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October 12, 2010

Who benefits from volatility?

By nearly all accounts, agriculture prices worldwide have entered a new era of volatility. Earlier this year, wheat prices shot up an additional $3 a bushel over two months due in large part to concerns around a wheat export ban in Russia. This week, corn prices have risen dramatically due to a USDA report issued Friday, finding a less-than-predicted corn crop this year.

This era of extreme volatility dating back to the 2007-08 global food crisis has contributed to the nearly one billion people worldwide suffering from hunger. This week in Rome, the U.N.'s Food and Agriculture Organization (FAO) is hosting a five-day conference on efforts to address global food security. The meeting comes on the heels of an emergency meeting at the FAO last month focused on increased volatility in grain markets.

Of course, agriculture production has always experienced ups and downs due to a variety of factors—from the weather to pests, economics or war. Traditionally, one of the simplest tools to smooth out agriculture markets is to establish reserves: putting food aside in times of plenty to release in times of scarcity. This week, IATP published a series of short primers on: why we need food reserves, food reserves in practice, what's next on food reserves, and the WTO and food reserves. IATP's Sophia Murphy is attending the FAO meeting in Rome to speak on a panel focusing on volatility, where she'll be making the case for food reserves.

Some kind of food reserve is just common sense, right? Who could be against food reserves and efforts to stabilize agriculture prices? Who profits from volatility in agriculture markets?

Yesterday's press release from Cargill announcing that profits jumped 68 percent this quarter provides a clue. As Cargill CEO Greg Page stated, "Our results were led by the food ingredients and the commodity trading and processing segments, both of which experienced resurgence in volatility across agricultural commodity markets. The change put Cargill's global breadth, trading and risk management skills more acutely into play as we worked with customers to help them manage their price risk and raw material needs."

As agriculture commodity prices remain volatile, agribusiness companies like Cargill and ADM (up $388 million last quarter) with a global reach and diversified holdings throughout the food chain are uniquely positioned to benefit, and so far, they have.

Ben Lilliston

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