Proceedings of the Standing Senate Committee on
Agriculture and Forestry
Issue 13 - Evidence - Meeting of May 15, 2008
OTTAWA, Thursday, May 15, 2008
The Standing Senate Committee on Agriculture and Forestry met this day at 8:07 a.m. to study the present state and future of agriculture and forestry in Canada.
Senator Joyce Fairbairn (Chair) in the chair.
[English]
The Chair: Good morning, honourable senators, witnesses and all who are watching our Standing Senate Committee on Agriculture and Forestry.
Today the committee continues to look into the issue of farm input prices in Canada. Canadian farmers have faced significant input price increases in recent years, which have had a direct impact on farmers' profitability despite higher grain prices. Growing demand from developing Asian countries and the development of biofuel production appear to be the main driving forces pushing demand for grains.
Joining us via video conference this morning — or this afternoon, in Italy — to give us a global perspective on the evolution of world supply and demand for agriculture commodities and inputs are Ali Gürkan, Chief, Trade and Markets Division; and Abdolreza Abbassian, Economist (Commodities). Both are from the Food and Agriculture Organization of the United Nations in Rome, Italy. We are pleased to have you with us.
Gentlemen, it is a pleasure to have you take the time to join us. We are eager to hear as much as we can on this issue. It is important here in Canada. We have been working on finding as much information as we can to make a public report for Canadians to understand and recognize this issue.
We will probably welcome a couple more of our senators as the morning moves along, but we are ready to go. Who wants to start?
Ali Gürkan, Chief, Trade and Markets Division, Food and Agriculture Organization of the United Nations: Thank you, indeed, for inviting us to contribute to the discussions you are having in Canada. I express our thanks and hope that we will be able to provide some of the answers that you will query this afternoon.
Our outlook on the issue is at a global level. We have monitored developments in the commodity markets for a long time. However, we have been aware of the pressures that have been building up, in the food markets, especially, since 2006.
We have a number of publications on the subject, the most recent of which will be available, hopefully, some time next week. It provides a roundup of all the food markets at the global level.
Rather than giving you any description of what has been happening, perhaps we can wait for your questions and queries, and see whether we can provide an answer to them. Is that acceptable to you?
The Chair: Is that acceptable, colleagues?
That is fine, Mr. Gürkan, unless your partner wants to say a word or two before we start.
Abdolreza Abbassian, Economist (Commodities), Food and Agriculture Organization of the United Nations: I simply want to thank you again. This is a great opportunity for us to speak to you and, hopefully, to answer your questions about the world food market.
The Chair: Then we will begin right away. We have one hour this morning with our witnesses and we will cover a wide range of issues. Given that time frame, I encourage that questions be short to give our witnesses from Italy an opportunity to respond as fully as they can, and to give everyone a chance to participate in the discussion.
Colleagues, you may want to say where you are from as you ask your questions so that our guests will know.
Senator Mercer: I am Senator Mercer from Nova Scotia, which is on the Atlantic coast of Canada. I have several questions.
Our main concern is the high input costs that farmers face today, whether it is fertilizer, veterinary drugs or the extremely high price of fuel.
Have any studies been undertaken at your level comparing input costs around the world and if so, is any country doing a better job than others? Who leads the pack in keeping input costs in check?
Mr. Gürkan: We essentially do not monitor input costs at a country level. Our main task is to monitor the global markets of food. We take into account the impact of other developments that influence the price of agriculture commodities and market developments.
I think there are many individual private research centres that maintain estimates of input costs in different countries for different commodities. At the moment, I cannot recall the institution that does this, which then sells the information to anyone who wants to buy it.
We have been looking at the analysis to see what the main contributory factors are to the increase in food prices. Our concern at the Food and Agriculture Organization of the United Nations, FAO, is, essentially, the implications of this increase on food security, especially on vulnerable countries and vulnerable populations.
Senator Mercer: It seems to me that one of the major contributing factors to the world food situation is the input costs farmers face. Developing countries face the same problems that those of us in the developed world have, but those problems become even more critical when we look at the return they receive.
Do you think the current situation will lead to a global increase in pricing and if so, what does that increase do to farmers in the developing world?
Mr. Gürkan: It certainly is leading to price increases. We have maintained the watch on international prices of almost all the basic foodstuffs. Over the past two and a half years, we have observed that the prices of all basic foodstuffs have risen considerably. As you note, fuel prices and costs of production like fertilizers as well as transportation costs have increased substantially and contributed to this particular process.
We are seeing grave uncertainty and possible volatility in the global markets at the moment. Within the Organisation for Economic Co-operation and Development, OECD, we have recently completed our analysis looking ten years into the future to 2017. We expect the price of agricultural commodities to remain high, but not to continue increasing as we have observed over the past two and a half years.
Many new factors are entering the equation that are likely to keep prices up. As you rightly note, fuel prices and the competition of biofuel feed stocks — especially food stocks like maize, sugar, canola and others — are expected to keep the prices high. We think the demand pressure on biofuels will continue as long as the policies in OECD countries are maintained to support the biofuels industry.
Therefore, we expect the prices to remain higher than what they have been thus far at least over the medium term.
Senator Mercer: You raised the issue of biofuels, which is helping to drive up prices, particularly with corn and other products that we grow in Canada. One concern we have discussed is what effect this will have on farmers in the developing world. The price of commodities is up, but the question is whether the input costs are such that there is no profit or even sustainability in biofuels for the farmer.
Are there any statistics or anecdotal evidence that this situation is happening in the developing world? Is the agriculture industry in the developing world going backwards rather than forward at this point?
Mr. Abbassian: On the fertilizer issue, I would add two points. Agriculture Canada prepared a good study in early 2006 on the impact of high fertilizer prices in Canada on wheat. It was one of the rare studies on this subject. That study was useful. You may want to refer to it also. I note that we rely on national institutes to carry out this sort of study because we do not have resources to do it for everyone.
One thing that is important about the price of fertilizer is that it is influenced from two sides. It is influenced by rising petroleum prices and by the fact that when farmers increase production in response to high prices, they will need more fertilizer. That key element needs to be examined.
Looking at the literature, one thing we realize is that in many developing countries they apply too much fertilizer in many instances. Part of the reason is that it was cheap. Another reason is that when farmers obtain good seed, they think they must use as much fertilizer as they can to have rising yields. Therefore, the application of fertilizer is not even correct.
There is a long way to go in the developing world to understand the benefits of fertilizer and using it efficiently. We think there is room for FAO to play some roll in that understanding.
With regard to biofuels, the main implication to us is that it is obviously one of the important factors on the demand side leading to the high prices. It is difficult to say how much of a factor it is, but I think everyone agrees that it has had a substantial impact.
The developing world and the importing countries, which rely on food, have paid higher prices. When we look at it from that simple perspective, biofuel is one reason they pay higher prices for imported food. It is difficult to deny that. It is an event that is happening.
In our view, 2007-08 was simply the beginning of what we see as the impact of biofuel. It was a year when the U.S. shifted a lot of land away from growing soybeans and wheat into producing corn. As you know perhaps better than we do, this shift led to record corn production in the U.S. There was enough corn to satisfy everyone.
However, what happened was completely unpredicted. Soybean and wheat production in other parts of the world deteriorated. In Canada, yields were below average and that was also the case in Europe, Ukraine and Australia where the country experienced its second year of drought. If these things did not happen, in my view, the biofuel implications in the current season would have been far less than we saw.
Now we are looking into the new season, and the early indications, to me at least, suggest that it will be a more important year for looking at our biofuel policies than the previous year. The simple reason is that the key player in ethanol production from grains, the United States, is cutting the planting of maize. Even if we assume normal weather conditions, this cut will result in a decline in production to the tune of perhaps 25 million tonnes.
This drop in production, according to the USDA's latest report last Friday, will come at a time when ethanol demand will increase for maize by about 20 million tonnes. There will be a 20-million tonne increase in demand, even if we assume other things to be constant, and a 25 million-tonne drop in production, so we will have a 45 million-tonne deficit.
This 45 million tonnes must come from four places: feed, food, exports and stocks. Food is negligible. For feed, already there is an expectation that there will be a slight decline, partly because there is a lot of distilled grain, which is one of the by-products of the ethanol production, so it can compensate a little from that and also from some other feed grains and non-grain feed ingredients. The biggest drop would come from exports and stocks.
We could allow for a 10-million tonne drop in exports because last year was a record one and this year, hopefully, Europeans will not use so much coarse grains. However, stocks, according to the USDA's own statistics, will go down for maize to something like 19 million tonnes and for coarse grains, 2 million tonnes. I think these stocks are the lowest since the Asian crisis in the mid-1990s.
This decrease in stocks already will provide support to corn prices in the weeks and months to come. Still, we do not even know what sort of production we will have as we are all at the mercy of the weather. You can appreciate that this uncertainty, this factor that stocks are declining and everyone is talking about high prices will be an important factor in the market. Everyone will watch that situation. Because of it, many people will discuss ethanol and whether it does or does not have a future. In my view, this year will be more important than last year. I will stop there.
Senator Mercer: My final question goes back to the discussion of fertilizer. We have had discussions in this committee over the last little while about the security of fertilizer. We know that ammonium nitrate, used improperly, can be a dangerous product. We saw that in Oklahoma City in 1995.
Has this situation been addressed at all around the world? We have large storages of ammonium nitrate in various places, either at the supplier end or at the farm end, where it may sit on the farm in large quantities. Has anyone looked at this issue as a concern? The Americans have made some security moves, as they normally do, and some people have expressed concern here. Has that been the case elsewhere?
Mr. Abbassian: I wish I could answer your question, but it is beyond the scope of what I know.
Mr. Gürkan: It is exactly the same for me as well.
Senator Chaput: My question is in regard to fertilizers. In general, what do you think of the price competition prevailing between farm input suppliers in Canada? Do you think the lack of competition in Canada among fertilizer suppliers could explain higher prices in Canada than in the United States?
Mr. Gürkan: As I said, it is difficult for us, given the resources we have, to follow in any detail what happens at the country level, especially on the input side.
Our own work here looks more at the output, raw material markets — foodstuffs as well as other agricultural commodities. Therefore, for us, that knowledge is not really there to provide a clear answer to you, unfortunately.
Senator Chaput: I have another question in regard to ethanol. In Canada, it seems that we might have legislation to require all gasoline sold in Canada to contain 5 per cent ethanol by 2010. The bill has been passed in the House of Commons but we still face a vote in the Senate. What are your views on that issue?
Mr. Gürkan: One of our major publications will be on the topic of biofuels, which will be published soon. The analysis and research that we have completed indicate that the demand for biofuels in general — including ethanol, as well as biodiesel — have been driven mainly by the policies implemented by OECD countries. Given the current situation in the food markets, in our view, these policies have contributed significantly to the increases that we have observed in the price of agricultural products.
In that sense, the actions taken in the countries regarding support of biofuels have had implications not only in the economies of the countries that have taken the measures, but they also have had spillover effects on the international markets, which have affected the food security concerns of some of the developing countries.
As you are well aware, the current increases in the prices of food have led to a significant decline in food aid usually provided to countries in crisis and in need. In the UN system, there is now a drive to ensure that the food aid that is provided to the neediest people is not cut. The impact of policies implemented to support the biofuel sectors has implication for the international market and others.
At FAO, we are trying to ensure that some kind of coherence is achieved, or at least knowledge is learned, that actions taken like those taken in biofuels could have, under certain circumstances, spillover effects on other nations and communities. The only thing we can do at this particular moment is to raise that awareness so that the people who make decisions take into account the other impacts that they might have possibly, and review the policies that they implement within this context.
It is up to the national governments to think what is best for their own country and their citizens. Our main task here is to raise at least the awareness that such action could lead to unwanted effects on other communities. Our view is essentially to be aware at least.
Mr. Abbassian: I will add a word about Canada on this subject. Canada is a big producer of canola, wheat and barley, and a big exporter of all three commodities. Your question must be seen in the context of producing those crops and already being a major exporter and major world player — will your recommendations for this 5 per cent mean that you will have less for exports?
The second thing to think about is that from the discussions I had earlier with some Canadian colleagues, the likelihood is that Canada will need to import corn to use it to produce ethanol. We all have seen what happened to the corn market and the main driver in the neighbouring country, the U.S., and how much it will put into ethanol. One must ask if that part of the export of U.S. corn in the future will be observed by other countries, especially within the OECD community, to be used for ethanol.
It is a question of resources; it is a question of whether what Canada plans to do in the future can be sustainable with its own resources, without putting more pressure on the world markets for these basic commodities.
Mr. Gürkan: It is important to note that, since the resources are limited, especially in the short term, we cannot significantly increase the production given the resource constraints that exist — not only in the countries themselves, but also at the global level. Richer countries, of course, have the resources to outbid the demand and bids of others who are not in a position to pay those prices.
We heard this morning a report regarding poultry producers. They are seeing their input costs, especially from grain, rise by $1 billion and they complain that the ethanol producers are bidding away the corn from producers themselves who also are in a position to be compared perhaps to the poorer consuming households. We are seeing they are, in fact, finding it difficult to compete with ethanol producers; those who are already subsidized by their governments.
The issue of who bids what and how many resources one has to outbid the others in a situation where supplies are tight is likely to have impacts on other countries. That is the main message we would like to give to you. The actions you take might have spill-over effects outside your borders. Perhaps, given the history of Canadians with regard to the aid it gives to the poorer countries, that is something that you might perhaps consider.
Senator Chaput: Do you think humanitarian arguments used against fuel production have any validity?
Mr. Gürkan: I just came from a presentation that I made to the Working Party on Food Aid of the European Council. I wish I could display some of the slides that I presented there.
When we look at the food aid shipments over the past years and compare them to, first of all, the stock levels at the global level — as well as stock levels of major exporting countries, as well as the international prices of the commodities given as aid — there is a definite relationship between the two.
For example, when the season-beginning stocks are low, food aid shipments in that subsequent season tends to be lower than they normally are. Also, if global international prices of, say, cereals, wheat or maize are high, the food aid shipments in the ensuing season tend to be lower.
There is that kind of evidence that links the issue of stocks and prices to food aid shipments.
Senator Mahovlich: What was your reaction to riots in the developing countries regarding the price of staple foods? Is there any link to be made between these riots and the increase in commodity speculation?
Mr. Gürkan: This is something we have been grappling with. I leave one side of that question to my colleague, Mr. Abbassian. I will answer the other side.
Things are always delicate in an organization that has 192 member countries. The social unrest that we observed and saw reported across the world shows how a rise in food prices adds an element of hardship. That is especially true for the poorer people since they spend 70 per cent to 80 per cent of their income on food.
Let us not forget there are issues related to the politics in some countries. These types of events can be used, essentially, as an excuse to make comments against the governments. The government may not like such comments. There is an element that is extremely difficult to assess but certainly is there. The news reports that we hear indicate this.
We must keep that at the back of our minds when we interpret the reports that we see in the international media. We need to be careful at how we interpret those reports.
Before I pass the floor to my colleague, I will say this: When we look at the global prices at the international level, we see that the prices have been increasing extremely significantly. Looking at the numbers we have, for example, for general oils — our index at the international level — when we compare the average of the four months in 2008 to the average in 2007 of our index, the increase is around 90 per cent. In other words, the average in the first four months of this year compared to the average of last year has increased by nearly 100 per cent.
We have also collected information at the country level, specifically developing countries. The information was gleaned from something like 50 members of FAO. When we look at the price increases at the domestic level, for the same period, they are well below the ones that are quoted at the international level. This information means there are many factors that impede the transmission of what we are observing in the international markets down to the domestic level.
For example, many developing countries have seen their exchange rates appreciate against the U.S. dollar. Therefore, although the quotes we give are in U.S. dollars, when we convert it into their domestic currency, the increases in prices are much less than what appears in U.S. dollars.
Also, many border measures are being implemented. Many subsidies are provided, especially for the consumers. As a result, the transmission of what happens at the international level prices to the other level is not as large as what we have observed.
That situation must be kept at the back of one's mind when one interprets or assesses the impact.
For three or four months of this year, the increase in prices for almost all food crops we have data for is in the region of about 7 or 8 to 10 per cent. It is not really as high as what we have observed at the international level.
Mr. Abbassian: I have two answers for you: One short and one long.
The short one is that it seems to us, in general, that the high prices fuelled speculative activities both at the national and international level. Speculative activities, in turn, seem to have fuelled price volatility at the global level and, in some instances, even at the national level.
Whether speculators come in and follow the trend or whether that trend is set by the speculators is still a point to discuss and analyze. The events of the past few months are, perhaps, too short a period to come to any decisive conclusion on this question.
However, a longer answer is to try to look into what we mean by speculators, and where. At the times of rising prices, traders also tend to be the biggest speculators, even at the national level. Therefore, a lot of hoarding is taking place in many markets. Such activities led a number of countries to impose restrictions and bans on exports. In one way, one could say that even countries are hoarding in the international market by those actions. Countries also can be speculators.
Then we have, of course, the speculators in the commodity exchanges that bring liquidity to the market. That is perhaps what I meant in my first answer to you as perhaps the focus you had in mind.
The issue is that speculative activities are at play at various stages of the value chain. It is misplaced to put the blame on speculation as the only factor for high prices. However, it is probably not farfetched to say that speculators have contributed increasingly to the high prices at the country level.
The rice market has surged rapidly in the last few weeks and months. International prices almost doubled and tripled. In certain countries, we know prices have gone up by as much as 400 per cent to 500 per cent.
There was no reason for this increase whatsoever. Those countries are not importing rice; they had their own good crop. That leaves us thinking there definitely was speculative activity involved in the country. Otherwise, there is no fundamental explanation supporting such a price surge in the rice market.
We need to define the speculators and also, perhaps, the commodities we are interested in examining. Then we can make better observations.
I will repeat it again; overall, it seems that speculators in the international markets are more followers of the trend than making the trend. However, by coming into the market in large numbers, as we have seen, they seem to have added to the volatility in the world market for major crops.
Senator Mahovlich: It sounds like a complex problem.
Mr. Gürkan: It certainly is.
Senator Mahovlich: Do you think high input costs will put farmers at risk by pushing their credit margins to the limit? If so, do you consider this situation to be worrisome for the long-term viability of the Canadian farm sector?
Mr. Gürkan: The moment you squeeze the margins they operate under, we put any economic agent who depends on the market for their existence in a difficult situation.
We have seen both input prices and output prices increasing. I think there is a great degree of flexibility, especially in developed countries where we can change the pattern of production to benefit from the differences in relative prices.
Indeed, this situation has been happening in the United States. It occurred rapidly when the maize prices shot up quickly in 2006. There was a rapid movement away from soybeans and wheat to produce maize, which registered a record increase.
The same thing is happening this year where maize planting is down, and soybean and wheat production is increasing. Indeed, the farmers, as economic agents tied to the market, are exploiting the differences in relative prices and choosing the product that will maximize their returns. They are acting rationally.
It is only when the relative price differences are not large and the output prices do not increase as much as the input prices that they have real difficulties in trying to maintain themselves and their profitability.
Mr. Abbassian: If I may add only to make it more complicated, perhaps, the key issue is the output prices and what assumptions we want to make in the future about those prices.
The discussions now taking place in the U.S. over the farm bill are an indication of the things policy-makers are thinking about. On one hand, they will say why provide subsidies to maintain or prolong the same farm bill when world prices are so high. However, on the other hand, farmers will question whether anyone can guarantee them these high prices in the future. If no one can guarantee the high prices, and energy prices continue to rise, farmers will see their profit decline.
I suspect this situation is also on the minds of farmers in Canada. It is a valid argument both ways.
The whole thing boils down to what assumptions we make about input costs, primarily energy, and what assumptions we make in terms of the output price or the farm gate price. We require those two things to do some sort of modeling exercise.
As you know, the FAO and the OECD, with great help and input from Canada, prepare 10-year medium-term projections. The results of our projections up to 2017 will be published in about 10 days. There are lessons to be learned from those projections in making policy recommendations for the future.
Mr. Gürkan: I will give you a sneak preview of what we have assumed regarding petroleum prices, in making those medium-term projections.
I believe the estimate for 2008 was US$94 per barrel and the medium-term baseline was projected on that basis. It further assumed that the prices until 2017 would be roughly US$104 per barrel. We know that at the beginning of this year, the average price of petroleum has been about US$110 per barrel. For the annual average to be US$94, the price of crude oil will need to be around US$80.
That price means one of the basic assumptions we used to make this particular scenario is no longer valid. What is nice about the modeling framework is that we can change the assumptions and see what would happen if, indeed, those assumptions failed.
Over the next five or six months, both the OECD Secretariat and the FAO Secretariat will use what we have done thus far to see what would happen if some of the assumptions change, especially the ones made for this year, and what the implication would then be on the future expectations regarding prices.
We think prices will remain high. We may use US$110 as an average to begin rather than US$94. However, the price will not rise as fast as it has over the past two and a half years because many short-term factors influenced that rise at the same time as the discussion was happening on biofuels. Therefore, short-term impacts are likely to dissipate over the next two or three years if the global system is able to respond to the changes in relative prices that we have observed.
Senator Mahovlich: I have another question.
How are corn and wheat growers coping with the energy cost increase?
Mr. Abbassian: In the case of most countries, the energy price increases relate to fertilizer and the use of machinery on the input costs. In the developing world, machinery is perhaps a bit less important than in OECD countries. I do not have particular information about Canada to know the real implication on rising input costs. However, as Mr. Gürkan mentioned, the poultry sector in the U.S. is already complaining about the drop in profit margins as a result of both input prices rising and the raw material for feed, which is basically corn.
These markets are linked to one another. The linkage and substitution effect is such that if we change a fundamental in one, it is bound to have a shockwave throughout the system. To me, the issue of the input cost increase is fundamental for industrial countries and countries that rely heavily on machinery, fertilizer and other more advanced inputs.
Regarding the prospects for us in the future, when we say we expect prices to be high, but perhaps not at the record highs we have seen now, one reason for us to believe that prices will not return to the artificial low prices we were used to is that production cost will be higher. That is something we need to live with. The production cost cannot fall if we assume that energy prices will stay at this high level or even increase further.
Higher cost of energy is a factor, and it is an undeniable force behind higher prices in the future.
Senator Mahovlich: Can current sky-high energy and grain prices be described as a bubble about to burst?
Mr. Gürkan: Some causes that have led likely to the increase in the prices of food are likely to dissipate. Weather events occur at particular moments, but it is difficult to judge when exactly they will occur.
Part of the reason we have seen such large increases in the prices are due to the fact that the global stocks, as well as the stocks in major exporting countries, have been declining since the mid-1990s. When we do not have enough stocks to buffer any unusual weather event that can occur, it can lead to extremely sharp increases in prices.
Given the tight supply situation due to low stocks in many commodities, it will take some time for the normal pipeline stocks to be replenished. If there are any supply problems, production problems, the process of replenishing stocks may be lengthened.
Over the next couple or three seasons, we expect stocks to recover to what we consider optimal levels, given the conditions that we are experiencing now. The prices are likely to remain high in the next few seasons precisely because people will most likely want to replenish stocks that are extremely low at the moment. The crude oil prices will continue to be an important underlying determinant of how long prices will stay up, as will the demand pattern changes in developing countries, which have been changing the past 10 years or so.
Those factors will keep the prices high, but it is likely that we will observe a normal supply response. Some demand factors will disappear, like the demand for replenishing stocks. As a result, prices will ease up. I think the projections of OECD and FAO reflect that kind of scenario. Prices will remain high, but the prices will not soar as much as they have soared over the past two and a half years.
Mr. Abbassian: If you asked me two years ago what would happen if the world trade in corn doubled from one year to the next, I would have told you prices would have gone up to the sky — and that did not mean 60 per cent or 80 per cent; that would mean perhaps a few hundred per cent. This rise did not happen even though trade in corn doubled.
The 100 million tonnes of corn that goes into ethanol — we reached that level in two or three years— was a huge amount that one would not have anticipated to be produced in such a short time, or to be consumed in such a short time.
However, in the context of a bubble, first, this price is not so high when seen in that light. It should have been even higher. The linkages, the substitution effect between commodities, prevented that price from rising even further than it did.
The second observation I want to share with you is prices are coming down. They are not falling rapidly; they are coming down gradually, at times in a volatile way. They come down quickly and then they make a little correction — they go up and come down. The decrease does not have the characteristics of a burst.
Wheat has lost 50 per cent quietly over the last few months, and maize seems to be starting that sort of a decline now. For the soybean market, it is more or less the same situation, along with sugar and dairy.
Rice is an exception. Perhaps one could qualify it as sort of a bubble. The market is thin. We have five exporters and when three of them do not sell anything, obviously the prices go through the roof. However, the moment one of them decides to open up the border, perhaps the prices will collapse. That scenario can be a little bit of a bubble.
In general, if we look at the whole sector together, I think the linkages are strong. The substitutions are strong. The price movements, both going up and down, have been orderly, if I can say this. Therefore, no, this market is still very much constrained by its own fundamentals.
Senator Mahovlich: Should the government play any role in trying to curb this excess speculation in commodity markets?
Mr. Gürkan: I come back to what my colleague said — who are the speculators? In the futures market, the speculators are large pension funds, and they do not speculate on the commodity itself. They speculate on the financial instruments that are based on the commodity exchanges. What they buy and sell at the moment are not the actual physical commodities but the papers — the futures contracts; they buy and sell options.
In that sense, it is a bit different. That type of speculation does not have the same kind of direct impact that they would have on commodity prices if they were speculating on the physical commodity market itself. The hoarding that my colleague has mentioned is taking place on the physical commodities themselves, and they can play havoc in the market. Governments are taking steps to lessen the hoarding and its impact.
In the case of rice, this hoarding is happening between harvests in a thin market. The moment the harvests are actually pulled in and the moment the governments or the speculators decide that holding on to these stocks will cause them real economic devastation, they will release them to the market, especially when the new harvest comes in.
We know prices will come down. They will have to think of when exactly they can release the stocks they are holding to gain the profit that they expect from holding on and expecting higher prices to occur. In the short run, that type of speculation can have an impact, but over the longer term, it is likely to be a much less important factor. In the end, the fundamentals in the market will ensure that the people will have large losses if they hold on to the stocks they are holding.
Let us not forget, these stocks are commodities; they are not like metals. They cannot keep them for long periods of time. They have to release them somehow or they have to change them because they can deteriorate quickly.
For example, what is happening now as far as rice is concerned is that Japan, because of public rules, had to open its markets for rice. Japan brought in more rice than they needed and they are keeping large stocks. If they could release these stocks to the world market, the prices would come down; but they cannot because Japan must have the approval of the U.S. to release them. It is illegal, according to the rules of the World Trade Organization, WTO, to re-export something that has been imported before.
It is possible to resolve this kind of speculation quickly, at least in the rice market. All the medium-term developments, and the developments in the market itself, would put a stop to the speculation. In looking at hoarding that takes place — I lived in the southern United States for about three years — whenever there was a warning of hurricanes or anything like that, immediately all the foodstuffs, all the water in major supermarkets, disappeared. People do not consume the items in two or three days but they panic-buy to ensure that during those few days when the hurricane affects their lives they will have food and water. It is this kind of thing. After the hurricane, they have possibility of replenishing their stocks and they do not need to consume that much so they gradually get rid of the stocks they have built up. The speculation, especially in the physical markets, is in short-term events. Given enough of them, it will no longer play an important role.
As far as the speculation in the financial markets is concerned, that speculation has been taking place for some time now and it will not likely dissipate soon because many factors play into it.
Mr. Abbassian: If I may add two points: The focus of what Mr. Gürkan said was more on the physical markets. In case your question is about the commodity exchange and the regulation aspect, a few weeks ago, a hearing in Chicago looked at the implications of speculative movements in the market. The general observation from that hearing was that speculation is self-managed and the clearing process still works; therefore there is no need for any regulation.
If we look at countries that prevented futures trading because of fear of speculation, one country that stands out is India. Last year, India decided there should not be any futures in rice and wheat because they were worried about prices rising and, last week, they extended that ban to all other agricultural crops. However, when we look at the result of the Indian action, prices rose and therefore one could conclude it looks like a speculation in the futures market had nothing to do with the big price rise in India.
That explanation is the simple one. The more complicated situation that perhaps people might look into in the future, which has been raised by Alan Greenspan in the U.S., is that when big volumes of money come in from the hedge funds to the agricultural market and to the food market, what new market or virtual futures market, one may ask, is created by that event and will that market need some sort of oversight?
For example, in the U.S., farms are the biggest users of the futures market, as they are even in Canada. Futures are used as a risk management tool. The premium that they are willing to pay is their insurance policy. If they cannot afford to pay the premium any longer because a huge amount of money is coming into the market that makes the contracts expensive to acquire — for example, for corn, we are talking about US $6,000 per contract — then the volatility that the speculators have brought into the market means that they need to keep up the margin that probably they cannot afford. Soon they find themselves in the situation where farmers, the main actors in this market may not be the main beneficiaries of the futures market because of speculative activities.
Here is another aspect that perhaps policy-makers need to look at, the real raison d'être of the futures market. To what extent can the futures market in the future achieve its main objective, which is price discovery, price transparency and providing a risk insurance scheme to the farmers, if farmers are not able to use it? I think somewhere along the line, someone needs to do more work on this issue, especially if it continues.
Senator Mahovlich: We have had a few crises in the world, such as in China and in Burma. Is the United Nations concerned about Africa next summer? Will there be a crisis in Africa and all the developing countries?
Mr. Gürkan: As you are most likely aware, from June 3 through June 5, the FAO will hold a high level conference especially on this particular topic. The whole UN system, I think, has now been mobilized to see what it can do to address some of the issues that are thrown up now as a result of what we have seen in the food markets.
The G8 meeting to be held in Tokyo, I think, has included this item on its agenda and, since the countries are major donors, I am sure we will discuss this issue in more depth. I believe they have invited the Secretary General of the United Nations to come to this meeting and to make a presentation in regards to what the UN system is trying to do.
We are essentially trying to raise awareness, as well as create the platform so that some kind of policy coherence can be achieved. Part of the reason why this speculation is taking place, especially in the physical markets, is because food security is an important concern of every nation. When the policy-makers do not believe that the international market can address the concerns they have, and they do not have the confidence in the global system to address those issues, I think the problem of hoarding, speculation, becomes a real problem for everyone.
The main aim of the United Nations system is to ensure that the main actors — the policy-makers, the governments of the countries — act in a unified way to at least defuse the constraints and the tension that now exist as a result of what has happened over the past two and a half years.
Mr. Abbassian: There is no doubt that the two natural disasters to which you referred are an additional strain to the current market. As for Africa, there are structural problems in Africa, as everyone knows. As of half an hour ago, I did not hear of any additional disaster in Africa, but Africa is not immune.
If we are talking about the crop situation there, the situation is slightly better than last year. The early indications are that in the southern region, South Africa will have many additional supplies of maize. South Africa is a big supplier to the southern region.
In North Africa, the drought of last year seems to have improved a little bit and Morocco may be in a bit better condition. Egypt, which was so much in the press, produces half of what it consumes and it imports the other half. We think the situation in Egypt will be tense again this year but that is mainly because of high domestic prices and the distribution of subsidized flour to the bakers.
Setting aside the big countries, the small countries have problems in Africa, and by all means we should not undermine the importance of that situation but there is nothing I can think of at this stage that is particularly new in terms of the problems that those countries face. The next few months are critical months for crops and a lot still depends on crops.
Last year we had the terrible floods in Mozambique that devastated the country. Zimbabwe is still going through a crisis that is perhaps a political crisis rather than a food crisis. They may have a better crop this year. The African problems are there but a natural disaster on the scale we have witnessed in the last few weeks in Asia, fortunately, we do not think is there.
The Chair: Thank you very much. Thank you, colleagues. This discussion has been vigorous this morning and we are glad that you have given us the time. Listening to your finals remarks, I imagine there is little extra time for you in the important work you do.
You have helped us. When we finally produce what will hopefully be a helpful report for our country, it may also be helpful for you and we will make sure you receive copies. Have a wonderful day in Italy and we will hope for the best here in Ottawa.
We will now suspend the meeting for a few minutes and then reconvene in camera.
The committee continued in camera.