mr. yium tavarolit - irco

7/29/2019 Mr. Yium Tavarolit - IRCo

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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


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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 variationfrom 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 regardto whether it is positive or negative).

Variations in prices become problematic

when they are large and cannot beanticipated, and they do not reflect market

fundamentals.

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As a result, they create a level of uncertaintywhich 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 andDecember 2010 pushed 44 billion individuals

below the extreme poverty line worldwide.

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What is volatility? (cont)


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What causes volatility?

Growing Population and Income in

Emerging Countries

FAO reported recently that agriculturalproductivity and low stocks in the

coming decades will grow at a slower

pace than demand for food that willresult in volatility around the uptrend.

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What causes volatility? (cont)

A Conflict between Demand for Food andFeed 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 bio-fuel 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,

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42.88

59.62

68.30

76.1778.71 78.03 76.22

85.17

94.06

102.56

86.76

94.07

102.93

93.4987.93

94.16

30

40

50

60

70

80

90

100

110

US$/Barrel


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Climate changeChanges in climatic and natural conditions

such as droughts, heat waves, and floods

have caused uncertainty of global foodproduction. 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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Exchange Rate MovementsU.S. dollar denominated international

commodity prices against other currencies

usually rise when the U.S. dollar weakensagainst other currencies. For

example, crude oil futures on New York

Mercantile Exchange will fall if the U.S.dollar strengthens.


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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 saywell functioning derivative markets for agricultural

commodities could play a significant role in

reducing or smoothing price fluctuations.


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The Nature of Market Structure

Focusing on agricultural products, there

are some natural characters that cause

price volatility as follows:-


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1. Inelastic supply: means a market

situation in which any increase ordecrease in the price of a good or

service does not result in a

corresponding increase or decreasein its supply;


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2. Production period: agricultural

production normally takes considerabletime. Supply cannot responds much to

price changes in the short-term, though

it can do so much more once theproduction cycle is complete;

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3. Natural shocks: agricultural

output varies from period to periodbecause of natural disasters such as

flooding, drought, diseases etc.

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Speculation on Commodity Markets

It is known that commodity prices

sometimes do not move in tandem withmarket fundamentals but market

sentiment, which is sometimes driven

by market players on commoditymarkets.


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To address price volatility throughinternational cooperation/international

institutions, the followings have to be

ensured that they will be adopted acrosscommodity exchanges and across

countries in order to avoid the migration

of participants and regulatory arbitrage.

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Strengthening International Discipline

Relevant international organizations/

institutions (WTO) and global leaders have

to resolve all forms of import and exportrestrictions, as well as domestic support

schemes that distort production

incentives, discourage supply in responseto market demand, constrain international

trade of food and agriculture products.

I. International Level

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Transparent International Financial

Systems

To develop commodity derivative

markets to function well, and asintended in terms of hedging and

price discovery, appropriate financial

regulations need to be in place acrossall relevant futures exchanges and

markets.

I. International Level (cont)

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Transparent International Financial

Systems

A question is how to regulate non-

commercial actors such as indexfunds, swap dealers, and money managers

in financial markets to trade on futures

markets transparently without amplifyingshort-term price swings that might lead to

price bubbles in some situations.


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Transparent Market Information

Reliable and up-to-date information oncrop supply, demand, stocks andexport availability could contribute toprice stability because information onthe current situation and outlook forglobal agriculture shapes expectations

about future prices and allows marketsto function more efficiently.


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Transparency in Futures Markets

Producers and consumers normallyhedge on futures markets so as tolower risks from price fluctuation, butspeculators buy and sell futurescontracts and take on the risk offuture price fluctuation to gain a risk

premium.


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Transparency in Futures Markets

To limit daily price changes and tolimit inventories held in deliverywarehouses by non-commercial

entities ( to limit market manipulationpossibility), compulsory guaranteedeposits, appropriate margin

calls, transparent market informationetc are the essential parts for curbingexcessive speculation on futuresmarkets.


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International Safety Nets

Contingency and compulsory financing

facilities provided and organized by

international organizations/institutionssuch as the World Bank, FAO etc are

important mechanisms that assist

countries to avoid food shortage, and tolower food spikes, especially in the

poorest and most vulnerable countries.


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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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Increase in Global Agricultural Production

to meet Global Consumption

At the same time, investment in non-

agriculture to enhance rural environmentfor human well being such as

education, sanitation and clean water

supply, health care etc are also a must.


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Reducing Policy Conflicts between Food

and Fuel

As a number of relevant crops such as

sugar cane, oilseeds, cassava and coursegrains could be consumed as both

energy and food/feed by utilizing the

same inputs, their prices haveskyrocketed until today.


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Reducing Policy Conflicts between Food

and Fuel

The International Food Policy Research

Institute (IFPRI) estimated that around30% of growth in prices over the period

2006 2008 was attributable to the bio-

fuel sector.


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Reducing Policy Conflicts between Food and

FuelTo moderate prices of these crops, it is

recommended that renewable fuels and feed

stocks should be produced where it iseconomically, environmentally, and socially

feasible, and is traded more freely. Scientific

research on alternative paths to reduce carbonemissions and to improve sustainability and

energy security should be accelerated, and more

efficient energy use is also encouraged.


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Reducing Policy Conflicts betweenFood and Fuel (cont)

Jean-Christophe Bureau, professor of

economics at Agro ParisTech warnsspeculators that they have to be aware

of rising oil prices that are inducing

producers to arbitrate in favor of bio-

diesel.


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Reducing Policy Conflicts betweenFood and Fuel (cont)

Furthermore, Matthew Beckwith points

out that the potential of GMOtechnology 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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National Trade Policy

To get rid of market distortions, countries haveto develop national regulatory and fiscal

policies to be legitimate and broadly owned by

relevant stakeholders, particularly thosepolicies that aim to restore trust in markets and

to avoid panic-driven behavior. The goal of the

policies is not to eliminate agricultural pricevolatility, but rather to reduce uncertainty, and

perhaps also the amplitude of variations by

smoothing out the extremes.

II. National Level

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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.

II. National Level (cont)

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Cooperation between Producing and

Consuming Countries

Cooperation between producing and

consuming countries to manage supplyand demand for agricultural commodities

is necessary. Proper planed investment in

increasing agricultural productivity is inurgency to sufficient and nutritious food.


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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 adynamic price band system, and

triggering interventions


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To eliminate speculation which is aroot 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

Conclusion

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References

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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 toReduce 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 YourAttention

mr. yium tavarolit - irco

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