City wants more hedging focus

FINANCIAL INSTITUTIONS in the City of London are being urged to corner a derivatives market for farm produced goods as free market reforms begin to impact on European agriculture.

Michael Savory, the Lord Mayor, told TheTelegraph, Tue, (Apr 26) that due to the changes of the CAP price, volatility in agricultural produce had increased dramatically.

If farmers are to cope with this increased price volatility they will need to use complex hedging techniques, he told the paper.

Mr Savory is attempting to bring together city banks, insurance companies, DEFRA and the NFU to sponsor the idea and develop affordable packages.

“The cost needs to be cut down to 1% of farmers’ total overheads, if it were as high as 2.5% it would be too expensive for them,” he told the paper.

The Future and Options Association has produced a report on the state of the derivatives market in South Africa and Australia.

These markets are recognised as being amongst the most open in the developed world and far more open to competition than Europe’s.

They provide a basis for the type of free market that Europe is slowly moving towards.

According to the FOA, almost half of South Africa’s farmers – responsible for 90% of production – trade agricultural derivatives on the South African Futures Exchange with contract volume as much as 12 times actual production.

Similarly, a third of Australian farmers now use hedging instruments covering products ranging from wool, cotton, fruit and wheat.