Final Report Summary - ULYSSES (Understanding and coping with food markets voLatilitY towards more Stable World and EU food SystEmS)
Executive Summary:
The context of Project ULYSSES inception is the aftermath of the 2007-2009 food crisis. The world entered a new era of increased price volatility and markets instability, higher commodities prices and more intense globalization of food markets. Serious concerns in the international community, placing the food crisis on top of the agenda, gave rise to discussions about the desired degree of markets regulations, the scope and adequacy of WTO regulations, the impact on households and consumers of food prices increases – not to mention the exacerbation of hunger and malnutrition, and the rebalancing of the agro-food value chain.
Most policy proposals and responses were made with none or little scientific base about the drivers of food price instability, the transmission of volatility along the market chain, and the impact on consumers around the world.
Trying to broaden the understanding of food and agricultural markets instability, ULYSSES project reached several policy relevant conclusions:
1. Price volatility on agricultural markets is largely driven by factors which are specific to each market and to a large extent is country specific. There are two groups of factors affecting agricultural prices volatility: macroeconomic factors and fundamental factors affecting supply and demand. Each requires policy actions pursued in the right context and domain. Agricultural policies cannot influence macro-economic factors or regulatory frameworks of the financial markets. Price formation for the most important agricultural commodities takes place primarily on a global scale. This represents a considerable barrier for effective policy and suggests that a more promising approach relies on policies focused on helping producers and consumers to cope with price volatility, instead of preventing price volatility.
2. Targeting specific sensible policy variables, such as self-sufficiency rate, are not exempt from increasing uncertainty in the future. Specific policy goals might not be met and world markets would need to adjust to the new situations. Findings suggest that agricultural policies as well as the uncertainty around key market drivers (macroeconomic environment and yields impacts caused by climate change) have a significant impact on future price levels and volatility which is in line with the literature.
3. Projects’ results do not provide evidence that financialisation and speculation are among the most important drivers of increasing agricultural price volatility. In consequence, findings do not support notion the introduction of position limits would help in curbing price volatility on agricultural markets.
4. A wide consensus in the literature emerges for the role of stocks in explaining price volatility. This does not necessarily imply that storage polices are a viable policy option. It should be noted that there is not any statistically significant impact of the stocks kept in a single country. This might point to the futility of country specific buffer stocks.
5. Opportunities for policy intervention along the value chain are identified at the farm stage where a gap in risk management seems to exist. Although farmers can respond to price drop persistence for one year/production cycle or longer, their responses are of limited value if the directions of price changes are suddenly reversed between years/production cycles. Income stabilization tools are useful policy tools in this respect. Price risk perceptions, and consequent coping strategies, differ among agents in the food value chain.
6. Agricultural and food price transmission vary across member states. Differences were identified in cointegration significance and levels, long term elasticities and in the speed of adjustment. Transmission elasticities of world agricultural prices to domestic consumer prices also vary significantly across countries. It tends to be at around 0.25 in the Eurozone, and above 0.5 in the non-members of Eurozone.
7. There are six significant options for reducing price risks in Sub-Saharan African countries: warehouse receipt systems (WRS), commodity exchanges, contract farming, agricultural information systems (market information systems and weather forecast and early warning systems), grain stock management, and trade policies. The options to support producers are the following: financial services, insurance, technology development and adoption, and farm safety nets. No developing country has successfully reduced poverty without first increasing agricultural productivity, which in turn depends on effective management of price and production risks.
8. Market-based approaches are very important for dealing with unstable markets in low-income countries, but their implementation requires a series of preconditions and an enabling policy environment. The country experiences highlighted that these tools are not in place or are not fully developed in most African countries. Farmers are not sufficiently protected and this emphasizes the critical role that governments should play in agricultural risk management.
9. Results reveal that there is a significantly negative relationship between the probability of being less food deprived among EU households and increases consumer food price index, even if the household's disposable income, size and Member State are taken into account. Positive deviations of the index of consumer food prices above the general consumer food prices do also explain the probability of a household in lowest income quintile of suffering food deprivation.
10. Households in low-income countries would benefit more from preventing or limiting an increase in the level of the cereals/food prices/ rather than in reducing their volatility. The greater impact of a price change should not be a surprise as it has multiple, direct and indirect effects on the daily life of agricultural households, influencing both their production and consumption strategies. Conversely, the impact pathway of price volatility is less clear and evident because it is connected to the dynamic concept of risk and the unobservable household capacities to manage and cope with it. The recommendation naturally arising from this finding is to focus more on policies mitigating and coping with the effects of price surges.
Project Context and Objectives:
ULYSSES’ main objectives were:
1. Revise and assess the literature on prices volatility of food, feed and non-food commodities, including market fundamentals, drivers, impacts, measurements and methodologies.
2. Re-evaluate and analyse the 2007-2011 markets’ volatility, using updated data, new methods and new drivers linkages with a view to identify primary causes of markets' volatility, including market fundamentals, estimate impacts, and make projections for future drivers of causes of markets' volatility.
3. Identify and evaluate the drivers and factors causing markets volatility, and make projections for supply shocks, demand changes and climate change impacts on agricultural production, identifying the linkages between these and short- and long- markets volatility.
4. Evaluate the impact of prices volatility in the food supply chain in the EU, and in developing countries assessing the strategies used by agents to cope with markets' instability and suggesting policies that can potentially enhance their capacity to deal with market uncertainties.
5. Evaluate impacts of food and agricultural price volatility and price levels on EU consumers and households in selected developing countries.
6. Draw policy relevant conclusions that help the EU define specific market management strategies within the CAP after 2013 and inform the EU’s standing in international discussions within the G-20, FAO and other initiatives.
Project Results:
Policy implications of the drivers affecting price volatility
• ULYSSES results (Brümmer et al., 2013) and the literature reveal much heterogeneity. The development of price volatility over time differs a lot, as well as the impact of the potential drivers. This suggests that there is no general approach for managing and coping with excessive levels of price volatility in agricultural markets.
• One common pattern across all groups and markets within each group is the strong role played by lagged own price volatility. Price volatility on agricultural markets is largely driven by factors which are specific to each market (Brümmer et al., 2013). Thus, policies for limiting price volatility would have to be fine-tuned to the market in question.
• Empirical results show that different volatility measures indeed capture different aspects of price volatility (Brümmer et al., 2014).
• Price formation for the most important agricultural commodities takes place primarily on a global scale (Brümmer et al., 2013). This represents a considerable barrier for effective policy and suggests that a more promising approach relies on policies focused on helping producers and consumers to cope with price volatility, instead of preventing price volatility.
• There are significant variations of maize, wheat and rice domestic volatility in developing countries (Pierre et al., 2014). Maize is the most volatile, and Africa is the most unstable region (Ibid.). Looking at potential volatility drivers quantifying their impact by commodity or by continent, results highlight the influence of international prices volatility, oil prices volatility and yields on domestic prices stability.
• Price volatility and level for rice was higher in Africa than in Asia (except in Philippines) (Pierre et al., 2014). This is a problem especially for some countries in western Africa where rice is one of the most important staple foods.
• Implied volatility estimators reveal more valuable information about future price moves than historical estimators (Brümmer et al., 2014). Policy makers who are interested in foreseeing volatility can use market expectations (Geman and Ott, 2014). Forward looking volatility can be derived from option contracts traded on markets of agricultural derivative contracts. This implied volatility reveals market sentiment regarding the risk aversion to future agricultural price developments and hence contains useful information for policy makers.
• The application of implied risk measures still faces different challenges, especially for early warning systems (Brümmer et al., 2014): (a) the choice of an appropriate threshold level that defines “large” price moves, which should be made in light of potential consequences of a price change and may be a complex market specific issue; the threshold could be considered as a free parameter that can also change over time; (b) a clear limitation is the requirement of having reliable option prices, which limits the number of commodity markets that qualify for an application of implied risk measures.
Long-term drivers
• Targeting specific sensible policy variables, such as self-sufficiency rate, are not exempt from increasing uncertainty in the future. Specific policy goals might not be met and world markets would need to adjust to the new situations. Findings suggest that agricultural policies as well as the uncertainty around key market drivers (macroeconomic environment and yields) have a significant impact on future price levels and volatility which is in line with the literature (Araujo Enciso et al., 2014).
Biofuels
• Biofuel mandates have an influence on the price variation by establishing a link among the different domestic markets and the world market (Araujo Enciso et al. 2014). Analysis suggests that biofuel policies do indeed contribute to higher volatility spillovers from the oil market to key agricultural products (Saucedo et al., 2015). In episodes of amplified volatility, the impact of oil price volatility on agricultural markets, which are already suffering from higher price levels and inflated uncertainty, exacerbates the situation.
• Analysis of volatility spillovers suggests that mitigating measures, which have the potential to limit the transmission of price volatility from oil to agriculture, might constitute a politically feasible yet helpful approach (Saucedo et al., 2015). These measures could include a more flexible handling of blending requirements for biodiesel and bioethanol, an approach, which is already partially in use in Brazil and the US. Developing countries contemplating a stronger support to biofuels should take this into account when designing their policies (Saucedo et al., 2015).
Market Spillovers
• If considered in isolation, the oil volatility spillovers are higher especially in the after-crisis episode and affect mainly the maize market for the ethanol group and all the vegetable oils for the biodiesel group (Saucedo et al., 2015).
• In the ethanol group, maize is most strongly affected by oil price volatility spillovers (Saucedo et al., 2015). Shocks from the oil market may also be transmitted indirectly to wheat, because of its high degree of acreage competition in production with wheat and the (limited) substitutability in consumption between maize and wheat.
• In the case of the biodiesel feedstocks, oil price volatility is found to affect all main vegetable oils (Saucedo et al., 2015), especially at the beginning and at the end of the post-crisis period. This suggests that the high values of the spillover index for the biodiesel group come mainly from the shocks to soybean oil and palm oil, and the interaction between them.
• Rapeseed prices are much more stable in the observed period. Rapeseed oil is the main raw material for the EU biodiesel production (Saucedo et al., 2015).
The role of stocks
• A wide consensus in the literature emerges for the role of stocks in explaining price volatility (Brümmer et al., 2013). This does not necessarily imply that storage polices are a viable policy option. It should be noted that there is not any statistically significant impact of the stocks kept in a single country (the US stocks, which were included in several cases) (Brümmer et al., 2013). This might point to the futility of country specific buffer stocks.
• Holding global buffer stocks are unlikely to be viable because of their relatively high costs and the incentives for free-riding (Brümmer et al., 2013). Furthermore, given the drastic difference in the relative size of oil and agricultural markets, when oil markets drive agricultural price volatilities holding national stocks would have very limiting effects (Saucedo et al., 2015).
• The importance of improving the access to public information on stocks is supported by the findings on the explanatory effect of revisions of stock projections on maize’s price volatility (Brümmer et al., 2013).
Supply shocks and climate change
• Comparing simulation scenarios, results show that the magnitude of the carbon fertilization effect strongly influences the direction of projected price movements (Artavia et al., 2014). Results show less positive (or more negative) yield effects across EU regions compared to the world average, in line with findings from other studies. However, agri-food market projections to 2030 are sensitive to changes in crop productivity (Araujo Enciso et al., 2014) and climate change uncertainties, in particular to climate projections and the magnitude of the carbon fertilization effect.
• Economic simulations highlight that positive yield effects will be counterbalanced by crop price decreases and vice versa (Artavia et al., 2014). As a consequence, market forces and changes in competitive advantages can reverse the effects of yield changes, and even attenuate the effects of climate change at the global level. They would have divergent effects across regions and sectors, depending on the magnitude and direction of yield changes and their impact on productivity (Araujo Enciso et al., 2014).
• However, results should be interpreted cautiously because climate change only considered effects on average yields and do not take into account full adaptation to climate change (management practices adjustments, technical change, structural change) but only partial market induced adaptation (cropland allocation, input adjustments) (Artavia et al., 2014).
Early warning systems
• The methodology built up in the project (Brümmer et al., 2013) allows for estimating the normal and unexpected price moves. Because the results show that the magnitude of large price increases is expected to be larger than the magnitude of large price decreases and the mean probability of a large price move is well above 0.5 for all markets analysed, efforts to develop tools to predict the expected price spikes would provide a sound basis for developing early warning systems.
• Results suggest that the measure of volatility should be adapted to the targeted economic agent (German and Ott, 2014). As policy makers are concerned by the welfare of farmers and consumers, the realized volatility of agricultural commodities should be measured on the price level instead of the return of the price. Furthermore, differentiating volatilities on the time horizon of the risk borne by agents – within the crop year (intra-annual volatility) and beyond the crop year (inter-annual volatility) – is also relevant.
Value chain perspectives in the EU
• Policy measures and instruments targeted at improving markets' information and transparency, training to improve farmers’ ability to manage risk, and developing risk management instruments, as well as appropriate frameworks (economic, institutional, legislative) may lower the barriers to promote futures markets (Assefa et al., 2014; 2015).
• Opportunities for policy intervention are identified at the farm stage where a gap in risk management seems to exist (Assefa et al., 2014). Although farmers can respond to price drop persistence for one year/production cycle or longer, their responses are of limited value if the directions of price changes are suddenly reversed between years/production cycles. Income stabilization tools are useful policy tools in this respect. The single farm payment scheme currently in place is one such tool. Future policy support for whole-farm income insurance can be a future policy option.
• Further support of farmers to organize themselves in producer organizations and cooperatives is another policy option to allow farmers invest in the production of specialty products and create closer links with retailers bypassing the wholesale stage (Assefa et al., 2014). This can empower farmers vis-a-vis the downstream sector and help secure good and stable prices for their produces.
• Absence of active futures markets in relevant markets sectors (e.g. the German pork, Dutch cheese and Bulgarian wheat) is another risk management gap that could be filled with policy intervention (Assefa et al., 2014). Interest for these hedging instruments was expressed among wholesalers, farmers (German pig farmers) and processors (Dutch cheese processors) in these sectors.
• Better prediction of short and long-term drivers of price volatility and timely dissemination of price predictions can be useful to help chain actors better manage the risk from price volatility (Assefa et al., 2014). While predictions of long-term trends in prices are particularly useful for farm investment decisions, predictions of short-term price changes can support the downstream sector’s decisions on whether and when to enter into contracts and on whether to raise stock levels.
• Price transmission mechanisms vary across member states, in cointegration significance and levels, long term elasticities and in the speed of adjustment (Garcia-German et al., 2014). The differences are striking even among MS whose economies are closely integrated (for example Benelux and Germany; Spain and Portugal; and France and Italy).
• Transmission elasticities of world agricultural prices to domestic consumer prices also vary significantly across countries (Garcia-German et al., 2014). It tends to be at around 0.25 in the Eurozone, and above 0.5 in the non-members of Eurozone, suggesting that monetary policy and exchange rate stability provide a stronger cushion for world food price instability.
• Many of the strategies identified in field work and interviews with value agents involved following the spot market prices without fixing prices (Assefa et al., 2015). As a result, many of the strategies adopted do not reduce the price volatility faced by the chain actors. Results show nevertheless that price fixing contracts and hedging in derivative markets are effective instruments to reduce the price volatility faced by the chain actors. Encouraging the use of these two instruments could be an effective policy option.
Value chain perspectives in Low income countries
• The appropriate policy response to food price risk and instability will vary across and within countries because of differences in geography, patterns of food production and consumption and institutional capacity to implement alternative policies (Demeke et al., 2014).
• Policies should address structural problems, among which the most important are: (i) widening gap between domestic cereal supply and demand, (ii) marketing constraints, and (iii) political instability and policy uncertainties (Demeke et al., 2014).
• There are six significant options for reducing price risks in Sub-Saharan African countries (Antonci et al., 2015): warehouse receipt systems (WRS), commodity exchanges, contract farming, agricultural information systems (market information systems and weather forecast and early warning systems), grain stock management, and trade policies. The options to support producers are the following: financial services, insurance, technology development and adoption, and farm safety nets. No developing country has successfully reduced poverty without first increasing agricultural productivity, which in turn depends on effective management of price and production risks. Policies should contribute to designing a policy framework for the mitigation of the negative effects of volatile prices and production shocks.
• Market-based approaches are very important for dealing with unstable markets, but their implementation requires a series of preconditions and an enabling policy environment (Antonci et al., 2015). The country experiences highlighted that these tools are not in place or are not fully developed in most African countries. Farmers are not sufficiently protected and this emphasizes the critical role that governments should play in agricultural risk management.
• Governments should create a supportive institutional environment where modern risk management tools can thrive (Antonci et al., 2015). Investments in basic services, such as definition of grades and standards, contract enforcement and market information, will help sustain long-term market development. An effective legal framework and conducive business and economic environment would facilitate the development of solutions for risk-pooling/sharing. Policy makers need to adopt an integrated and holistic approach in support of risk management interventions through incentives and by strengthening agricultural markets and financial institutions.
• Most African governments have yet to include agricultural risk management policies in their national development plans (Antonci et al., 2015). Risk management tools need to be mainstreamed into agricultural policies and programmes in order to promote a paradigm shift towards an integrated approach of managing ‘development’ and ‘emergencies’. Enabling an efficient response to systemic risks, components of disaster risk management should be incorporated into national strategic plans. Besides large-scale emergency operations, they can improve farmers’ capacities to adapt to changing environmental pressures.
• Training of extension officers and farmers in hazard-affected communities is critical to encourage crop diversification, counter-season production, water harvesting and water conservation, the adoption of resistant seeds (against drought or floods), and generally to improve existing production techniques (Antonci et al., 2015). The recent move by the New Partnership for Africa’s Development (NEPAD) Planning and Coordination Agency (NPCA) to mainstream risk management policies and resilience building programmes into the Comprehensive Africa Agriculture Development Program (CAADP) investment plans is a step in the right direction.
• Information about modern risk management strategies in Africa is scarce and governments generally lack the capacity to manage agricultural risks (Antonci et al., 2015). Combined with high levels of price and production risks in Africa, the weaknesses provide a good case for comprehensive studies into risk profiles, assessment of risk management tools, legal framework and policy environment, the role of social protection, and risk management policies and strategies, which best suit the different political and economic contexts of African countries.
Impacts on consumers and households in the European Union
• Results reveal that there is a significantly negative relationship between the probability of being less food deprived and the consumer food price index, even if the household's disposable income, size and Member State are taken into account. Positive deviations of the index of consumer food prices above the general consumer food prices do also explain the probability of a household in lowest income quintile of suffering food deprivation (Garcia-German et al., 2015). Since wages and pensions are usually pegged to inflation rates, these results suggest that Member States should keep an eye to food prices and provide income, food or social assistance to the most vulnerable households when food prices rise consistently above inflation rates.
Low income countries
• Households would benefit more from preventing or limiting an increase in the level of the cereals/food prices/ rather than in reducing their volatility (Magrini et al., 2015). The greater impact of a price change should not be a surprise as it has multiple, direct and indirect effects on the daily life of agricultural households, influencing both their production and consumption strategies. Conversely, the impact pathway of price volatility is less clear and evident because it is connected to the dynamic concept of risk and the unobservable household capacities to manage and cope with it. The recommendation naturally arising from this finding is to focus more on policies mitigating and coping with the effects of price surges.
• Domestic markets of different countries have responded differently to this surge in international price volatility (Pierre et al., 2014). The sources, size, and consequences of food price instability vary substantially across and within countries. The appropriate policy response to food price risk and instability will also vary across and within countries because of differences in geography, patterns of food production and consumption, and institutional capacity to implement alternative policies.
• Policy responses in the wake of the food crisis have focused on short-term coping mechanism rather than addressing key structural problems, production variability, and market underdevelopment and failure (Demeke et al., 2014). Greater attention has been given to protecting consumers through policy measures such as reducing tariffs and VAT, releasing stocks, banning export, and undermining private sector thorough ad-hoc interventions with little regard to the impact of such measures on producers and traders. Unpredictable changes in policy and high price volatility have raised the cost of doing business in the area of grain marketing.
• Increasing agricultural productivity and preventing food crisis ‘rather than trying to cope after the fact with their impact on the poor is the only way to avoid substantial, perhaps permanent, damage to the welfare of poor households’(Demeke et al., 2014). Protecting consumers should not be done at the expense of addressing structural problems of increasing production and developing markets. Support to producers and market improvement has a long term benefit of increasing domestic supply and lowering prices for consumers.
Potential Impact:
Potential impact
Long-term drivers
• Uncertainty in the macroeconomic environment in large exporting countries, can translate into competiveness losses or gains due to exchange rates, thus imports can increase or decrease, and third countries can benefit from an excess in the world supply to increase their stocks when prices are low (Araujo Enciso et al., 2014)
The role of financialisation
• ULYSSES results do not provide evidence that financialisation and speculation are among the most important drivers of increasing agricultural price volatility (Brümmer et al., 2013). In consequence, findings do not support the notion that the introduction of position limits, a key element of the MIFID reform, would help in curbing price volatility on agricultural markets.
Biofuels
• The 2030 scenario with abolished biofuel mandates revealed that the mandates appear to be reducing uncertainty by setting strict consumption obligations. Without them, the strong uncertainty around crude oil prices is partially transmitted particularly to biodiesel, since it is less competitive than bioethanol (Artavia et al., 2014).
• With respect to biofuel mandates, although the results show negative trend in biodiesel price volatility at least in a short run, it should be admitted that this is possibly a consequence of the policy framework driven by EU renewable energy directive (Artavia et al., 2014). Therefore maintaining the current renewable energy policy could slightly reduce the price volatility of biodiesel.
• Results also show that an adjustment of biofuel prices could be expected with the removal of the mandates in the major pricing countries (EU, US, Brazil, Argentina, Australia, and Canada), which is particularly noticeable for biodiesel (Artavia et al., 2014). While removing the mandates has a minor impact on the consumption of bioethanol, as well as on its price level and uncertainty (since bioethanol prices are relatively competitive), for biodiesel the incentive for consuming at mandate-levels would disappear and the price uncertainty in case of biodiesel would increase.
Market Spillovers
• The analysis of volatility spillovers has clearly indicated that these spillovers between the products rarely follow a simple pattern (Saucedo et al., 2015). Episodes with notoriously high oil price fluctuations induce additional volatility in key agricultural markets.
• Structural problems have affected price levels and volatilities in Sub-Saharan Africa (SSA) ( Demeke et al., 2014). First, maize production variability has increased markedly in recent years in most countries with available data. Cereal production has also declined significantly in recent years in countries affected by political or civil conflicts. Because of commercial links (formal and informal trade), staple grain prices in some countries are affected by production declines and political turmoil in neighbouring countries. At the same time, demand has steadily increased due to high population growth and rapid urbanization in nearly all African countries. High- income growth in many countries has also contributed to the widening gap between demand and variable supply. Attempting to bridge the deficit through commercial import has widened the food trade deficit, raised the cost of staples, and increased vulnerability to international price volatility.
Value Chain Perspectives in the EU
• Risk perceptions are also quite different among agents in the value chain: farmers and retailers are concerned with persistent price deviations as risky, but wholesalers and processors fear more short-term price changes occurring during the production cycle. Strategies vary significantly across sectors too: farmers focus on survival strategies, through output and cost reduction; wholesalers and processors focus on adaptive strategies to stabilise margins, and retailers care to secure a continuous supply of quality produce for their customers. Overall, the findings suggest diversity in perceptions and strategies along EU food chains and challenges current assumptions that price volatility management strategies are limited to few traditional instruments. The results also showed that price volatility leads to the development of non-traditional types of strategies and to changes in the structure of the chains and in the competitive landscapes of EU food markets.
Value Chain Perspectives in Low income countries
• Inadequate national and regional markets in SSA exacerbate the problems of price rises (Demeke et al., 2014). High transport costs, inappropriate and high cost of storage, small-scale operations, high cost of finance, and limited access to information, among others, have contributed to price volatility and high price levels for consumers but low prices for producers. Neither the public nor the private sector maintains enough stock of grains to offset the impact of production variability on prices. Because of poor roads, lack of bulk transport systems, high cost of operating and maintenance costs, the cost of transport is significantly higher in SSA than elsewhere.
• The performance of food and agriculture is better in countries where public and private sector work together to stabilize prices (Demeke et al., 2014). Policy makers should also have a regional perspective to market development as grain trade ties are relatively strong among neighbouring countries. It is also important to realize that regional trade could help reduce price variation by spreading supplies across geographically dispersed markets.
Impacts on consumers and households in the European Union
• Poor households in the EU are vulnerable to food deprivation (not affording a meal with meat, chicken, fish (or vegetarian equivalent) every second day) and face difficulties to consume healthy food items (Garcia-German et al., 2015).
• Income and social support to children and vulnerable households should be major policy goal, although it is not clear that the European policy level is the most appropriate to address the problem of malnutrition and obesity.
• Based on the importance given by many authors to the percentage of food expenditure, it is clear that increasing food prices must have had notable impact in the households within the lowest income quintile in Romania, Lithuania, Bulgaria, Malta, Poland, Slovakia, and Estonia, reaching possibly to the median income household in Romania (Garcia-German et al., 2015).
• From a policy perspective, it is important to delve also into the retailers' strategies too, learning more about how the poorest urban consumers make use of the wide food choice they can find in EU cities and by rural households in less densely populated areas (Garcia-German et al., 2015).
Households impacts in Low income countries
• Welfare of farmers who rely on cereals-based food systems is determined by the interaction of several complex and interconnected factors, namely, consumer and producer price dynamics, the market structure, and the policy environment (Magrini et al., 2015). Understanding how these factors operate together is essential for policy makers engaged in delivering food security as part of their mandate. Hence, a deeper understanding of the forces influencing household responses to price shocks at micro level is a necessary step to better support policy intervention with evidence-based suggestions.
• The impact of price changes and price volatility on welfare should be analysed at domestic level because the country-specific structure of the economy plays a fundamental role (Magrini et al., 2015). Results suggest key variations across countries for the same price shocks and this heterogeneity depends on differences in the share of food expenditure over total consumption, the specific budget share devoted to cereals, the substitution effect among food items, and the relative number of net sellers and net buyers accessing the market.
Main dissemination results
The project has held and co-organised the following dissemination results:
a) Website and project IT's platform
IT’s platform aimed to develop an attractive website for external users and an intranet page for project members (team site) to share (discussion) documents. The website (www.fp7-ulysses.eu) was launched Spring 2013 and allowed external users to quickly grasp the objectives and up to date deliverables. All project deliverables were uploaded on the website on time.
Website includes:
• Videos with interviews
• All publications (working documents; scientific papers and policy briefs)
• Seminar presentations
In addition, ULYSSES project’s had a twitter account @ULYSSES7FP with 109 followers, and which issued 693 tweets. Through the Twitter account ULYSSES broadcasted the upcoming events of the project, the results obtained, presentations hold in the Seminars, video interviews with project members, and information related to food-price-volatility. Amongst our followers, we counted with general and specialized public, international agencies and institutions, specialized media, agro and food-security trend-settlers, specialized publishers, NGO’s, others project’s accounts and academic institutions.
Furthermore, “Ecoagra” (http://www.rediris.es/list/info/ecoagra.html) mail list was used to disseminate ULYSSES results and events, with 700 users. It has announced the publication of all working documents and events.
ULYSSES project partner, FARMD (Forum of Agricultural Risk Management and Development), an initiative of the World Bank Group, helped also to disseminate the activities and project’s outcomes worldwide, especially amongst specialists and researchers working on issues of special interest to developing and emerging countries. Its partnership was especially useful in the dissemination of ULYSSES 1st International Seminar (held in Madrid in March 2014).
The CommNet Project (http://commnet.eu) also helped ULYSSES to disseminate the scope and objectives of the project.
A YouTube channel was created to help disseminating the ULYSSES video materials (https://www.youtube.com/channel/UCb0tDbjxoa8i6ctmG87lkjQ).
b) Seminars and workshops:
1. Seminar in Madrid. March 27-28. “Food price volatility: Looking for viable policy approaches”.
It was design as a high-level seminar for debating about food agricultural markets volatility and thinking about future developments and scenarios with world class specialists, private and public sector officers from leading public and private institutions.
The event was co-organised by ULYSSES project, the Forum for Agricultural Risk Management and Development (the World Bank), and the Food and Agriculture Organization of the United Nations (FAO). Professionals from intl. Institutions and the European Commission, Ministries, NGOs and leading academic institutions, provided lectures on various topics and participate in the discussions.
The programme was designed to address both up to date research findings, and practical aspects towards developing policy responses to address the cause and effect of food prices volatility.
Goals of the Seminar:
• Present new results and evidence of the 2007-2008 food crises.
• Provide a venue for discussion the relevance and implications of the reassessment and new analyses with expanded and update databases.
• Facilitate a debate with analysts, politicians and practitioners about analytical tools, policy implications and the role of the private sector.
• Bring together researchers and practitioners from different institutions to discuss issues and approaches.
• Provide critical insight into ULYSSES' project approaches and findings.
Once the Seminar was finished, actions for results-dissemination and network development were implemented.
All papers and videos available from: https://www.agriskmanagementforum.org/content/international-seminar-food-price-volatility-looking-viable-policy-approaches
2. Rome. ULYSSES FAO Special Event. Looking beyond the food price crisis: rethinking the policy framework to address food markets instability (Wednesday, 11 February 2015 9:30-11:35)
Selected presentations are available at http://www.fp7-ulysses.eu/events.html
3, Brussels. June 24th 2015, 12:45-17:00h
Part I. Can agricultural policy cope with market volatility? Final dissemination seminar of the ULYSSES project.
Part II Deepening the analysis on agricultural market volatility. Final dissemination seminar of the ULYSSES project
Presentations are available at http://www.fp7-ulysses.eu/events.html
4. Milán. Scientific Conference at EXPO. Food and agricultural markets instability: Policies and regulation perspectives. 9-10 July 2015
The symposium was co-organized by the ULYSSES Project, the Università Cattolica del Sacro Cuore (UCSC), and the Joint Research Centre of the EC (JRC).
Selected presentations are available at http://www.fp7-ulysses.eu/events.html
c) Editing & publishing policy 5 briefings, one monograph, and a final report.
Aimed to publish policy briefs (5) and one monograph.
Policy briefings, all available from the webpage
Policy Briefing (1) Jul.2013 Food price volatility drivers in retrospect
Policy Briefing (2) Mar.2014 Long term drivers of food markets variability and uncertainty
Policy Briefing (3) Jul.2014 Agro-food chain actors’ perceptions of price volatility and their management strategies
Policy Briefing (4) Apr.2015 Analysis of material and food deprivation in the EU under food price volatility and rise
Policy Briefing (5) Apr.2015 Price Shocks, Volatility and Household Welfare: A Cross-Country Inquiry
Monograph. July 2015. Agricultural Markets Instability. Revisiting the Recent Food Crises. Edited by Alberto Garrido, Bernhard Brümmer, Robert M'Barek, Miranda Meuwissen, Cristian Morales-Opazo. In press.
It will be freely downloadable
Table of contents
1. Scope and Objectives
Alberto Garrido, Robert M'Barek, Isabel Bardají, Miranda Meuwissen, Cristian Morales-Opazo and José María Sumpsi
Part 1: Literature Reviews and New Findings
2. Volatility in the After-crisis Period: A Literature Review of Recent Empirical Research
Bernhard Brümmer, Olaf Korn, Kristina Schlüßler, Tinoush Jamali Jaghdani and Alberto Saucedo
3. Has Agricultural Price Volatility Increased since 2007?
Bernhard Brümmer, Ayca Donmez, Tinoush Jamali Jagdhani, Olaf Korn, Emiliano Magrini and Kristina Schlüssler
4. Medium-term Drivers of Food Markets Variability and Uncertainty
Sergio Rene Araujo Enciso, Maria Blanco, Marco Artavia, Fabien Ramos, Robert M'Barek, Ben Van Doorslaer, Lucian Stanca and Ayca Donmez
5. Transparency of Food Pricing in the European Union
Steve McCorriston and Stephan von Cramon-Taubadel
6. A Review of the Role of Contextual Factors on Price Volatility Transmission in Food Supply Chains
Tsion Taye Assefa, Miranda Meuwissen and Alfons G.J.M. Oude Lansink
7. Impacts of Increased Food Prices and Volatility on Consumers and Households
Sol García-Germán, Cristian Morales-Opazo, Alberto Garrido, Emiliano Magrini, Jean Balié and Isabel Bardají
Part 2: The Views of Some Stakeholders
8. Are Derivatives Introducing Distortions in Agricultural Markets?
Adamo Uboldi
9. The View of Farmers: German Pig Producers
Torsten Staack
10. Mitigating the Effects of Agricultural Price Volatility: A European Cereal Grower’s Point of View
Nicolas Ferenczi
11. Milk and Dairy Products’ Price Volatility:The View of a Large EU Cooperative
Wim Kloosterboer
12. Coping with Food Price Volatility: The Contribution of Local Food Reserves
Gabriel Pons Cortès and Itzíar Gómez Carrasco
Part 3: Policy Discussion and Conclusions
13. Assessment of National Policies in Developing Countries to Combat and Mitigate the Effects of Agricultural Markets Excessive Price Volatility
Mulat Demeke and Jean Balie
14. Price Volatility Perceptions, Management Strategies and Policy Options in EU Food Supply Chains
Tsion Taye Assefa, Miranda Meuwissen and Alfons G.J.M. Oude Lansink
15. Book Summary and ULYSSES Project's Conclusions
Plamen Mishev, Alberto Garrido, Nedka Ivanova and Milkana Mochurova
List of Websites:
http://www.fp7-ulysses.eu/
@ULYSSES7FP Twitter account
Youtube channel: https://www.youtube.com/channel/UCb0tDbjxoa8i6ctmG87lkjQ
Coordinator contact:
Prof. Alberto Garrido alberto.garrido@upm.es
+34 91 452 4900 (ext.1913 or 1918)
The context of Project ULYSSES inception is the aftermath of the 2007-2009 food crisis. The world entered a new era of increased price volatility and markets instability, higher commodities prices and more intense globalization of food markets. Serious concerns in the international community, placing the food crisis on top of the agenda, gave rise to discussions about the desired degree of markets regulations, the scope and adequacy of WTO regulations, the impact on households and consumers of food prices increases – not to mention the exacerbation of hunger and malnutrition, and the rebalancing of the agro-food value chain.
Most policy proposals and responses were made with none or little scientific base about the drivers of food price instability, the transmission of volatility along the market chain, and the impact on consumers around the world.
Trying to broaden the understanding of food and agricultural markets instability, ULYSSES project reached several policy relevant conclusions:
1. Price volatility on agricultural markets is largely driven by factors which are specific to each market and to a large extent is country specific. There are two groups of factors affecting agricultural prices volatility: macroeconomic factors and fundamental factors affecting supply and demand. Each requires policy actions pursued in the right context and domain. Agricultural policies cannot influence macro-economic factors or regulatory frameworks of the financial markets. Price formation for the most important agricultural commodities takes place primarily on a global scale. This represents a considerable barrier for effective policy and suggests that a more promising approach relies on policies focused on helping producers and consumers to cope with price volatility, instead of preventing price volatility.
2. Targeting specific sensible policy variables, such as self-sufficiency rate, are not exempt from increasing uncertainty in the future. Specific policy goals might not be met and world markets would need to adjust to the new situations. Findings suggest that agricultural policies as well as the uncertainty around key market drivers (macroeconomic environment and yields impacts caused by climate change) have a significant impact on future price levels and volatility which is in line with the literature.
3. Projects’ results do not provide evidence that financialisation and speculation are among the most important drivers of increasing agricultural price volatility. In consequence, findings do not support notion the introduction of position limits would help in curbing price volatility on agricultural markets.
4. A wide consensus in the literature emerges for the role of stocks in explaining price volatility. This does not necessarily imply that storage polices are a viable policy option. It should be noted that there is not any statistically significant impact of the stocks kept in a single country. This might point to the futility of country specific buffer stocks.
5. Opportunities for policy intervention along the value chain are identified at the farm stage where a gap in risk management seems to exist. Although farmers can respond to price drop persistence for one year/production cycle or longer, their responses are of limited value if the directions of price changes are suddenly reversed between years/production cycles. Income stabilization tools are useful policy tools in this respect. Price risk perceptions, and consequent coping strategies, differ among agents in the food value chain.
6. Agricultural and food price transmission vary across member states. Differences were identified in cointegration significance and levels, long term elasticities and in the speed of adjustment. Transmission elasticities of world agricultural prices to domestic consumer prices also vary significantly across countries. It tends to be at around 0.25 in the Eurozone, and above 0.5 in the non-members of Eurozone.
7. There are six significant options for reducing price risks in Sub-Saharan African countries: warehouse receipt systems (WRS), commodity exchanges, contract farming, agricultural information systems (market information systems and weather forecast and early warning systems), grain stock management, and trade policies. The options to support producers are the following: financial services, insurance, technology development and adoption, and farm safety nets. No developing country has successfully reduced poverty without first increasing agricultural productivity, which in turn depends on effective management of price and production risks.
8. Market-based approaches are very important for dealing with unstable markets in low-income countries, but their implementation requires a series of preconditions and an enabling policy environment. The country experiences highlighted that these tools are not in place or are not fully developed in most African countries. Farmers are not sufficiently protected and this emphasizes the critical role that governments should play in agricultural risk management.
9. Results reveal that there is a significantly negative relationship between the probability of being less food deprived among EU households and increases consumer food price index, even if the household's disposable income, size and Member State are taken into account. Positive deviations of the index of consumer food prices above the general consumer food prices do also explain the probability of a household in lowest income quintile of suffering food deprivation.
10. Households in low-income countries would benefit more from preventing or limiting an increase in the level of the cereals/food prices/ rather than in reducing their volatility. The greater impact of a price change should not be a surprise as it has multiple, direct and indirect effects on the daily life of agricultural households, influencing both their production and consumption strategies. Conversely, the impact pathway of price volatility is less clear and evident because it is connected to the dynamic concept of risk and the unobservable household capacities to manage and cope with it. The recommendation naturally arising from this finding is to focus more on policies mitigating and coping with the effects of price surges.
Project Context and Objectives:
ULYSSES’ main objectives were:
1. Revise and assess the literature on prices volatility of food, feed and non-food commodities, including market fundamentals, drivers, impacts, measurements and methodologies.
2. Re-evaluate and analyse the 2007-2011 markets’ volatility, using updated data, new methods and new drivers linkages with a view to identify primary causes of markets' volatility, including market fundamentals, estimate impacts, and make projections for future drivers of causes of markets' volatility.
3. Identify and evaluate the drivers and factors causing markets volatility, and make projections for supply shocks, demand changes and climate change impacts on agricultural production, identifying the linkages between these and short- and long- markets volatility.
4. Evaluate the impact of prices volatility in the food supply chain in the EU, and in developing countries assessing the strategies used by agents to cope with markets' instability and suggesting policies that can potentially enhance their capacity to deal with market uncertainties.
5. Evaluate impacts of food and agricultural price volatility and price levels on EU consumers and households in selected developing countries.
6. Draw policy relevant conclusions that help the EU define specific market management strategies within the CAP after 2013 and inform the EU’s standing in international discussions within the G-20, FAO and other initiatives.
Project Results:
Policy implications of the drivers affecting price volatility
• ULYSSES results (Brümmer et al., 2013) and the literature reveal much heterogeneity. The development of price volatility over time differs a lot, as well as the impact of the potential drivers. This suggests that there is no general approach for managing and coping with excessive levels of price volatility in agricultural markets.
• One common pattern across all groups and markets within each group is the strong role played by lagged own price volatility. Price volatility on agricultural markets is largely driven by factors which are specific to each market (Brümmer et al., 2013). Thus, policies for limiting price volatility would have to be fine-tuned to the market in question.
• Empirical results show that different volatility measures indeed capture different aspects of price volatility (Brümmer et al., 2014).
• Price formation for the most important agricultural commodities takes place primarily on a global scale (Brümmer et al., 2013). This represents a considerable barrier for effective policy and suggests that a more promising approach relies on policies focused on helping producers and consumers to cope with price volatility, instead of preventing price volatility.
• There are significant variations of maize, wheat and rice domestic volatility in developing countries (Pierre et al., 2014). Maize is the most volatile, and Africa is the most unstable region (Ibid.). Looking at potential volatility drivers quantifying their impact by commodity or by continent, results highlight the influence of international prices volatility, oil prices volatility and yields on domestic prices stability.
• Price volatility and level for rice was higher in Africa than in Asia (except in Philippines) (Pierre et al., 2014). This is a problem especially for some countries in western Africa where rice is one of the most important staple foods.
• Implied volatility estimators reveal more valuable information about future price moves than historical estimators (Brümmer et al., 2014). Policy makers who are interested in foreseeing volatility can use market expectations (Geman and Ott, 2014). Forward looking volatility can be derived from option contracts traded on markets of agricultural derivative contracts. This implied volatility reveals market sentiment regarding the risk aversion to future agricultural price developments and hence contains useful information for policy makers.
• The application of implied risk measures still faces different challenges, especially for early warning systems (Brümmer et al., 2014): (a) the choice of an appropriate threshold level that defines “large” price moves, which should be made in light of potential consequences of a price change and may be a complex market specific issue; the threshold could be considered as a free parameter that can also change over time; (b) a clear limitation is the requirement of having reliable option prices, which limits the number of commodity markets that qualify for an application of implied risk measures.
Long-term drivers
• Targeting specific sensible policy variables, such as self-sufficiency rate, are not exempt from increasing uncertainty in the future. Specific policy goals might not be met and world markets would need to adjust to the new situations. Findings suggest that agricultural policies as well as the uncertainty around key market drivers (macroeconomic environment and yields) have a significant impact on future price levels and volatility which is in line with the literature (Araujo Enciso et al., 2014).
Biofuels
• Biofuel mandates have an influence on the price variation by establishing a link among the different domestic markets and the world market (Araujo Enciso et al. 2014). Analysis suggests that biofuel policies do indeed contribute to higher volatility spillovers from the oil market to key agricultural products (Saucedo et al., 2015). In episodes of amplified volatility, the impact of oil price volatility on agricultural markets, which are already suffering from higher price levels and inflated uncertainty, exacerbates the situation.
• Analysis of volatility spillovers suggests that mitigating measures, which have the potential to limit the transmission of price volatility from oil to agriculture, might constitute a politically feasible yet helpful approach (Saucedo et al., 2015). These measures could include a more flexible handling of blending requirements for biodiesel and bioethanol, an approach, which is already partially in use in Brazil and the US. Developing countries contemplating a stronger support to biofuels should take this into account when designing their policies (Saucedo et al., 2015).
Market Spillovers
• If considered in isolation, the oil volatility spillovers are higher especially in the after-crisis episode and affect mainly the maize market for the ethanol group and all the vegetable oils for the biodiesel group (Saucedo et al., 2015).
• In the ethanol group, maize is most strongly affected by oil price volatility spillovers (Saucedo et al., 2015). Shocks from the oil market may also be transmitted indirectly to wheat, because of its high degree of acreage competition in production with wheat and the (limited) substitutability in consumption between maize and wheat.
• In the case of the biodiesel feedstocks, oil price volatility is found to affect all main vegetable oils (Saucedo et al., 2015), especially at the beginning and at the end of the post-crisis period. This suggests that the high values of the spillover index for the biodiesel group come mainly from the shocks to soybean oil and palm oil, and the interaction between them.
• Rapeseed prices are much more stable in the observed period. Rapeseed oil is the main raw material for the EU biodiesel production (Saucedo et al., 2015).
The role of stocks
• A wide consensus in the literature emerges for the role of stocks in explaining price volatility (Brümmer et al., 2013). This does not necessarily imply that storage polices are a viable policy option. It should be noted that there is not any statistically significant impact of the stocks kept in a single country (the US stocks, which were included in several cases) (Brümmer et al., 2013). This might point to the futility of country specific buffer stocks.
• Holding global buffer stocks are unlikely to be viable because of their relatively high costs and the incentives for free-riding (Brümmer et al., 2013). Furthermore, given the drastic difference in the relative size of oil and agricultural markets, when oil markets drive agricultural price volatilities holding national stocks would have very limiting effects (Saucedo et al., 2015).
• The importance of improving the access to public information on stocks is supported by the findings on the explanatory effect of revisions of stock projections on maize’s price volatility (Brümmer et al., 2013).
Supply shocks and climate change
• Comparing simulation scenarios, results show that the magnitude of the carbon fertilization effect strongly influences the direction of projected price movements (Artavia et al., 2014). Results show less positive (or more negative) yield effects across EU regions compared to the world average, in line with findings from other studies. However, agri-food market projections to 2030 are sensitive to changes in crop productivity (Araujo Enciso et al., 2014) and climate change uncertainties, in particular to climate projections and the magnitude of the carbon fertilization effect.
• Economic simulations highlight that positive yield effects will be counterbalanced by crop price decreases and vice versa (Artavia et al., 2014). As a consequence, market forces and changes in competitive advantages can reverse the effects of yield changes, and even attenuate the effects of climate change at the global level. They would have divergent effects across regions and sectors, depending on the magnitude and direction of yield changes and their impact on productivity (Araujo Enciso et al., 2014).
• However, results should be interpreted cautiously because climate change only considered effects on average yields and do not take into account full adaptation to climate change (management practices adjustments, technical change, structural change) but only partial market induced adaptation (cropland allocation, input adjustments) (Artavia et al., 2014).
Early warning systems
• The methodology built up in the project (Brümmer et al., 2013) allows for estimating the normal and unexpected price moves. Because the results show that the magnitude of large price increases is expected to be larger than the magnitude of large price decreases and the mean probability of a large price move is well above 0.5 for all markets analysed, efforts to develop tools to predict the expected price spikes would provide a sound basis for developing early warning systems.
• Results suggest that the measure of volatility should be adapted to the targeted economic agent (German and Ott, 2014). As policy makers are concerned by the welfare of farmers and consumers, the realized volatility of agricultural commodities should be measured on the price level instead of the return of the price. Furthermore, differentiating volatilities on the time horizon of the risk borne by agents – within the crop year (intra-annual volatility) and beyond the crop year (inter-annual volatility) – is also relevant.
Value chain perspectives in the EU
• Policy measures and instruments targeted at improving markets' information and transparency, training to improve farmers’ ability to manage risk, and developing risk management instruments, as well as appropriate frameworks (economic, institutional, legislative) may lower the barriers to promote futures markets (Assefa et al., 2014; 2015).
• Opportunities for policy intervention are identified at the farm stage where a gap in risk management seems to exist (Assefa et al., 2014). Although farmers can respond to price drop persistence for one year/production cycle or longer, their responses are of limited value if the directions of price changes are suddenly reversed between years/production cycles. Income stabilization tools are useful policy tools in this respect. The single farm payment scheme currently in place is one such tool. Future policy support for whole-farm income insurance can be a future policy option.
• Further support of farmers to organize themselves in producer organizations and cooperatives is another policy option to allow farmers invest in the production of specialty products and create closer links with retailers bypassing the wholesale stage (Assefa et al., 2014). This can empower farmers vis-a-vis the downstream sector and help secure good and stable prices for their produces.
• Absence of active futures markets in relevant markets sectors (e.g. the German pork, Dutch cheese and Bulgarian wheat) is another risk management gap that could be filled with policy intervention (Assefa et al., 2014). Interest for these hedging instruments was expressed among wholesalers, farmers (German pig farmers) and processors (Dutch cheese processors) in these sectors.
• Better prediction of short and long-term drivers of price volatility and timely dissemination of price predictions can be useful to help chain actors better manage the risk from price volatility (Assefa et al., 2014). While predictions of long-term trends in prices are particularly useful for farm investment decisions, predictions of short-term price changes can support the downstream sector’s decisions on whether and when to enter into contracts and on whether to raise stock levels.
• Price transmission mechanisms vary across member states, in cointegration significance and levels, long term elasticities and in the speed of adjustment (Garcia-German et al., 2014). The differences are striking even among MS whose economies are closely integrated (for example Benelux and Germany; Spain and Portugal; and France and Italy).
• Transmission elasticities of world agricultural prices to domestic consumer prices also vary significantly across countries (Garcia-German et al., 2014). It tends to be at around 0.25 in the Eurozone, and above 0.5 in the non-members of Eurozone, suggesting that monetary policy and exchange rate stability provide a stronger cushion for world food price instability.
• Many of the strategies identified in field work and interviews with value agents involved following the spot market prices without fixing prices (Assefa et al., 2015). As a result, many of the strategies adopted do not reduce the price volatility faced by the chain actors. Results show nevertheless that price fixing contracts and hedging in derivative markets are effective instruments to reduce the price volatility faced by the chain actors. Encouraging the use of these two instruments could be an effective policy option.
Value chain perspectives in Low income countries
• The appropriate policy response to food price risk and instability will vary across and within countries because of differences in geography, patterns of food production and consumption and institutional capacity to implement alternative policies (Demeke et al., 2014).
• Policies should address structural problems, among which the most important are: (i) widening gap between domestic cereal supply and demand, (ii) marketing constraints, and (iii) political instability and policy uncertainties (Demeke et al., 2014).
• There are six significant options for reducing price risks in Sub-Saharan African countries (Antonci et al., 2015): warehouse receipt systems (WRS), commodity exchanges, contract farming, agricultural information systems (market information systems and weather forecast and early warning systems), grain stock management, and trade policies. The options to support producers are the following: financial services, insurance, technology development and adoption, and farm safety nets. No developing country has successfully reduced poverty without first increasing agricultural productivity, which in turn depends on effective management of price and production risks. Policies should contribute to designing a policy framework for the mitigation of the negative effects of volatile prices and production shocks.
• Market-based approaches are very important for dealing with unstable markets, but their implementation requires a series of preconditions and an enabling policy environment (Antonci et al., 2015). The country experiences highlighted that these tools are not in place or are not fully developed in most African countries. Farmers are not sufficiently protected and this emphasizes the critical role that governments should play in agricultural risk management.
• Governments should create a supportive institutional environment where modern risk management tools can thrive (Antonci et al., 2015). Investments in basic services, such as definition of grades and standards, contract enforcement and market information, will help sustain long-term market development. An effective legal framework and conducive business and economic environment would facilitate the development of solutions for risk-pooling/sharing. Policy makers need to adopt an integrated and holistic approach in support of risk management interventions through incentives and by strengthening agricultural markets and financial institutions.
• Most African governments have yet to include agricultural risk management policies in their national development plans (Antonci et al., 2015). Risk management tools need to be mainstreamed into agricultural policies and programmes in order to promote a paradigm shift towards an integrated approach of managing ‘development’ and ‘emergencies’. Enabling an efficient response to systemic risks, components of disaster risk management should be incorporated into national strategic plans. Besides large-scale emergency operations, they can improve farmers’ capacities to adapt to changing environmental pressures.
• Training of extension officers and farmers in hazard-affected communities is critical to encourage crop diversification, counter-season production, water harvesting and water conservation, the adoption of resistant seeds (against drought or floods), and generally to improve existing production techniques (Antonci et al., 2015). The recent move by the New Partnership for Africa’s Development (NEPAD) Planning and Coordination Agency (NPCA) to mainstream risk management policies and resilience building programmes into the Comprehensive Africa Agriculture Development Program (CAADP) investment plans is a step in the right direction.
• Information about modern risk management strategies in Africa is scarce and governments generally lack the capacity to manage agricultural risks (Antonci et al., 2015). Combined with high levels of price and production risks in Africa, the weaknesses provide a good case for comprehensive studies into risk profiles, assessment of risk management tools, legal framework and policy environment, the role of social protection, and risk management policies and strategies, which best suit the different political and economic contexts of African countries.
Impacts on consumers and households in the European Union
• Results reveal that there is a significantly negative relationship between the probability of being less food deprived and the consumer food price index, even if the household's disposable income, size and Member State are taken into account. Positive deviations of the index of consumer food prices above the general consumer food prices do also explain the probability of a household in lowest income quintile of suffering food deprivation (Garcia-German et al., 2015). Since wages and pensions are usually pegged to inflation rates, these results suggest that Member States should keep an eye to food prices and provide income, food or social assistance to the most vulnerable households when food prices rise consistently above inflation rates.
Low income countries
• Households would benefit more from preventing or limiting an increase in the level of the cereals/food prices/ rather than in reducing their volatility (Magrini et al., 2015). The greater impact of a price change should not be a surprise as it has multiple, direct and indirect effects on the daily life of agricultural households, influencing both their production and consumption strategies. Conversely, the impact pathway of price volatility is less clear and evident because it is connected to the dynamic concept of risk and the unobservable household capacities to manage and cope with it. The recommendation naturally arising from this finding is to focus more on policies mitigating and coping with the effects of price surges.
• Domestic markets of different countries have responded differently to this surge in international price volatility (Pierre et al., 2014). The sources, size, and consequences of food price instability vary substantially across and within countries. The appropriate policy response to food price risk and instability will also vary across and within countries because of differences in geography, patterns of food production and consumption, and institutional capacity to implement alternative policies.
• Policy responses in the wake of the food crisis have focused on short-term coping mechanism rather than addressing key structural problems, production variability, and market underdevelopment and failure (Demeke et al., 2014). Greater attention has been given to protecting consumers through policy measures such as reducing tariffs and VAT, releasing stocks, banning export, and undermining private sector thorough ad-hoc interventions with little regard to the impact of such measures on producers and traders. Unpredictable changes in policy and high price volatility have raised the cost of doing business in the area of grain marketing.
• Increasing agricultural productivity and preventing food crisis ‘rather than trying to cope after the fact with their impact on the poor is the only way to avoid substantial, perhaps permanent, damage to the welfare of poor households’(Demeke et al., 2014). Protecting consumers should not be done at the expense of addressing structural problems of increasing production and developing markets. Support to producers and market improvement has a long term benefit of increasing domestic supply and lowering prices for consumers.
Potential Impact:
Potential impact
Long-term drivers
• Uncertainty in the macroeconomic environment in large exporting countries, can translate into competiveness losses or gains due to exchange rates, thus imports can increase or decrease, and third countries can benefit from an excess in the world supply to increase their stocks when prices are low (Araujo Enciso et al., 2014)
The role of financialisation
• ULYSSES results do not provide evidence that financialisation and speculation are among the most important drivers of increasing agricultural price volatility (Brümmer et al., 2013). In consequence, findings do not support the notion that the introduction of position limits, a key element of the MIFID reform, would help in curbing price volatility on agricultural markets.
Biofuels
• The 2030 scenario with abolished biofuel mandates revealed that the mandates appear to be reducing uncertainty by setting strict consumption obligations. Without them, the strong uncertainty around crude oil prices is partially transmitted particularly to biodiesel, since it is less competitive than bioethanol (Artavia et al., 2014).
• With respect to biofuel mandates, although the results show negative trend in biodiesel price volatility at least in a short run, it should be admitted that this is possibly a consequence of the policy framework driven by EU renewable energy directive (Artavia et al., 2014). Therefore maintaining the current renewable energy policy could slightly reduce the price volatility of biodiesel.
• Results also show that an adjustment of biofuel prices could be expected with the removal of the mandates in the major pricing countries (EU, US, Brazil, Argentina, Australia, and Canada), which is particularly noticeable for biodiesel (Artavia et al., 2014). While removing the mandates has a minor impact on the consumption of bioethanol, as well as on its price level and uncertainty (since bioethanol prices are relatively competitive), for biodiesel the incentive for consuming at mandate-levels would disappear and the price uncertainty in case of biodiesel would increase.
Market Spillovers
• The analysis of volatility spillovers has clearly indicated that these spillovers between the products rarely follow a simple pattern (Saucedo et al., 2015). Episodes with notoriously high oil price fluctuations induce additional volatility in key agricultural markets.
• Structural problems have affected price levels and volatilities in Sub-Saharan Africa (SSA) ( Demeke et al., 2014). First, maize production variability has increased markedly in recent years in most countries with available data. Cereal production has also declined significantly in recent years in countries affected by political or civil conflicts. Because of commercial links (formal and informal trade), staple grain prices in some countries are affected by production declines and political turmoil in neighbouring countries. At the same time, demand has steadily increased due to high population growth and rapid urbanization in nearly all African countries. High- income growth in many countries has also contributed to the widening gap between demand and variable supply. Attempting to bridge the deficit through commercial import has widened the food trade deficit, raised the cost of staples, and increased vulnerability to international price volatility.
Value Chain Perspectives in the EU
• Risk perceptions are also quite different among agents in the value chain: farmers and retailers are concerned with persistent price deviations as risky, but wholesalers and processors fear more short-term price changes occurring during the production cycle. Strategies vary significantly across sectors too: farmers focus on survival strategies, through output and cost reduction; wholesalers and processors focus on adaptive strategies to stabilise margins, and retailers care to secure a continuous supply of quality produce for their customers. Overall, the findings suggest diversity in perceptions and strategies along EU food chains and challenges current assumptions that price volatility management strategies are limited to few traditional instruments. The results also showed that price volatility leads to the development of non-traditional types of strategies and to changes in the structure of the chains and in the competitive landscapes of EU food markets.
Value Chain Perspectives in Low income countries
• Inadequate national and regional markets in SSA exacerbate the problems of price rises (Demeke et al., 2014). High transport costs, inappropriate and high cost of storage, small-scale operations, high cost of finance, and limited access to information, among others, have contributed to price volatility and high price levels for consumers but low prices for producers. Neither the public nor the private sector maintains enough stock of grains to offset the impact of production variability on prices. Because of poor roads, lack of bulk transport systems, high cost of operating and maintenance costs, the cost of transport is significantly higher in SSA than elsewhere.
• The performance of food and agriculture is better in countries where public and private sector work together to stabilize prices (Demeke et al., 2014). Policy makers should also have a regional perspective to market development as grain trade ties are relatively strong among neighbouring countries. It is also important to realize that regional trade could help reduce price variation by spreading supplies across geographically dispersed markets.
Impacts on consumers and households in the European Union
• Poor households in the EU are vulnerable to food deprivation (not affording a meal with meat, chicken, fish (or vegetarian equivalent) every second day) and face difficulties to consume healthy food items (Garcia-German et al., 2015).
• Income and social support to children and vulnerable households should be major policy goal, although it is not clear that the European policy level is the most appropriate to address the problem of malnutrition and obesity.
• Based on the importance given by many authors to the percentage of food expenditure, it is clear that increasing food prices must have had notable impact in the households within the lowest income quintile in Romania, Lithuania, Bulgaria, Malta, Poland, Slovakia, and Estonia, reaching possibly to the median income household in Romania (Garcia-German et al., 2015).
• From a policy perspective, it is important to delve also into the retailers' strategies too, learning more about how the poorest urban consumers make use of the wide food choice they can find in EU cities and by rural households in less densely populated areas (Garcia-German et al., 2015).
Households impacts in Low income countries
• Welfare of farmers who rely on cereals-based food systems is determined by the interaction of several complex and interconnected factors, namely, consumer and producer price dynamics, the market structure, and the policy environment (Magrini et al., 2015). Understanding how these factors operate together is essential for policy makers engaged in delivering food security as part of their mandate. Hence, a deeper understanding of the forces influencing household responses to price shocks at micro level is a necessary step to better support policy intervention with evidence-based suggestions.
• The impact of price changes and price volatility on welfare should be analysed at domestic level because the country-specific structure of the economy plays a fundamental role (Magrini et al., 2015). Results suggest key variations across countries for the same price shocks and this heterogeneity depends on differences in the share of food expenditure over total consumption, the specific budget share devoted to cereals, the substitution effect among food items, and the relative number of net sellers and net buyers accessing the market.
Main dissemination results
The project has held and co-organised the following dissemination results:
a) Website and project IT's platform
IT’s platform aimed to develop an attractive website for external users and an intranet page for project members (team site) to share (discussion) documents. The website (www.fp7-ulysses.eu) was launched Spring 2013 and allowed external users to quickly grasp the objectives and up to date deliverables. All project deliverables were uploaded on the website on time.
Website includes:
• Videos with interviews
• All publications (working documents; scientific papers and policy briefs)
• Seminar presentations
In addition, ULYSSES project’s had a twitter account @ULYSSES7FP with 109 followers, and which issued 693 tweets. Through the Twitter account ULYSSES broadcasted the upcoming events of the project, the results obtained, presentations hold in the Seminars, video interviews with project members, and information related to food-price-volatility. Amongst our followers, we counted with general and specialized public, international agencies and institutions, specialized media, agro and food-security trend-settlers, specialized publishers, NGO’s, others project’s accounts and academic institutions.
Furthermore, “Ecoagra” (http://www.rediris.es/list/info/ecoagra.html) mail list was used to disseminate ULYSSES results and events, with 700 users. It has announced the publication of all working documents and events.
ULYSSES project partner, FARMD (Forum of Agricultural Risk Management and Development), an initiative of the World Bank Group, helped also to disseminate the activities and project’s outcomes worldwide, especially amongst specialists and researchers working on issues of special interest to developing and emerging countries. Its partnership was especially useful in the dissemination of ULYSSES 1st International Seminar (held in Madrid in March 2014).
The CommNet Project (http://commnet.eu) also helped ULYSSES to disseminate the scope and objectives of the project.
A YouTube channel was created to help disseminating the ULYSSES video materials (https://www.youtube.com/channel/UCb0tDbjxoa8i6ctmG87lkjQ).
b) Seminars and workshops:
1. Seminar in Madrid. March 27-28. “Food price volatility: Looking for viable policy approaches”.
It was design as a high-level seminar for debating about food agricultural markets volatility and thinking about future developments and scenarios with world class specialists, private and public sector officers from leading public and private institutions.
The event was co-organised by ULYSSES project, the Forum for Agricultural Risk Management and Development (the World Bank), and the Food and Agriculture Organization of the United Nations (FAO). Professionals from intl. Institutions and the European Commission, Ministries, NGOs and leading academic institutions, provided lectures on various topics and participate in the discussions.
The programme was designed to address both up to date research findings, and practical aspects towards developing policy responses to address the cause and effect of food prices volatility.
Goals of the Seminar:
• Present new results and evidence of the 2007-2008 food crises.
• Provide a venue for discussion the relevance and implications of the reassessment and new analyses with expanded and update databases.
• Facilitate a debate with analysts, politicians and practitioners about analytical tools, policy implications and the role of the private sector.
• Bring together researchers and practitioners from different institutions to discuss issues and approaches.
• Provide critical insight into ULYSSES' project approaches and findings.
Once the Seminar was finished, actions for results-dissemination and network development were implemented.
All papers and videos available from: https://www.agriskmanagementforum.org/content/international-seminar-food-price-volatility-looking-viable-policy-approaches
2. Rome. ULYSSES FAO Special Event. Looking beyond the food price crisis: rethinking the policy framework to address food markets instability (Wednesday, 11 February 2015 9:30-11:35)
Selected presentations are available at http://www.fp7-ulysses.eu/events.html
3, Brussels. June 24th 2015, 12:45-17:00h
Part I. Can agricultural policy cope with market volatility? Final dissemination seminar of the ULYSSES project.
Part II Deepening the analysis on agricultural market volatility. Final dissemination seminar of the ULYSSES project
Presentations are available at http://www.fp7-ulysses.eu/events.html
4. Milán. Scientific Conference at EXPO. Food and agricultural markets instability: Policies and regulation perspectives. 9-10 July 2015
The symposium was co-organized by the ULYSSES Project, the Università Cattolica del Sacro Cuore (UCSC), and the Joint Research Centre of the EC (JRC).
Selected presentations are available at http://www.fp7-ulysses.eu/events.html
c) Editing & publishing policy 5 briefings, one monograph, and a final report.
Aimed to publish policy briefs (5) and one monograph.
Policy briefings, all available from the webpage
Policy Briefing (1) Jul.2013 Food price volatility drivers in retrospect
Policy Briefing (2) Mar.2014 Long term drivers of food markets variability and uncertainty
Policy Briefing (3) Jul.2014 Agro-food chain actors’ perceptions of price volatility and their management strategies
Policy Briefing (4) Apr.2015 Analysis of material and food deprivation in the EU under food price volatility and rise
Policy Briefing (5) Apr.2015 Price Shocks, Volatility and Household Welfare: A Cross-Country Inquiry
Monograph. July 2015. Agricultural Markets Instability. Revisiting the Recent Food Crises. Edited by Alberto Garrido, Bernhard Brümmer, Robert M'Barek, Miranda Meuwissen, Cristian Morales-Opazo. In press.
It will be freely downloadable
Table of contents
1. Scope and Objectives
Alberto Garrido, Robert M'Barek, Isabel Bardají, Miranda Meuwissen, Cristian Morales-Opazo and José María Sumpsi
Part 1: Literature Reviews and New Findings
2. Volatility in the After-crisis Period: A Literature Review of Recent Empirical Research
Bernhard Brümmer, Olaf Korn, Kristina Schlüßler, Tinoush Jamali Jaghdani and Alberto Saucedo
3. Has Agricultural Price Volatility Increased since 2007?
Bernhard Brümmer, Ayca Donmez, Tinoush Jamali Jagdhani, Olaf Korn, Emiliano Magrini and Kristina Schlüssler
4. Medium-term Drivers of Food Markets Variability and Uncertainty
Sergio Rene Araujo Enciso, Maria Blanco, Marco Artavia, Fabien Ramos, Robert M'Barek, Ben Van Doorslaer, Lucian Stanca and Ayca Donmez
5. Transparency of Food Pricing in the European Union
Steve McCorriston and Stephan von Cramon-Taubadel
6. A Review of the Role of Contextual Factors on Price Volatility Transmission in Food Supply Chains
Tsion Taye Assefa, Miranda Meuwissen and Alfons G.J.M. Oude Lansink
7. Impacts of Increased Food Prices and Volatility on Consumers and Households
Sol García-Germán, Cristian Morales-Opazo, Alberto Garrido, Emiliano Magrini, Jean Balié and Isabel Bardají
Part 2: The Views of Some Stakeholders
8. Are Derivatives Introducing Distortions in Agricultural Markets?
Adamo Uboldi
9. The View of Farmers: German Pig Producers
Torsten Staack
10. Mitigating the Effects of Agricultural Price Volatility: A European Cereal Grower’s Point of View
Nicolas Ferenczi
11. Milk and Dairy Products’ Price Volatility:The View of a Large EU Cooperative
Wim Kloosterboer
12. Coping with Food Price Volatility: The Contribution of Local Food Reserves
Gabriel Pons Cortès and Itzíar Gómez Carrasco
Part 3: Policy Discussion and Conclusions
13. Assessment of National Policies in Developing Countries to Combat and Mitigate the Effects of Agricultural Markets Excessive Price Volatility
Mulat Demeke and Jean Balie
14. Price Volatility Perceptions, Management Strategies and Policy Options in EU Food Supply Chains
Tsion Taye Assefa, Miranda Meuwissen and Alfons G.J.M. Oude Lansink
15. Book Summary and ULYSSES Project's Conclusions
Plamen Mishev, Alberto Garrido, Nedka Ivanova and Milkana Mochurova
List of Websites:
http://www.fp7-ulysses.eu/
@ULYSSES7FP Twitter account
Youtube channel: https://www.youtube.com/channel/UCb0tDbjxoa8i6ctmG87lkjQ
Coordinator contact:
Prof. Alberto Garrido alberto.garrido@upm.es
+34 91 452 4900 (ext.1913 or 1918)
