Françoise Gérard: "Tackling agricultural price volatility can help many farmers out of the poverty trap"

What are the consequences of agricultural market instability?

Françoise Gérard : Excessive price volatility and unpredictable markets are bad news for everyone. When prices are high, the consequences for poor consumers are catastrophic. When they are low, producers can no longer cover their costs. Unpredictable prices considerably hamper investment and innovation by farmers, which are crucial in improving economic performance and in modernizing farms. This vicious circle is largely responsible for the persistent poverty facing farmers in many countries. Increasing numbers of experts agree that addressing just the consequences of volatility, without tackling the causes, is extremely costly and as such well beyond the means of the poorest countries. Moreover, it is not enough just to look at the effects.

So we need to reduce agricultural price volatility, but what are the factors actually involved in these fluctuations?

F.G. : Economists all agree on the share of price instability that can be attributed to the dependence of yields on natural conditions: this is one of the characteristics of agricultural production. Such fluctuations are supposed to be less marked in a global market, and to self-regulate through trade, but a second source of price volatility runs counter to this rule. It is linked to forecasting errors by farmers, traders and speculators, which are more common than for any other type of product, precisely because of climate hazards. Generally speaking, increased prices are a symptom of increased demand. This is a signal for producers, who would be wise to invest. Except that the signal may in fact only be the result of a poor harvest. Investing in increasing production would in this case be counter-productive, and would only destabilize the market even further. The phenomenon is the same with traders and speculators, who have stocks to manage.
We have been studying these phenomena for a long time now, using mathematical models. This has shown that these fluctuations caused by forecasting errors worsen as markets grow larger. One might think that two markets in opposite phase would serve to balance prices, but in fact, quite the opposite happens. Shocks do not cancel each other out, they are amplified and become synchronized.

Was it this phenomenon that was behind the 2007-2008 price hike?

F.G. : In part, yes. Instability grows as markets start to panic. Prices fluctuate, which worries people, who tend to make the wrong decisions, such as stockpiling. We've all seen this phenomenon: countries ban exports, while households stockpile goods.

These conclusions have prompted you to defend direct intervention in agricultural markets…

F.G. : Yes. One possible means of regulation is to keep prices within a band set by negotiation between stakeholders. Fluctuations within that band make it possible to record useful information provided by the market. The lower threshold price allows producers to cover their costs and prevents any sudden bankruptcies among farmers who are in debt, while the upper threshold prevents consumers paying over the odds if prices rise sharply. Controlling this price band means intervening in overseas trade (imports and exports). However, this solution has several weak spots: the complexity of its implementation is compounded by a risk of over-production.
One other alternative is contract farming. The State undertakes to buy a share of national output, which is determined beforehand, at a minimum price. Any surplus is released onto the open market. This solution is also fairly complicated to implement, and may be open to abuse, particularly in poor countries, where the institutional structures are generally very weak. However, contracts could be signed with farmers' organizations, hence cutting transaction costs and making it possible to target the most vulnerable farmers.

In your study, you also analysed the agricultural market regulation experiments conducted in some fifteen countries. What is the overall conclusion?

F.G. : There are almost as many solutions that have been tried as countries concerned. Some work well, others less so, and for varying lengths of time. But on the whole, these regulatory mechanisms are more effective the more their implementation is transparent and is seen as legitimate. To this end, public policy has to be negotiated by the various agricultural market stakeholders. Relatively substantial financial resources are required, but then this is also the case for interventions aimed at reducing the effects of fluctuations. This could help tens of thousands of farmers out of the poverty trap of which they have been victims for too long, particularly in Africa.
The experts invited to the seminar confirmed the scientific validity of our work. What remains to do now is to draw up some clear recommendations that France could use in G20 discussions on these topics, particularly the need to encourage the poorest countries to develop ambitious agricultural policies that recognize the difficulties of self-regulation of agricultural markets.

Your work is all too relevant to the current situation, in which the international community is concerned about a possible sudden rise in the price of vital agricultural products... Are you also afraid of this?

F.G. : It's hard to say. Nowadays, the main characteristic of agricultural markets is their uncertainty. Uncertainty linked to climate change or how we are going to feed the planet between now and 2050, when our children's plates are already full of pesticides. We don't know whether the 2007-2008 price levels were a hiccup or the result of an increasing shortage of agricultural products. Fluctuations in those prices are merely a reflection of current uncertainties and the difficulty of self-regulation on these markets.

* The Groupement de recherche et d’échanges sur la régulation des marchés agricoles (GREMA) is a consortium of research organizations and NGOs, including CIRAD, the Groupe de recherche et d'échanges technologiques (GRET) and the Institut de recherches et d’applications des méthodes de développement (IRAM).

** The study was commissioned by the Agence française de développement, the Ministry of Foreign and European Affairs, the Ministry of Food, Agriculture and Fisheries, and the Ministry of the Economy, Industry and Employment.