Soft commodities – what drives agricultural prices?

Situation analysis, 2011 and 2012. Situational analysis based on latest research from 2011 and 2012 – key findings still apply today.

After conducting an extensive study in March 2011, Deutsche Bank research presented its findings and highlighted important linkages in August 2012: "Food prices on the rise again, yet no major crisis in sight."

Deutsche Bank Research: Rising prices due to rising demand

A comprehensive study by Deutsche Bank Research shows that rising prices for agricultural commodities are mainly caused by the fact that supply cannot keep pace with increasing demand. What exactly is causing this increase?

Key drivers include global population growth, rising incomes, changing diets in developing and threshold economies, and bio-fuel production. At the same time, water shortages, extreme weather, climate change, poor infrastructures, unjust land distribution and other factors are restricting supplies of agricultural products. International trade restrictions and subventions at national levels further aggravate the situation.

This is what the World Bank says

A 2013 World Bank study shows that increases in agricultural commodity prices can be mainly attributed to changes in crude oil prices. Food storage levels and consumption as well as the influence of exchange rates are seen as far less influential. more

G20 determines that agricultural prices are a global challenge

The international community needs to address these issues on a coordinated basis, and the Action Plan on Agriculture adopted by the G-20 at the Cannes Summit is an important step toward it.

Some academic research suggests an impact on prices (both up and down) from speculative activity, but most of the peer-reviewed, academic literature suggests that the fundamentals of demand and supply are the dominant drivers of commodities prices. More research is needed in order to assess the true impact of speculation. We will sponsor such efforts, including by our own research teams.

At the same time, it is widely accepted that derivative markets for agricultural products provide hedging - through futures, options, swaps and other tools - and bring liquidity to the markets (by allowing sellers to find buyers and vice-versa), thus contributing, in principle, to decrease volatility. They also provide strong price signals to which supply will react within the constraints of growing seasons. They provide the certainty which encourages longer term investment in infrastructure and farming technology.

We agree with international policy makers that transparency in agricultural commodity derivatives markets should be enhanced and measures to avoid misconducts strengthened. Significant regulatory changes have already been decided upon or are under consideration in both Europe and the US.

These reform aim at tightening conduct requirements to avoid manipulation; additional reporting requirements to increase transparency; position limits or similar measures such as position management; and new trading and clearing rules for OTC derivative contracts.

Deutsche Bank is supporting these efforts to implement appropriate regulation across all relevant futures exchanges and markets. We believe this is essential to allow these markets to function well as instruments of hedging and price discovery.

2011 summit in Cannes

G20 action plan

Key points include:

  • Better agricultural yields are seen as the basis for food security
  • Market transparency on commodities markets should be improved
  • Clear rules and framework parameters to keep commodity markets functional
G20 action plan

Deutsche Bank Research

Dr. Claire Schaffnit-Chatterjee

"Where are food prices heading?" –
A study by Dr. Claire Schaffnit-Chatterjee from 2011, Deutsche Bank Research, PDF, 800 KB

Food prices on the rise again, no major crisis in sight yet

For food to become cheaper and more plentiful, agriculture must become more productive, more efficient and more sustainable. This calls for enormous investments. Read more about agricultural investments for more productivity and sustainability

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