The State of Agricultural Commodity Markets 2004 is the first issue of a new biennial publication that is intended to expand FAO's existing series of “The State of …” reports. While the findings and conclusions presented rely on technical analysis by FAO commodity and trade specialists, this is not a technical report. Rather, it aims to present commodity market issues in an objective, transparent and accessible way to the attention of a wider public, including policy-makers, commodity market observers and all those interested in commodity market developments and their impact on developing countries.
A particular goal is to raise awareness of the impact that developments on commodity markets have on the livelihoods and food security of hundreds of millions of people in the developing world, as well as on the economies of dozens of developing countries that depend on commodity exports for a substantial portion of their export earnings.
The report is divided into four main sections, supplemented by tables that provide basic data on current conditions and historical trends for commodity prices and terms of trade.
The first section, Recent developments and long-term trends, considers trends and volatility in agricultural commodity prices and discusses current conditions and recent developments against this background.
The second section focuses on Food import bills. It looks at the changing pattern of food imports as developing countries have shifted from being net exporters to net importers of food and other agricultural products. The section also examines the impact of international food price movements on the food import bills of developing countries in general and the least developed countries in particular.
The third section, Agricultural export earnings, looks at the continuing importance of agricultural exports for the economies of many developing countries. This section examines the implications of declining commodity prices and price volatility for commodity-dependent countries and investigates how tariffs and subsidies have impeded growth in agricultural exports from developing countries.
The fourth and final section explores Changing patterns of agricultural trade, with particular attention to their implications for commodity-dependent farmers and countries in the developing world. Issues addressed in this section include the shift in trade from primary to processed agricultural products, the growing importance and potential for commodity trade and regional trade agreements among developing countries, and the impact of increasing market concentration as agricultural commodity chains are increasingly dominated by a few transnational trading, processing and distribution companies.
The State of Agricultural Commodity Markets 2004 was prepared by a team from the Commodities and Trade Division of FAO, led by Alexander Sarris and David Hallam, and under the general guidance of Hartwig de Haen, Assistant Director General, Economic and Social Department of FAO.
Material for Section 1 on Recent developments and long-term trends was provided by commodity specialists in the Commodities and Trade Division: Abdolreza Abbassian, Pedro Arias, Boubaker BenBelhassen, Concha Calpe, Kaison Chang, Merritt Cluff, Michael Griffin, Ali Gurkan, David Hallam, Pascal Liu, Shakib Mbabaali, Brian Moir, Nancy Morgan, Paul Pilkauskas, Adam Prakash, George Rapsomanikis, Shangnan Shui, and Peter Thoenes. The statistical data underlying the analyses and many of the graphics were compiled by the statistical clerks in the Division: Gianni Borgianelli, Laura Cattaneo, Claudio Cerquiglini, Daniela Citti, Julie Claro, Dino Forzinetti, John Heine, Massimo Iafrate, Daniela Margheriti, Patrizia Masciana, Vincenzo Mazzucca, Marco Milo, Mauro Pace and Barbara Senfter.
The annex tables providing supporting data were assembled by Pedro Arias and Julie Claro.
Material for Section 2 on Food import bills was drafted by Ali Gurkan, Merritt Cluff, Adam Prakash, and Piero Conforti.
Section 3 on Agricultural export earnings was prepared by Pedro Arias, Shakib Mbabaali, George Rapsomanikis and David Hallam.
Material for Section 4 on Changing patterns of agricultural trade was provided by Nasredin Elamin, Hansdeep Khaira and Harmon Thomas.
All of the above reviewed and commented on draft material. Further helpful comments on earlier drafts were received from a number of other FAO professionals in the Economic and Social Department, in particular: Jelle Bruinsma, Deep Ford, Ted Gillin, Haluk Kasnakoglu, Panos Konandreas, Ramesh Sharma, Prakash Shetty, Josef Schmidhuber, Jacob Skoet and Randy Stringer.
The report was edited by David Hallam with assistance from Pedro Arias and Andrew Marx.
Long-term trends and short-term shocks on agricultural commodity markets affect us all. They have a direct impact not only on the prices of the food we eat and the clothes we wear but on the economic well-being of households, communities and entire nations that depend on commodity exports. Less directly but just as inexorably, they affect the viability of rural communities and lifestyles, the pace of migration to urban areas and the prospects for sustainable development.
The impact is greatest on hundreds of millions of people and on many of the poorest countries in the developing world. An estimated 2.5 billion people in the developing world depend on agriculture for their livelihoods. For many of them, the sale of agricultural commodities or employment in producing and processing commodities for export represent their only sources of cash income. More than 50 developing countries, including a majority of the least developed countries (LDCs), depend on exports of three or fewer agricultural commodities, typically tropical products, for between 20 and 90 percent of their foreign exchange earnings. However, many LDCs are also net food importers, spending more than half their export earnings on commodity markets purchasing food imports to make up for shortfalls in domestic production. For these people and countries, developments on international commodity markets may literally spell the difference between feast and famine.
The long-term trend in real prices for agricultural commodities has been downwards but prices have also shown marked variability around that trend. In the second half of the1990s, prices of a number of commodities exported by developing countries fell to their lowest levels since the Great Depression of the 1930s. The price of coffee plummeted 70 percent between 1997 and 2001, threatening the livelihoods of an estimated 25 million people who depend on coffee and triggering food emergencies in several countries in Africa and Central America. On the other hand, the lower prices for basic foods enabled many poor consumers, especially in urban areas, to meet their food needs at lower cost and to gain access to more nutritious diets.
Although commodity markets have rebounded in recent months, and dramatically so in the case of cereals, real prices in general continue their long-term downward trend. Many farmers and exporting countries still find themselves trapped by their dependency - producing and exporting more but earning less than they did in the past. At the same time, food-importing countries have benefited from the downward trend, but are concerned by the variability and short-term increases in international food prices.
Many reasons can be cited for the long-term decline and short-term volatility of real commodity prices. Much of the steady downward trend appears to be structural, reflecting the basic forces of supply and demand that drive markets: global supplies have grown more rapidly than demand, fuelled by increased productivity and the emergence of major new producers.
Advances in agricultural productivity through improved technology potentially benefit both producers and consumers. The former stand to gain from lower costs and improved competitiveness, and the latter from lower prices. But it has mainly been producers in better-endowed and more-developed regions that have been able to take advantage of productivity gains to strengthen their position on world markets. The LDCs have seen their share of world agricultural trade shrink, even as their dependency on it has remained far higher than that of other developing countries.
The main beneficiaries of lower food prices have been consumers in developed countries and in urban areas of developing countries. However, for the vast majority of the world's poor and hungry people who live in rural areas of developing countries and depend on agriculture, losses in income and employment caused by declines in the prices of the products they market generally outweigh the benefits of lower food prices when commodity prices fall.
The problem of oversupply has been exacerbated by government policies in both developed and developing countries that have severely distorted agricultural markets.
Tariffs on agricultural imports in developed and developing countries have impeded growth in agricultural exports from developing countries. Tariff escalation, where higher tariffs apply to goods exported at more advanced stages of processing, has reduced opportunities for developing countries to export higher-value processed goods whose prices have been considerably more stable than those for basic commodities.
In addition to tariffs, farmers in developing countries must contend with competition from highly subsidized and highly mechanized producers in the industrialized countries. Producer support to farmers in developed countries currently adds up to more than US$230 billion per year, almost 30 times the amount provided as aid for agricultural development to developing countries.
Tariffs and other barriers have also slowed the growth of trade among developing countries. South-south trade could expand rapidly, particularly where income growth is high and consumption levels remain low. But tariff barriers among developing countries can be higher than those imposed on imports by developed countries.
Another development in agricultural commodity markets has been the increasing concentration of market power in the hands of a few transnational corporations. Just three companies now control almost half the coffee roasting in the world, for example, and the 30 largest supermarket chains control almost one-third of grocery sales worldwide.
Such transnational enterprises have helped some smallholders integrate into the global market and have helped in the transfer of modern production and distribution technology. However, it is a matter of concern that market concentration has left others with little market power: FAO's Panel of Eminent Experts on Ethics in Food and Agriculture warned four years ago that “there are serious power imbalances arising from the concentration of economic power in the hands of a few”.
Agricultural commodity prices have shown signs of recovery in recent months. However, that recovery does not appear to be secure and the long-term prospects for commodity-dependent farmers and countries in the developing world are not bright. On the other hand, further short-term commodity price rises for basic foods are likely, and may threaten livelihoods in many low-income food-deficit countries.
Agricultural commodity prices remain highly volatile, and the tendency for growth in the supply of agricultural commodities to outpace growth in demand at given prices persists. High tariffs and subsidies in developed countries still hamper market access and depress prices. While trade among developing countries is growing faster than trade between developing and developed countries, opportunities for increased trade among developing countries are still undermined by trade barriers. For some commodities, trade, processing and retailing have become dominated by a small number of transnational corporations, and the market power of farmers and exporting countries has become relatively limited. Concern has been expressed at the apparently small share of developing country producers in the final value of their production.
The commodity market crisis of the 1990s has focused attention on all of these problem areas and has highlighted the need for new approaches to resolving many of them.
Take the example of price volatility. Past efforts to deal with the problem emphasized measures to stabilize prices or revenues directly, by managing buffer stocks or providing compensation to countries that suffered from unforeseen shortfalls in export earnings. For the most part and for a variety of reasons, these measures failed. New approaches aim less at preventing price swings than at helping farmers and consumers protect themselves against their impact 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. Diversification strategies that would allow farmers to shift to growing higher-value crops or to producing and trading value-added processed goods can contribute to reducing both supplies and dependency.
Action must also be taken to improve our understanding of the impact that increasing concentration in commodity chains has had on competition, prices and the share of final retail value that goes to farmers and exporters of agricultural products. Careful monitoring and further analysis are urgently needed, along with support for efforts by exporters to increase their collective market power. Analysis must also be devoted to understanding how declining world prices of basic food commodities, as well as the changing market structures, affect the food security of the poor in both rural and urban areas.
With the launch of The State of Agricultural Commodity
Markets, FAO hopes to contribute to informed discussion and decisive action in all of these areas.
This report will provide a biennial review of important trends in commodity markets and will highlight major policy issues and options for action.
Given the significant role that agricultural commodities play in all of our lives and their vital importance for millions of the world's hardest working and most vulnerable people, increased attention and concerted action are long overdue.