PART ONE: REPORT OF THE CONSULTATION ON AGRICULTURAL COMMODITY PRICE PROBLEMS

Rome, 25-26 March 2002

I. Introduction

1. Representatives of International Commodity Organizations (representing coffee, cotton, rubber and sugar), International Organizations (FAO, World Bank, IMF, UNCTAD, OECD and the CFC), and Academics and other Experts participated in high level consultations at the FAO Headquarters on 25-26 March 2002 concerning agricultural commodity price problems. The International Grains Council provided a written statement to the meeting. The List of Participants is attached as Appendix I to this report.

2. The Consultation was called to address three important aspects of the depressed levels of most agricultural commodity prices: the nature of the price trough, and the factors underlying it; the implications of low commodity prices for developing countries; and the case for and possible forms of actions to redress low commodity prices.^[1]

3. Average prices of nearly all basic foodstuffs had declined steadily from peaks reached in the mid 1990s to levels not seen for nearly two decades. For tropical products the decline in prices had been even more dramatic: coffee prices had fallen to their lowest levels for more than thirty years, and quotations for other beverage crops were also very low. Prices of raw materials had deteriorated significantly. Among these, prices of cotton were at the lowest level since the mid-eighties.

4. The Consultation noted that developing countries exporting agricultural commodities, especially beverages and raw materials, have suffered particularly from low prices and falling export earnings. The problem is obviously most severe where countries are dependent for a significant share of their export earnings on one or a few agricultural exports. Forty-three countries, concentrated in Sub-Saharan Africa and Latin America and the Caribbean, earn more than 20 percent of their total merchandise export revenue and more than 50 percent of their total agricultural export revenue from just one agricultural commodity. Of these countries, 32 are least developed or small island developing states. In countries with high dependence, there is a clear and direct link between commodity trade performance, economic growth and food security.

5. Therefore, the overall objective of the Consultation was to promote international action to deal with agricultural commodity price problems and to identify possible approaches to meeting the concerns of commodity sectors, particularly of developing countries and of poor farmers.

II. Nature of the price depression

6. The Consultation noted that although most commodity prices were at historically low levels, in the context of prevailing market fundamentals these prices were not considered "abnormal". The results of preliminary econometric analysis on commodity price developments since the 1970s presented by the Commodities and Trade Division of FAO indicated no recent changes in structural market relationships.

7. The Consultation recognized the economic and social significance of agricultural commodities and recommended that greater attention be given to the issues affecting their markets and the implications for producing and consuming countries in both the short and longer run. It was stressed that in addition to over-arching and macroeconomic factors, prices were influenced by a number of commodity-specific factors. These were clearly set out in inter alia the statements presented by the International Coffee Organization, the International Cotton Advisory Committee, the International Rubber Study Group, the International Sugar Organisation and the International Grains Council.

III. Factors influencing prices

8. The Consultation assessed the impacts of some of the overarching factors influencing commodity markets and prices on the basis of presentations by high-level participants. These covered developments in the international monetary system; technology, productivity and market growth; changing market structures and consumer preferences; WTO negotiations and commodity market liberalization; policies and other factors at the national level; and various intervention or withholding schemes.

9. As regards the influence of the international monetary system, the Consultation noted that over the past 30 years the US dollar cycle had generally moved in the opposite direction of dollar commodity price cycles: a strong dollar was often associated with weak dollar commodity prices as was the case in recent years. In the course of discussion, a number of issues were identified which could merit further examination, in particular whether commodity price instability had increased since the 1970s and the extent to which this reflected changes in the international monetary system. Also, it was suggested that there was a need to investigate whether certain external factors might be operating to influence both dollar and commodity price cycles simultaneously. Thus, increased productivity stemming from the use of new technologies in the United States relative to the rest of the world was one of the causes for a stronger dollar, but at the same time the rapid growth of productivity in agriculture relative to other sectors was in part responsible for lower commodity prices.

10. In seeking explanatory factors for commodity price movements, the Consultation agreed that while monetary factors could exert a significant influence, changes in commodity supply/demand conditions were of fundamental importance. In order to more accurately describe movements, the Consultation agreed that commodity prices should be expressed in terms of a universal unit of account other than the US dollar. It was suggested that the use of SDRs should be considered for future analysis of price developments.

11. The Consultation took note of the proposal by Nobel laureate, Dr Robert Mundell, that countries should return to fixed exchange rates which would restore order to the world monetary system. In his view, this could be beneficial for developing countries and provide an anchor for responsible national monetary policies. It was pointed out by several participants in the Consultation that currency devaluations had given some exporters of primary commodities a competitive edge in world markets to the detriment of other supplying countries.

12. In considering the effects of technological change on commodity prices, the Consultation was informed that over the past 50 years, real cost reductions in agriculture in both developed and developing countries had been approximately double those for the rest of the economy. Gains due to technology adoption were higher in Latin America, Asia and the Near East than in Sub-Saharan Africa. It was noted that cost reduction technology was one factor which had often contributed to growth in output outpacing increases in demand. The Consultation expressed concern about the adverse impact that lack of access to technological advances could have in terms of price/cost squeeze on producing countries and commodity sectors which did not share in the technological progress. Those countries most in need of improved productivity and competitiveness were often those which suffered the greatest constraints in their adoption of new technologies. Biased access to such technologies could increase the gap between those countries able to participate in the global economy and those relegated to marginalization.

13. Uncoordinated approaches to commodity development also contributed to market imbalances, for example the continued investment in commodities beset by significant short and longer term market problems.

14. With regard to the policy environment affecting commodity prices, the Consultation drew attention to the close linkages between domestic and international policies. It therefore cautioned that trade liberalization, which was often considered to offer prospects of higher commodity prices, might not be effective by itself in enhancing the growth of markets and remuneration to farmers world-wide unless accompanied by appropriate reform in domestic policy regimes.

15. The Consultation took note of the complexities of commodity markets at the national level. It was necessary to take account of the structures of those markets, the different roles played in various commodities by the public and private sectors, and also the market interactions among various commodity groupings. It was noted that these factors often outweighed the effects of international price developments and hence insulated both producers and consumers. The Consultation recognized the difficulties that often existed in liberalizing domestic commodity sectors in the light of broader economic and social objectives and discussed whether a "second-best" approach might be to adopt regulatory arrangements which might offset existing market imperfections. However, it was noted that domestic reforms are often the best way to improve producer incentives and stimulate production, and current low commodity prices make such reforms even more essential.

16. While progress had been made under WTO in disciplining agricultural trade, considerable progress was still required. Tariffication had improved market transparency, but bound tariffs remained high for many agricultural products. There was therefore a need to increase market access. Of greater significance for many commodities was the need to reduce tariff peaks on value-added processed and semi-processed products. TRQ's were also mentioned as requiring further attention in the new round of negotiations. It was stressed that for some commodities, in particular cotton, neither export subsidies nor tariffs were of significance but rather large domestic support programmes had a major distorting effect on the market and were mainly responsible for the prolonged and continuing price depression. A number of instances of adjustments in supply to declining prices were cited, implying that market forces would redress supply-demand imbalances in the absence of such policy distortions.

17. For certain, mainly temperate, products, trade liberalisation was expected to lead to higher prices at least in the short term. However, it was agreed that for others, notably tropical products, trade liberalisation would have little effect. The Consultation concluded that two related problems required remedial actions: tariff escalation which limited the ability of developing countries to compete in the markets for value-added products, and domestic support policies which insulated producers from price signals and had adverse effects on commodity prices.

18. In reviewing the range of other actions which might be taken in response to low and variable commodity prices, the Consultation recognized that attempts to resist market forces were fraught with difficulty and had enjoyed little success in the past. The record of international commodity agreements (ICAs) in reducing price variability was difficult to judge, but ICAs with "economic clauses" were in any case not appropriate to current circumstances. The scope for "producer only" agreements in general and the nature of actual attempts in this direction, for example ITRO in the rubber market, were discussed.

19. Attempts to stimulate demand and raise prices in the longer term through promotional activities were regarded as potentially useful, although the difficulties of international promotional campaigns were noted. Therefore, the Consultation stressed that coordinated national programmes in collaboration with national agencies were more easily manageable and potentially more effective, and suggested that the possibilities for undertaking such programmes for various commodities should be examined. The opportunities to increase demand for certain commodities in the producing countries themselves were also highlighted.

20. Diversification was discussed as a means of securing longer-term improvement in prices. However, a number of constraints to successful diversification were noted. Vertical diversification into value-added forms faced problems of tariff escalation. The need to highlight this issue in the current round of multilateral trade negotiations was stressed. Barriers to entry into the markets for value-added products were also noted as a result of the market structure of many commodity markets. The Consultation called for a detailed investigation of market structures and the implications for competition and commodity prices.

21. At the same time the Consultation drew attention to the substantial additional returns which could be earned from limited processing and alternative presentations (such as retail packs) and product differentiation. The importance of enhancing the competitiveness of commodities from developing countries through such approaches was noted.

22. Fair trade, organic and other niche product forms were seen as potentially valuable means of raising returns for some producers, but were not regarded as a solution to the major imbalances of demand and supply faced by some commodities.

23. In noting that the handling, processing and distribution of agricultural commodities were often associated with high costs, particularly in high income countries, the Consultation nevertheless expressed some concern about the share of returns accruing to the producing sectors, and the need to curtail intermediary costs in order to stimulate demand. Attention was drawn to the need to examine more closely the effects of increased concentration in the international food market on prices and on the relative benefits accruing to consumers, producers and intermediaries for individual commodities.

IV. Conclusions

24. Following its intensive discussions, the Consultation considered that there were a number of matters to be drawn to the attention of the international community and subjects on which further research was needed.

Matters to be drawn to the attention of the International Community

Adverse impacts that prolonged commodity price depression was having on the food security situations of developing countries

25. While recognizing that low international prices for food commodities might be generally beneficial for importing countries, the Consultation stressed that the ongoing widespread price depression was having extremely adverse effects on producers world-wide, and particularly those in developing countries. It was pointed out that in the longer run continued price depression could also result in excessive adjustments which could curtail availabilities of food and non-food commodities and lead to destabilizing price developments.

26. There are large numbers of developing countries which remained heavily dependent on the export of a few primary commodities for their earnings which also helped sustain the import of food products. Attention was drawn particularly to the adverse impact that losses in international and government revenues had on economic and social conditions, particularly in African countries highly dependent on the export of coffee and some Asian countries dependent on cotton exports.

Need to promote greater evenness in the access of developing countries to improved technologies in the agricultural sector

27. Differential access to improved technologies in the agricultural sector tended to widen the gap between those countries able to compete effectively in international markets and those which continue to suffer from relatively high cost structures. Intensified technical assistance was required to counter such adverse long term trends in agricultural productivity, particularly in least developed countries and small island developing countries. Programmes or projects should be undertaken to assist developing countries to adopt new technologies and to engage in appropriate vertical and horizontal diversification.

Promotion of enabling international regulatory environment allowing developing countries to gain greater benefits from trade

28. While recognizing that national economic, social and policy factors had an important influence of the gains obtained from agricultural trade, other factors such as market access restrictions, export subsidies and production supports represented distorting factors which hampered the growth of markets and trade. Attention was needed to correct these factors, particularly those which impacted on least developed countries and small island states, and those which weighed heavily on exports of value added products from developing countries. Developing countries should identify the policy measures in their trading partners and in competing suppliers having a negative impact on their major items of trade as a basis for seeking more favourable conditions under future WTO negotiations.

Integrated information on commodity market conditions, prospects and issues

29. The various international agencies involved in commodities work and the respective international commodity bodies should consider bringing together their complementary expertise to develop an overview of the commodity situation and problems, or of significant issues. This overview should be widely disseminated at periodic intervals to improve the allocation of resources to these sectors. The form of such assessments and the means of dissemination should be agreed among participating agencies and bodies.

Promotion of demand for agricultural commodities

30. Past experience suggests that promotion activities can help reinforce demand for agricultural commodities. Therefore, the possibilities for undertaking such programmes should be examined in appropriate commodity organizations or other international fora, with particular attention being given to the advantages of coordinated national programmes implemented in cooperation with national agencies.

Priority issues for further analysis

31. The Consultation also highlighted a number of priority issues in commodity markets where further analysis was required to better inform debate and provide information on which to base any proposed actions to address commodity price problems. These were as follows.

• The incidence and effects of tariff escalation for value-added products, and in particular for developing country exports.

• The effects of domestic support policies on the market balance for certain commodities, for example cotton, including the effects on developing country exports.

• The share of primary commodity producers, and in particular those in developing countries, in the price of their commodities in final markets and the obstacles they face in securing a greater proportion of that value-added.

• More generally, trade and competition including the market structure for developing country export commodities, the scope for vertical integration and barriers to entry.

• Commodity and country specific opportunities for diversification, including through product differentiation.

• The design of demand promotion schemes and an analysis of factors affecting their success or otherwise.

• The value of market information in improving the bargaining position of producers and developing country exporters.

• Policy options open to developing countries to reduce negative consequences of excessive price fluctuations on world markets.

Future interagency cooperation

32. The Consultation concluded that there were ample opportunities for cooperation among the various international and national agencies, commodity organizations, and academic institutions to promote coordinated research on significant and emerging commodity problems and issues, and that consultations should be pursued among interested experts on the implementation of a coordinated programme in this area. It was further agreed that the conclusions and recommendations of the Consultation should be disseminated as widely as possible, inter alia through a summary report to the 64th Session of the Committee on Commodity Problems (18-21 March 2003). It was suggested that the outcomes of various research initiatives, for example regarding tariff escalation and domestic support for specific commodities, should be made available in appropriate fora to assist the WTO negotiating process.

33. The Consultation requested FAO to explore the possibility of organizing high level meetings every one or two years among representative of international agencies, commodity organizations and academic institutions to (i) carry out an assessment of commodity market conditions and prospects for broad dissemination, and (ii) undertake in-depth discussions and exchange of expertise concerning issues of mutual concern, as identified by participants.

Appendix I: List of Participants

INTERNATIONAL COMMODITY ORGANIZATIONS

UNITED NATIONS AND SPECIALIZED AGENCIES

INTERGOVERNMENTAL ORGANIZATIONS

RESEARCH INSTITUTES

EXPERTS

Dr Robert Mundell, Professor of Economics, Columbia University (1999 Nobel Prize in Economic Science)

Dr Robert Evenson, Professor of Economics, Yale University

Dr Timothy E. Josling, Professor and Senior Fellow, Stanford University

Mr James Greenfield, Former Director, FAO Commodities and Trade Division

Mr Stephen Kirubi, Kenya Planters' Co-operative Union Ltd

Mr John Wainio, USDA/ERS

Mr Adel Beshai, Professor of Economics, American University, Cairo