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Opinion: Sarko misses a lucrative trick

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Nicolas Sarkozy should go back to the drawing board over farm policy.

The French president's plans, including E1.6bn in financial support, to prop up farmers, aren't just a backward step politically.

(Justified or not – and even so-called free market economies such as America practice agriculture support – they end France's spell as a consensus actor which has been a remarkable success in squeezing Brussels for aid to dairy farmers.)

The main reason Mr Sarkozy should think again is his dismissal of speculators. In a move for less volatile commodity prices, he urged the commission to come up with "genuine regulation" to keep non-trade investors at bay.

That's no good. For two reasons.

Wrong tree

The first is that he is being naïve. The main speculative forces in farm commodity markets lie well beyond Brussels' jurisdiction.

Sure, they have some impact in the London and Paris markets, accounting for 15-20% of trades.

But that's chicken feed compared with Chicago, which last year traded lots equivalent to 39 times total US wheat production. And it is Chicago which sets the pace in the main markets.

Whatever reforms Brussels bought to Europe's commodity trading would be dwarfed on the world stage.

Paris match

The second reason for Mr Sarkozy to withdraw is that he is missing a trick. He should be encouraging speculators to come to Europe rather than attempting to tie them in knots.

That would be good for Europe as a whole. Getting bigger in good ole' farm commodities would be one way for the region to rebuild in finance without recourse to the little-understood derivatives which have caused such trouble.

And it could especially good for France. Grain trading is one financial arena in which Paris far outpunches London. On Tuesday, its November wheat contract traded 4,370 lots compared with 70 (albeit twice the size) for London's.

Volatility problem?

Of course, the risk is that getting more speculators on board would drive the price volatility Mr Sarkozy is trying to iron out.

That's not impossible, although the evidence linking short-term investors and volatility is not conclusive. (Government intervention is probably a bigger problem, as last year's spike in rice prices showed.)

But it would take some time to get speculative levels anywhere near Chicago volumes. Indeed, Chicago was dominant for decades before this year's regulatory concerns over funds and short-term investors really took root.

If excessive speculation did become a problem in Europe, it is likely be an issue for a distant successor of Mr Sarkozy to solve.


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