont)

The Nature of Market Structure

3. Natural shocks: agricultural output varies from period to period because of natural disasters such as flooding, drought, diseases etc.

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What causes volatility? (cont)

Speculation on Commodity Markets It is known that commodity prices sometimes do not move in tandem with market fundamentals but market sentiment, which is sometimes driven by market players on commodity markets.
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To address price volatility through international cooperation/international institutions, the followings have to be ensured that they will be adopted across commodity exchanges and across countries in order to avoid the migration of participants and regulatory arbitrage.

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I. International Level
Strengthening International Discipline Relevant international organizations/ institutions (WTO) and global leaders have to resolve all forms of import and export restrictions, as well as domestic support schemes that distort production incentives, discourage supply in response to market demand, constrain international trade of food and agriculture products.
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I. International Level (cont)

Transparent International Financial Systems To develop commodity derivative markets to function well, and as intended in terms of hedging and price discovery, appropriate financial regulations need to be in place across all relevant futures exchanges and markets.
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I. International Level (cont)

Transparent Systems International Financial

A question is how to regulate noncommercial actors such as index funds, swap dealers, and money managers in financial markets to trade on futures markets transparently without amplifying short-term price swings that might lead to price bubbles in some situations.
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I. International Level (cont)

Transparent Market Information Reliable and up-to-date information on crop supply, demand, stocks and export availability could contribute to price stability because information on the current situation and outlook for global agriculture shapes expectations about future prices and allows markets to function more efficiently.
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I. International Level (cont)

Transparency in Futures Markets Producers and consumers normally hedge on futures markets so as to lower risks from price fluctuation, but speculators buy and sell futures contracts and take on the risk of future price fluctuation to gain a risk premium.

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I. International Level (cont)

Transparency in Futures Markets To limit daily price changes and to limit inventories held in delivery warehouses by non-commercial entities ( to limit market manipulation possibility), compulsory guarantee deposits, appropriate margin calls, transparent market information etc are the essential parts for curbing excessive speculation on futures markets.
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I. International Level (cont)

International Safety Nets Contingency and compulsory financing facilities provided and organized by international organizations/institutions such as the World Bank, FAO etc are important mechanisms that assist countries to avoid food shortage, and to lower food spikes, especially in the poorest and most vulnerable countries.
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I. International Level (cont)

Increase in Global Agricultural Production to meet Global Consumption Direct investment in agricultural research and development in order to increase productivity and to safeguard farmers against natural calamities such as an early warning system, disaster risk assessment, development on climate change adaptation strategies etc are a must.
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I. International Level (cont)

Increase in Global Agricultural Production to meet Global Consumption At the same time, investment in nonagriculture to enhance rural environment for human well being such as education, sanitation and clean water supply, health care etc are also a must.

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I. International Level (cont)

Reducing Policy Conflicts between Food and Fuel As a number of relevant crops such as sugar cane, oilseeds, cassava and course grains could be consumed as both energy and food/feed by utilizing the same inputs, their prices have skyrocketed until today.
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I. International Level (cont)

Reducing Policy Conflicts between Food and Fuel The International Food Policy Research Institute (IFPRI) estimated that around 30% of growth in prices over the period 2006 2008 was attributable to the biofuel sector.

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I. International Level (cont)

Reducing Policy Conflicts between Food and Fuel
To moderate prices of these crops, it is recommended that renewable fuels and feed stocks should be produced where it is economically, environmentally, and socially feasible, and is traded more freely. Scientific research on alternative paths to reduce carbon emissions and to improve sustainability and energy security should be accelerated, and more efficient energy use is also encouraged.
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I. International Level (cont)

Reducing Policy Conflicts between Food and Fuel (cont) Jean-Christophe Bureau, professor of economics at Agro ParisTech warns speculators that they have to be aware of rising oil prices that are inducing producers to arbitrate in favor of biodiesel.
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I. International Level (cont)

Reducing Policy Conflicts between Food and Fuel (cont) Furthermore, Matthew Beckwith points out that the potential of GMO technology could hold the key to unlock future development and will probably lead to a better decoupling of food and bio-fuel production.
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II. National Level

National Trade Policy
To get rid of market distortions, countries have to develop national regulatory and fiscal policies to be legitimate and broadly owned by relevant stakeholders, particularly those policies that aim to restore trust in markets and to avoid panic-driven behavior. The goal of the policies is not to eliminate agricultural price volatility, but rather to reduce uncertainty, and perhaps also the amplitude of variations by smoothing out the extremes.
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II. National Level (cont)

National Buffer Stocks To smooth out seasonal fluctuations and time lags in trade, stockholding is a necessary component of a well functioning market. Year on year variations in domestic production can be more effectively and much less expensively buffered by adjustments in the quantities imported or exported.
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II. National Level (cont)

Cooperation between Producing and Consuming Countries Cooperation between producing and consuming countries to manage supply and demand for agricultural commodities is necessary. Proper planed investment in increasing agricultural productivity is in urgency to sufficient and nutritious food.
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II. National Level (cont)

Set up Intelligence Unit (IU) Set up Intelligence Unit: the roles of IU is to forecast prices in the medium & long terms, design and maintain a dynamic price band system, and triggering interventions

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Conclusion
To eliminate speculation which is a root cause of price volatility, we have to create an environment more favorable to the elimination of market imbalances and the roots from which they grow

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References
1. FAO, IFAD, IMF, OECD, UNCTAD, WFD, the World Bank, the WTO, IFPRI, and the UN HLTF, Price Volatility in Food and Agricultural Markets: Policy Responses, 2 June 2011. 2. Joachim von Braun & Maximo Torero, Implementing Physical and Virtual Food Reserves to Protect the Poor and Prevent Market Failure, IFPRI Policy Brief 10, February 2009. 3. Maximo Torero & Joachim von Braun(2009), Alternative Mechanism to Reduce Food Price Volatility and Price Spikes. Available online: http://wwwagritrade.org/ 4. Professor Bernard Munier, Commodity Price Volatility: Causes and Impact on the EU Agricultural Markets. Available online: http://www.momagri.org/ 5. Paris Tech Review, How to Fight Against Agricultural Price Volatility, Available online: http://www.paristechreview, 22 March 2011. 6. SOAS Research Online, Reducing Food price Volatility for Food Security and Development. Available online: http://eprints.soas.ac.uk/11098/
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Thank You For Your Attention