Secular decline and variability in agricultural commodity prices continue to be matters of concern, not only for those developing countries dependent on commodity export earnings, especially from tropical crops, but also for those developing countries increasingly reliant on food imports for their food security. Secular relative decline in agricultural commodity prices is expected as technological progress reduces costs and induces supply expansion at a faster rate than population and income growth expand demand. However, unanticipated shifts in supply and demand lead to variability around commodity price trends, and the effects of these shifts are made more pronounced by the inherent economic and physical characteristics of agricultural commodities such as low demand and supply elasticities and perennial production. At a general level, all commodity prices are affected by the same basic factors, namely the market fundamentals of demand and supply, but these can change through time as a result of changes in technology, consumer preferences, market structures, policies or institutions. The articles in this Commodity Market Review describe analyses undertaken by the FAO Commodities and Trade Division relevant to a number of commodity market and policy issues.
The price inelastic demand for most agricultural commodities means that lower world prices lead to lower export earnings for developing country exporters. Many developing countries, and especially certain least developed countries, remain dependent for a significant share of their export earnings on one or a few agricultural exports. The first article explores the international coffee crisis which provides a graphic illustration of the difficulties faced by commodity exporters in recent years. It also illustrates some of the difficulties involved in industry coordinated responses to depressed commodity prices. The review of the recent unsuccessful coffee export retention scheme has topical relevance to the current discussions of commodity supply control schemes. It is apparent that attempts to control commodity supplies are fraught with difficulties. Attempts to stimulate demand through generic promotion may be more promising, but in the longer term demand-supply balance generally requires diversification out of commodity production.
Clearly, the implications of low agricultural commodity prices are different depending upon whether the perspective is that of a commodity exporter or a food importer, although declining export earnings will reduce a country's ability to pay for increasing food imports. Lower international prices for basic foodstuffs should slow the growth in the food import bills of the importing developing countries which include many of the poorest countries in the world. However, the trend towards increasing net imports exposes countries to risks of variability in food prices and hence food import bills. The second article in this review provides an analysis of trends in food import bills and the increasing vulnerability of least developed countries in particular to commodity price variability, including that which might be induced by international agricultural trade policy reform. Price fluctuations are not the only source of escalating food import bills. The third article in this review, on food emergencies, food security and economic progress in developing countries, examines the impact of disasters - natural and man-made - both of which appear to have increased in frequency in recent years.
The impact of world commodity price variability on producers and consumers and the effectiveness of price signals in bringing about adjustments in supply and demand depend on the extent to which world market prices are transmitted to domestic markets. It is only if falling prices, for example, are transmitted to domestic markets that producers have the incentive to reduce production and consumers have the incentive to increase their demand moving the market towards balance. The fourth article in this review on market integration and price transmission is concerned with these issues. It focuses particularly on empirical analysis of the extent of the degree of price transmission from world to domestic markets and presents some case study evidence of price transmission for various food and cash crops.
Recent discussions of international agricultural commodity markets have been dominated by the issue of trade liberalization and multilateral negotiations on improvement of market access and limitation of export subsidies. The process of liberalization is generally seen as one which will lead to higher commodity prices at least in the short-run, although the effects of liberalization on commodity prices so far following the Uruguay Round have been apparently small. Progress in the negotiations of the current Doha Round is slow, with opinions apparently divided at the Cancun ministerial meeting on the appropriate scope and ambition of the liberalization envisaged. However, there remains keen interest in the likely outcomes of the negotiations. The next two articles consider policy issues and debates.
The first of these two policy articles presents a modelling analysis of the likely impact on world prices, producer and consumer welfare, trade and government revenues of various proposals put forward in the Doha Round - the Harbinson, US and EU proposed modalities. Since the Doha Round has been referred to as a "Development Round", the impacts on developing and least developed countries is the focus, and the article provides an assessment on the extent to which developing country concerns would be met under these various reform proposals.
While improving market access is important for food products, tariff levels for tropical products and raw materials at least in their less-processed forms are typically not high. More significant issues for these commodities are tariff escalation, where tariffs increase along value chains, and domestic support in developed countries which encourages excess production. Both of these issues were highlighted at the Doha Ministerial Conference. Reducing tariff escalation is considered a critical element of the development dimension of the Doha Round since it is seen as limiting the opportunity for developing country exporters to capture value-added through vertical diversification and hence achieve greater and less volatile growth in export earnings. The final article reviews the widespread incidence of tariff escalation and the extent to which different tariff-cutting formulae will reduce it.
David Hallam
Chief,
Raw Materials, Tropical and Horticultural Products Service
Editor, Commodity Market Review 2003-2004
