Why discuss commodity price volatility at the G20?
The wide and sudden price variations observed on commodities markets since 2007, in particular on oil and agricultural markets, have made commodity price volatility a vital issue for the world economy. Three areas are involved:
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Economic growth. Excessive price fluctuations foster uncertainty and disrupt the forecasting abilities of the various economic stakeholders. This uncertainty is
exacerbated by the lack of transparency in commodities markets, which in turn makes prices more volatile.
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Food security. The food crisis of 2007-2008 and the subsequent rioting, for instance in Haiti and Senegal or more recently in Mozambique, provided dramatic proof
of the consequences of fluctuations in commodity prices in developing countries. Such fluctuations particularly affect consumers' purchasing power as well as the earnings of
commodity producers.
- Financial stability and regulation. The financial markets must provide the means for managing this volatility, by allowing actors to protect themselves against price variations. However, commodity derivatives markets are not covered by a specific regulatory framework that is adapted to the volume of trading that takes place on them (for example, the volumes traded on the financial oil markets are some thirty-five times those of their physical counterparts. In the same way, every year, the Chicago Mercantile Exchange trades the equivalent of 46 times the world's annual wheat production and 24 times the annual production of corn).
The G20 is the appropriate forum to tackle this issue since its members are predominant actors on the oil and agricultural markets (G20 countries represent 65% of world farmland and 77% of the world production of cereals).
What commitments has the G20 made to date?
The G20 examined the issue for the first time at the 2009 Pittsburgh Summit, where the leaders agreed to "improve the regulation, functioning, and transparency of financial and commodity markets". However, few concrete measures have been taken to date. France would like to place the fight against excessive commodity price volatility at the top of the 2011 G20 agenda.
How can commodity price volatility be combatted?
The G20 is the appropriate forum to deal with the issue of volatility, given that its members are major stakeholders on both oil and agricultural commodity markets. The G20 countries accounted for 54% of the world's agricultural surfaces, 65% of farmland and 77% of global production of grains in 2008.
By focusing on energy and agricultural commodities, France hopes to move forward in four critical areas:
- Improved regulation for commodity financial markets. There is no harmonised regulation for these markets, and some of them do not have a basic set of rules governing market abuses and price manipulations. Efforts are underway in the United States and in Europe. The goal of the French presidency is to define a common set of rules for both commodity and financial markets.
- Increased transparency for physical commodity markets. The lack of reliable international data concerning supply and demand trends on commodities markets hampers price formation and increases volatility. Improved information about the level of commodities stocks would also represent a real step forward.
- Better prevention and management of food crises. Growth in the supply of agricultural products in emerging countries is a first response, and one encouraged by France. Over and beyond this however, the most recent food crises have pointed to the lack of an international body that is sufficiently reactive to provide a collective response from governments, and to channel unilateral measures (export restrictions) that might prove to be counterproductive. The use of strategic and emergency food stocks to prevent and deal with food crises should be better coordinated at the international level. A meeting of the G20 agricultural ministers will be held in mid-2011 to offer answers to these critical issues.
- Stronger hedging instruments to provide better protection for the poorest populations against excessive price volatility. As chair, France will explore ways in which the poorest countries may benefit from new financial insurance instruments to protect themselves from price hikes and events that affect harvests.
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