Commodity markets: global trends, local impacts
Least-developed countries most vulnerable to price declines
Long-term trends, short-term shocks and price spikes in agricultural commodity markets aren't just arcane macro-economic phenomena -- they have very real impacts on the day to day lives of people everywhere. Not only do they affect the price people pay for food and clothing, they can have a larger impact on the overall economic well-being of families, communities -- even entire countries -- that are dependent on commodity exports for cash earnings.
According to a new FAO report, The State of Agricultural Commodity Markets (SOCO), the impact of commodity price fluctuations is greatest in the poorest countries of the developing world. "An estimated 2.5 billion people in the developing world depend on agriculture for their livelihoods," SOCO points out.
And, according to the report, in the second half of the 1990s prices of several commodities exported by developing countries fell to their lowest levels since the Great Depression.
Overall, real prices for all agricultural commodities have declined over the past 40 years, but the rate of decline has varied from commodity to commodity. Raw materials, tropical beverages, oil crops and cereals have experienced the steepest declines, SOCO observes. The real price decline for horticultural products, meat and dairy goods has not been so dramatic.
The impact of success - oversupply
SOCO also notes that global commodity supplies have grown more rapidly than demand, fuelled by increased productivity and the emergence of major new producers. According to the report, advances in agricultural productivity through improved technology potentially benefit both producers and consumers. Producers see lower costs and improve their competitiveness, while consumers benefit from lower prices.
However, SOCO adds that it has been the more advanced and prosperous developing countries that have managed to take advantage of the downward price trend in commodities by shifting production and trade into higher-value sectors.
Developing countries other than least developed countries (LDCs) have more than doubled the share of horticultural, meat and dairy products in their agricultural exports, while reducing their reliance on tropical beverages and raw materials. In the 1960s tropical beverages and raw materials made up 55 percent of their agricultural exports. By 1999-2001 they accounted for just around 30 percent, says SOCO.
In LDCs the story is very different. Their dependence on tropical beverages and raw materials for export earnings actually rose from 59 percent to 72 percent between the 1960s and 2001. At the same time, SOCO says, LDCs saw their share in world agricultural trade shrink even as their dependency on it remained far higher than that of other developing countries.
Lower food prices mainly benefit consumers in developed countries or consumers living in urban areas of developing countries. Net food importing countries benefit from savings in foreign exchange. However, in so far as lower world prices are transmitted to local markets, the vast majority of the world's poor and hungry, who live in rural areas of developing countries and depend on agriculture, suffer losses in income and employment caused by declining commodity prices which generally outweigh the benefits of lower food prices.
Government policies in both developed and developing countries have seriously distorted the over-supply problem in agricultural markets. Tariffs on agricultural imports in both developed and developing countries have impeded growth in agricultural exports from developing countries. In addition, farmers in many developing countries that do not have, or use, possibilities to apply tariffs on food imports face competition from highly subsidized and mechanized producers in industrialized countries. [For more on this, see related article, "Food trade deficits threaten poorest countries", linked at right.]
Small farmers need to protect themselves
Though agricultural commodity prices have shown signs of recovery in recent months, SOCO says this trend does not appear to be secure and warns "the long-term prospects for commodity-dependent farmers and countries in the developing world are not bright."
Agricultural commodity prices remain highly volatile, and FAO says the tendency for growth in supplies of agricultural commodities to outpace growth in demand at given prices will continue.
To reduce the impacts of commodity price shocks and spikes, FAO has recommended helping farmers and consumers protect themselves through schemes such as market-based price insurance or forward pricing systems. "Efforts to address the long-term problem of excess production of traditional export crops must focus both on increasing demand and controlling supplies of some commodities and on reducing the vulnerability of farmers and countries that depend on these commodities," SOCO explains.
The report also recommends implementing diversification strategies that would allow farmers to move into the production of higher-value crops, or value-added processed goods, which it says would contribute to reducing both supplies and dependency.
15 February 2005
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