Handbook of Multi-Commodity Markets and Products: Structuring, Trading and Risk Management

CHAPTER 9 Agricultural and Soft Markets

Francis Declerk

9.1 INTRODUCTION: STAKES AND OBJECTIVES

9.1.1 Stakes

Agricultural and soft product prices have strong business and social impacts: decisions of production, consumption and trade; food prices and world hunger. Beyond professionals (producers, manufacturers, distributors and retailers), consumers and particularly poor people are very sensitive to increases and volatility in agricultural commodity prices.

9.1.2 Objectives

The objective is to explain the dynamics of market prices and the management specificity of hedging tools.

9.1.2.1 Price Volatility is Common

Volatility in agricultural commodity prices is common, while price stability is rare. Risks taken by commodity producers and processors are high.

Commercial agreements following the World Trade Organization (WTO) framework and agricultural policies (such as the US Farm Bill and the EU Common Agricultural Policy) affect commodity price mechanisms. When agricultural commodity prices are quoted in US dollars, a professional operating outside the USD zone bears some risk due to the volatility of currency rates.

9.1.2.2 Different Ways to Manage Price Fluctuation Risks

In addition to the political protection afforded by the Common Agricultural Policy (CAP), such as the intervention price for grain, producers and processors have devised several ways to mitigate the impacts of commodity price volatility:

• securing public regulation with an adequate trade policy, farming ...