Food Outlook 10/96

Previous Page TOC Next Page

(Contributed by the International Grains Council)

The Baltic Freight Index (BFI) declined on 23 September below 1 000 for the first time since early August 1987. The main cause of the weakness of rates was the build-up in excess tonnage as new vessels entered service. These additions to the world fleet were not offset by scrapping of older ships. Prices in the demolition market are not sufficiently attractive to persuade owners to ballast vessels to scrapping enterprises, which are located primarily in Far East Asia. For several months older tonnage was able to compete by accepting consistently lower rates, often under short-term time-charter arrangements. Eventually, however, this practice proved uneconomic given high maintenance and insurance costs for older ships.

Mid-October, however, brought a change in market sentiment. A pronounced increase in tonnage demand to ship grain and fertilizers stimulated freight rates at major loading areas, especially for Paramax and Handysize carriers. More activity in coal and iron ore business for deliveries to destinations in Far East Asia encouraged Capesize fixtures. Owners with vessels in prompt positions were able to hold out for higher rates.

By 18 October the FBI had risen to 1 145, although it was uncertain how long the recovery would be sustained. Operational costs increased due to the upsurge in oil prices and thus bunkering costs at major ports. Some traders considered that this development could result in older vessels being laid up or scrapped. Nonetheless a situation of tonnage equilibrium could prove elusive, due to the large number of vessels on order.

Effects of 1995/96 Cereal Price Rise in Selected Developing Countries

This box reports the key findings of a recent FAO survey on cereal price situation in over 30 food importing developing countries during 1995-96 when world market prices increased sharply. The survey also reviewed policy responses by governments to the price rise 1/.

During 1995-96 (March-May 1996 over July-September 1995), world wheat prices rose 27 percent and maize prices by 47 percent while rice prices rose in the second half of 1995 by 30 percent. The key findings of the special survey were as follows.

First, cereal prices, measured in local currency terms and therefore the actual prices faced by consumers, increased sharply, defined here as the rise in prices by at least as much as in the world markets: in 10 of the 19 sample countries for wheat (with a simple average price increase of 65 percent); in four of the 19 sample countries for maize (average 60 percent); and in only one of the 21 sample countries for rice. However, prices rose less sharply than that but still considerably in many other countries. For example, maize prices rose by at least half the increase in the world market ( i.e. by at least 24 percent) in 11 countries, with a simple average of 45 percent. Similarly, rice prices were found to have risen by at least 15 percent in seven countries - the Sudan, Zambia, Pakistan, Sri Lanka, Chile, Ecuador, Jamaica and Venezuela, with a simple average of price changes for the seven countries being 24 percent.

Second, in terms of the impact by region, price rises were most conspicuous in countries of Latin America and much less in Africa. Thus, wheat prices increased by at least 27 percent in four of the six sample countries of Latin America, the simple average of price changes being 65 percent. In Asia, wheat prices rose in eight of the nine sample countries, the increase being sharp (i.e. by at least 27 percent) in five cases (Fiji, Islamic Republic of Iran, Philippines, Sri Lanka and Turkey), with an average rise of 48 percent. Wheat prices hardly increased in the other four countries: Bangladesh, Indonesia, Pakistan and Syria. In Africa, the only country where wheat price increased sharply was the Sudan while prices either fell or only increased marginally in other three countries, namely Ethiopia, Morocco and Tunisia.

Third, the above changes were in local currency terms and, therefore, also reflect the effect of currency depreciation over the review period. Measured in U.S. dollar terms, domestic market prices were found to have increased by roughly half of the increase in local currency terms. For example, the simple average of price changes for wheat for the 10 countries where prices rose considerably was 36 percent in US dollar terms compared to 65 percent in local currency terms. In the case of maize prices, for a sample of 11 countries where prices rose substantially (e.g. by at least 24 percent), the simple average of changes in these prices was 30 percent compared to 45 percent in local currency terms.

Fourth, the domestic supply situation played an important role in influencing the extremes of price transmission. Good harvests in 1995/96 in a number of countries were associated with smaller price increases. For example, cereal harvests in 1995/96 were normal or above normal in most of the sub-Saharan Africa countries covered by the survey.

Fifth, the estimated short-term price transmission elasticities (a measure of the extent of the change in domestic prices for a given change in world prices) were found to be highest for maize followed by wheat and they were low for rice. Price transmissions were relatively strong in countries of Latin America, compared with other regions.

And sixth, offsetting measures were widely taken by governments. The most common measures were trade-related, particularly increased import quotas and/or tariff reductions. In some cases, governments also raised consumer subsidies to mitigate the effect of the price rise.

1/ For details see, Review of Cereal Price Situation in Selected Developing Countries in 1995-96 and Policy Measures to Offset the Price Rise, Commodities and Trade Division, FAO, September 1996.

Previous Page TOC Next Page