European Commission conference on commodities and raw materials
Brussels, June 14, 2011
The first oil crisis hit nearly 40 years ago. That was in 1973 and a stunned world watched as the price of oil rose from three to 18 dollars a barrel. This morning, it stood at 119 dollars a barrel.
And, for the first time, economists the world over became aware that the increased cost of non-renewable commodities and raw materials constituted a huge threat to the future of world growth. Well, ladies and gentlemen, 40 years later, that threat has become a reality. And we have no choice but to act and act now.
The world has long followed a mistaken belief: that its wealth of raw materials could be spent at will. Yet the world knows now that raw materials are finite resources, whether precious metals, energy or farming land. These resources are and will be increasingly scarce at precisely the time when they are required on a vast scale, in particular by emerging economies’ industries. There, in a nutshell, is the cataclysmic vice the world is caught in. Scarce and increasingly scarce raw materials and growing energy needs.
With scarcity of raw materials comes the risk of paralysis of economic activity, societal breakdown, war and hunger.
Thanks to the action taken by the G20, we managed to overcome the most serious crisis the world had faced in a century. Today, growth has picked up again with a global growth rate of over 4%. It is clear, however, that one of the chief dangers threatening growth is the rising cost of commodities and raw materials. The picture today is no surprise and is even pretty straightforward. We have put a great deal into kick-starting world growth. This world growth is threatened by rising commodity prices.
The G20 countries are the first to be affected by this issue, and so it is the G20 countries that need to establish the conditions, Mr President, for sustainable growth. How? There is a principle: we apply to the commodities market the same rule that we set out to apply to the financial markets. There is a word, and that word is not taboo. It is the word "regulation". Regulation is precisely the principle we have applied to the banking system and to financial products. And then we now have an example: the extreme deregulation of the financial markets drove the world to the edge of the abyss. A market without rules is no longer a market. This is what triggered the financial market disaster. Are we going to let it trigger the same disaster for the commodities markets? The question is simple. It is inescapable. We cannot put off the answer.
Regulation does not mean controls, nor does it mean protectionism, nor does it even mean administrative price-fixing. Who would dream of such a thing? It is an absurd idea. It has never worked anywhere. Yet without rules, I say it again, there is no market. The idea that some would like to prove that the market can operate without rules is misguided. And we need to find the path between the absence of rules, which leads to the law of the jungle, and too many rules, which leads to paralysis. There is a word, and that word is "regulation". I do not understand why people sometimes shy from using this word when we see such catastrophic situations as those we have seen with the financial markets. We do not want to find ourselves in the same situation.
So President Barroso, José Manuel, the French presidency has indeed brought this issue on board, even though not everyone agreed. Excuse me, but if we only tabled subjects that everyone agreed upon, the French presidency’s agenda would be much shorter, because there aren’t any, and I didn’t think the role of the presidency was to sit and watch the problems, say a few carefully chosen words and conclude that there was nothing to be done.
We are faced with a triple challenge and we have no time to take it up. We have to take it up now:
The first challenge is production: what must we do to ensure that the global economy has sufficient resources at a reasonable price to meet the needs of the world’s population? That is the production challenge.
The second challenge, I agree with José Manuel, is the transparency challenge. Frankly, the perfect counter-example is how the financial markets were operating before the crisis. If we have a direction – I do not know if it is the right direction – but we know which way is the wrong direction and that is the direction in which the financial markets were heading before the crisis. That is the perfect counter-example. I do not know anyone who would say to me, "You need to do what the financial markets were doing before the crisis."
The third challenge is the regulation of the commodity derivatives markets.
I see these challenges as common to all the markets that you will be discussing: energy, agricultural commodities and raw materials derivatives.
Our first concern is the supply and production of commodities and raw materials.
In 2050, our planet will have a population of some nine billion. We know that. We cannot say that we did not know. Nine billion people.
Nothing will change that. If world agricultural production is to meet these nine billion people’s food needs, it will have to increase output by 70%, and that is something we are not at present capable of doing for one simple reason: that demand for agricultural produce is constantly rising, and that agricultural production has grown over the past 20 years at half the rate it did between 1960 and 1990.
Any calling into question of agricultural production and especially the Common Agricultural Policy would be totally at odds, Mr Commissioner, with the world’s needs. I would like us to think about that. The world needs 70% more agricultural production. The question is can Europe afford not to step up agricultural production on its land? That would make no sense at all. We can develop European agricultural production and, at the same time, help the African countries to develop their agricultural production and, with that, ladies and gentlemen, we will not manage to meet the needs of the nine billion people living on this planet by 2050. And that is a fact.
The G20 countries need to undertake to comply with common rules of good conduct on the purchase of arable land. Everyone needs to be able to develop their agriculture and agricultural productivity. I’m well aware how actively engaged the African Union Commission is on this subject.
Feeding the world is an enormous challenge for all of us to work on and, in this regard, the strength of the Common Agricultural Policy is an extraordinary asset for Europe. I would add, and President Barroso quite rightly often says this, but it is a little known fact, that the European Union is the leading importer of food products worldwide. So to take the European Union to task for being protectionist in this area is total nonsense.
In energy, we already know that we have entered an era of increasing scarcity of oil resources. We need to develop alternative sources of energy. We all agree on that.
I would like to point out that nuclear energy is an alternative energy and the only energy that will enable us to respect the greenhouse gas reduction commitments we have made in Europe. Would someone please tell me how we are going to meet our environmental commitments, and France totally supports the Commission’s action in this area, by developing fossil fuels, waiting for renewable energies and refraining from nuclear energy. But, and here is the problem, the increasing scarcity of fossil fuels is not the sole reason for the volatility of oil prices. May I remind you that, in 2008, oil prices fell from $140 to $40 a barrel in just six months. Could someone tell me what changes in economic growth can explain a fall in oil prices from $140 to $40 in just six months? An increase in oil prices due to more demand and less supply, France can accept that, it can understand that. But that the barrel should plummet from $140 to $40 in six months in 2008, not in the Middle Ages, you cannot tell me, "move along, there’s nothing to see, the oil market is working perfectly well." Late in 2010, oil prices were off again. From $97 a barrel in January this year to $120 a barrel, and then in May the barrel lost 10% in one week. Here again, I saw no economic events to justify this totally erratic movement.
So, obviously, we need dialogue between producers and consumers.
Obviously we need to be able to draw on excess capacities where these are available. Obviously, we need to invest in and step up research in both energy and agriculture. But, at the same time, we cannot stand by and do nothing in the face of these movements.
I would add that the distribution of energy is extraordinarily unfair. Consider that 800 million Africans, 48 Sub-Saharan African countries produce the same amount of energy as Spain. Consumption of electricity in Africa is just 124 kilowatt hours per person per year. That is barely enough to run one 100 watt light bulb per person for three hours a day. And this happens just 12 km from Europe across the Strait of Gibraltar.
The question of investment in energy infrastructures is clearly key to the world’s development. France has made highly ambitious commitments regarding the development of renewable energies, but clearly, ladies and gentlemen, we will not solve the problem solely with solar and wind power, whatever other commitments anyone may make.
President Barroso used an important word: transparency. He also said that, when a country invests in resources, the amount of money paid by these countries should be published as a way of combating corruption, and he is right.
But let’s talk about market transparency. Commodity and raw material price volatility is driven by what? By one thing. By the opacity of the commodity markets. Since the fact of the matter is that the commodity markets are not transparent; they are opaque. Is an opaque market still a market? The question is worth putting since the first quality of a market – and we do believe in the market economy – is transparency.
Yet transparency there is not, and I will endeavour to demonstrate this to you. What level of stocks do we have? No one knows. Who knows the name of those who conduct such or such a transaction on a physical delivery or a financial derivative? No one knows. No information on stocks. Very few countries, even in Europe, are capable of providing information on stocks; we were talking about that again with José Manuel just recently. As for those who conduct transactions on the market, no one knows who they are.
We led the way in 2002 with the creation of the JODI (Joint Organization Data Initiative) database. We must now ensure that all members of the G20 commit to improving the comprehensiveness of the data supplied. It is my hope that over the next few months, each G20 country will publish a national report detailing the progress made in this domain. Furthermore, I see no reason why what we require for oil should not go for the other fossil fuels, such as gas and coal.
We must extend this transparency to the agricultural commodity markets, whose prices are increasingly volatile. If we compare agricultural market prices these past five years with the 15 years from 1990 to 2005, the volatility of world prices has doubled for cereals, tripled for sugar and quadrupled for rice, which is a staple food for one-quarter of the human race. Is that normal? Is it acceptable? Is it tolerable?
Once again, when price volatility is due to climate instability, there is nothing we can do. When volatility is due to rising demand from emerging economies, we can accept that. But it is unacceptable for volatility to be due to the recent financialization of the world’s agricultural commodity markets.
So it is time for the G20 to assume its responsibilities. I will raise this again on 16 June, with the agriculture associations, and also on 22 June, when the agriculture ministers of the G20 countries will be meeting, cher Bruno Le Maire, in Paris.
We intend to introduce a new information system on the agricultural markets, along the same lines as the JODI database for oil a decade ago. This tool would be hosted by the FAO and would collect all relevant data, including on private equity, in a move to step up international cooperation in this area.
Last but not least, the question probably giving the most cause for concern is the regulation of the commodity derivatives markets. Brace yourselves, because in May, an initial public offering hit an all-time high of $60 billion for a leading commodities trading house. The response to financialization is key to the balance of the global economy.
In oil, the financial markets are 35 times larger than the physical market. They trade in financial volume, 35 times the value of the physical quantity of oil. And they tell me that speculation is not a problem! 35 times!
Yet in agricultural commodities, on the Chicago Mercantile Exchange alone – and please listen carefully to these figures, because they condemn the current system – their annual trade in derivatives on the Chicago Exchange is 46 times America’s annual production of wheat; 35 times the oil and 46 times the annual production of wheat; 24 times the annual production of corn. Now what possible reason could there be for that? Granted, José Manuel, it’s complicated. But some dishonest systems are also complicated. That does not prevent us from combating them. I’m not saying dishonesty is at work here, but who can accept, when we have not got enough to feed the planet and planetary growth, financiers trading 46 times the physical volume of the world wheat market?
At the same time, the number of players operating on these markets has grown steadily: trading companies have been joined by hedge funds and index funds and, through these, individuals have also gained access to commodity and raw materials markets.
My major concern, and I say it to President Barroso, is not to ban financialization, nor to interfere with price levels, but to demand that the price-setting process functions correctly, and to prevent, because it is our duty, unacceptable abuse.
France wants the G20 countries to adopt common principles of regulation and oversight, applicable to all commodity derivatives markets.
The first such principle is therefore transparency. We call for the creation of a central register for data on transactions on the derivatives markets, including commodities and raw materials. At least we should know about the transactions, otherwise there is no market. We also call for the supervisory bodies to have reciprocal access to such registers. That is the proposal that the IOSCO regulators have submitted to the G20 Financial Stability Board, Christine Lagarde, and I am delighted that the European Union is already discussing draft regulations on this issue.
We should also extend regulation. We should extend regulation to all products exchanged on the commodity derivatives markets, to all players involved and to all the tools used in the process.
We should encourage the standardization of derivatives and their listing on platforms and regulated markets.
I do not think it healthy that markets should be allowed to function without any central authority to issue margin calls. We need to restrict the leverage effect; I assume my responsibilities. France asks for a minimum cash deposit for each transaction.
Ladies and gentlemen, who can accept a player on a world market who purchases 15% of this world market’s physical production without having to pay a penny? And then sells the 15% and pockets the profit without having paid a penny? But naturally, when the player buys 15% of the cocoa market, the price of cocoa goes up. Is this the market economy we talk about? Is this the world we want? Are these the values in which we believe? Is this normal? Is it acceptable? And you have farmers producing cocoa in Côte d’Ivoire and elsewhere who cannot get paid, and consumers in Africa whose only food is rice and who cannot buy it because of soaring prices driven by the pressure of speculation, panic and lack of transparency. Is this the world we want?
France says loud and clear, "we do not want this world." We do not want it precisely because we are against protectionism and for the market economy. And the way the markets operate is at odds with our ideas. It is a parody of our ideas. And if we want the world to keep turning, and if we refuse to give credibility to those who refuse globalization, then we have to put our house in order in this world as it operates today. We have no choice.
One last word on oversight: we need to improve the coordination of action by physical market regulators with action by financial market regulators in order to detect – I will say it – cross price manipulation.
Because price manipulation there is. On the stock markets, such manipulation is criminal, in both senses of the word. Why would we accept it on the commodity markets? Just because they are global? The G20 is global. So this is the place where we should take action. And, here again, I was appalled to see that a financial player managed, by operating simultaneously on the physical and financial markets, to buy almost every single cocoa contract available on a commodities exchange for a total of exactly 240,000 tonnes, 7% of world production, 15% of world stocks and 25% of European stocks, without paying a penny. And they tell me that speculation is not a problem? Then there must be a problem with the interpretation of the word "speculation".
Europe, President Barroso – and this is why I am pleased to be here, because France believes your conference is extremely important – Europe has the duty to stand as a model; to establish cooperation between the financial regulators and the physical regulators.
We want to give the world the means to punish market abuse. I would say that position limits strike me as being a useful tool. When I see, excuse me for saying so, that position limits were introduced in the United States in 1936, Europe could maybe draw, in 2011, on what the United States did in 1936, without setting off a positive debate between the supporters of free enterprise and the others. That should be possible.
I would add that the Dodd-Frank Act, passed in 2010, led the US regulatory agency to propose position limits for all raw materials derivatives. What the United States did last year, can we hope that Europe will follow?
This would prevent a repeat of what happened on the oil market in 2008, when three traders, ladies and gentlemen, three were able to take up positions totalling 80% of the world’s short-term oil futures. That is not a market economy: three operators, 80% of the stock. I hope that Europe will lead the way in this area, based on what has already been done in the United States.
The French presidency is absolutely determined for all the G20 countries to take this road. I am told, "yes, but be careful, you need fair competition between exchanges and investors should not be tempted to play our national regulatory environments against one another. I am aware of this argument, but I will ask a question. If one country does not fight the mafia, should we all give up fighting the mafia? If one country or region has a regulatory shortfall in one area, should the whole world have to follow this country into the financial market collapse we saw in 2008? Or should Europe be an area of stability? I would like us to think about that, because I hear that same argument about everything: taxing financial transactions, forget about it, everything will go elsewhere. Forget about financing the developing countries, there’s no point. Market transparency, forget about it, the others are opaque. Market regulation, forget about it.
So what image of the world are we going to give? Always driven down to the lowest common denominator, a completely flattened world where he who leads the way, who decides on the path is he who believes in the least, who wants the fewest rules, who has the fewest values? And should we wait for him to be convinced before we can finally promote a model, a European model worthy of the name, respectful of the market, information, producers and consumers? Is this where we are heading?
The French presidency believes that the issue of commodity price regulation – and I will conclude on this note – is emblematic. Emblematic of market operations, emblematic of economic issues, emblematic of respect for people in the world who have the right to be able to survive with acceptable food prices, emblematic of the world of the 21st century, which we want stable, organized, cohesive, respectful of values and not just unscrupulous interests.
I hope you understand now, ladies and gentlemen, that my presence alongside President Barroso at this conference is very important to me.
It is not a technical conference, as I have sometimes read, where you are going to discuss abstruse arguments. It is about life, it is about the world’s future, it is about not finding ourselves once again on the edge of the abyss, turning the page on the disastrous example that the unscrupulous financial operators set, who brought the world to the edge of the abyss and, from this dreadful experience, building a new world together based on something we deeply need: stability, transparency and regulation.
¹ Source of English text: French G20 presidency website.