France 24 debate on agflation

On Tuesday 26 February, France 24, the English edition of the French news channel, hosted a debate about the worldwide rise in food prices. In the course of that debate, an Italian banking commentator criticised the dairy firm of Yoplait, whose marketing director was representing the food sector, for not offsetting the rise in his milk costs through appropriate hedging instruments.

There are a number of points to be made here. First of all using hedging instruments only protects one against short-term fluctuations. Where there is a long-term shift in prices, that will ultimately have to be passed on to the consumer, if only because the cost of the hedging instrument will also rise. Even the case of short-term fluctuations, it is quite possible to take out a hedge and then to find that prices fall unexpectedly and one's less sophisticated customers turn out to be more competitive. In a worst-case scenario one can then find that customers or suppliers seek to renegotiate contracts and the hedge then becomes a liability.

Apart from this broad point, there is the fact that hedging instruments are only generally available for foreign exchange rates and for bulk commodities like wheat and sugar. One reason for the limited availability of hedging instruments in the dairy sector is that this sector is the subject of intensive market management both by the common agricultural policy in Europe and by the USDA in the United States. Up to 2006 this resulted in milk prices being much more stable within the United States and the European Community than they were on the world market. This was particularly true in Europe where there was a natural surplus of milk held in check by the quota system. In the United States was no need for a quota system because supply and demand were more or less in internal balance. This situation resulted in more significant internal price fluctuations in the United States than in Europe. As a result there are hedging instruments for dairy products on the Chicago Mercantile Exchange. However these instruments are linked to the course of the internal US milk prices which are rather separate from those on the world milk market.