After a steep and prolonged decline in the prices of many agricultural commodities to historic lows from the late 1990s through 2001, prices on world markets have rebounded, or at least levelled off, over the past two years.
The recent recovery reflects reduced supplies of some commodities and stronger demand for others, as markets have responded to chronic oversupply and falling prices caused by changes in technology, consumer preferences, and market structures, policies and institutions. A variety of short-term factors have also contributed to the recovery, including the weaker exchange rate for the United States dollar, which is used to denominate many commodity prices.
Between 1997 and 2001, coffee prices fell by almost 70 percent, plummeting below the cost of production in many countries. This steep decline left coffee prices lower than they had been 30 years earlier, even in nominal terms, and precipitated food emergencies in several countries in Africa and Central America that depend heavily on coffee exports. Coffee prices have strengthened gradually over the past two years as producers, especially in Latin America, have responded to falling prices by reducing supplies.
Cocoa prices followed a similar trend but rallied earlier, starting in 2000. The recovery in cocoa prices began to falter by late 2003, however, as supplies started to rise again. The market has been weakened further by competition from “cocoa butter equivalent”, as the European Union (EU) relaxed its regulations on the use of fats derived from other sources to replace some of the cocoa butter in chocolates.
Tea prices have also been under pressure, as production ran ahead of demand growth, reaching record levels in 2003.
Record production and surplus stocks have also continued to pressure world sugar prices in the second half of the 2003/04 crop year.
Increased supplies from Latin America and sluggish demand depressed banana prices in 2003. Frozen concentrated orange juice prices were similarly influenced, although fresh fruit prices were shored up by reduced production. While demand growth has been significant for tropical fruits, price levels remain sensitive to market balance.
Shifts in the price trends for most agricultural raw materials have been less dramatic and there has been more variation among individual commodities. Nevertheless, a broadly similar pattern of recovery has emerged in most cases.
Cotton, rubber, jute, sisal and abaca prices have all benefited recently from stronger demand and slower supply growth. Prices for hides and skins, on the other hand, declined through 2003 in response to weak demand and increased supply.
International prices for most cereals surged during the second half of 2003, reflecting tight market conditions. In the case of rice, the tightness was exacerbated by the imposition of restrictions on exports in India and Myanmar. For wheat, reductions in exportable supplies in the EU and the Commonwealth of Independent States fuelled the price rise. Coarse grain prices continued to receive underlying support from sharply reduced exports by China, near-record low stocks in the United States and continuing increases in soybean prices.
The picture for oilseeds is rather different. In the past few years, prices have improved steadily from the low levels recorded in 1999-2000 and producers have responded with a robust increase in production. The increase in prices was triggered mainly by a sustained growth in demand that outstripped the expansion in supplies.
With demand firm and stocks at relatively low levels, both global output and prices for oilcrop products are expected to continue to rise in the short term.
Market balance is also currently favourable to dairy product prices. International prices have been bolstered in recent months by limited export supplies and sustained import demand. Higher prices are expected to be maintained during 2004.
The international market for meats, on the other hand, continues to be disrupted by animal disease outbreaks. During the first half of 2004, approximately one-third of global meat exports were affected by outbreaks of avian flu or by identified cases of bovine spongiform encephalopathy (BSE). Import bans on poultry and beef from disease-affected countries are leading to higher prices for products originating from disease-free zones. Constrained export supplies of meat are also pushing up prices for other animal protein products.
In general, it appears that the balance between supply and demand of agricultural commodities has improved, and with it the prospects for commodity prices after the sharp and persistent decline during the late 1990s. In spite of the recent strengthening, however, agricultural commodity prices generally remain close to historically depressed levels - and their longer-term decline relative to the prices of manufactured goods continues.
This secular downward trend is analysed further in the following sections of this report. For the latest information concerning commodity prices and trade, readers are referred to the Commodities and Trade Division pages on the FAO Web site at http://www.fao.org/es/ESC/en/index.html.
Movements in commodity prices on world markets provide a barometric reading on supply and demand conditions. Spikes or sharp drops in prices highlight the impact of shocks that affect the markets. Long-term trends in commodity prices, on the other hand, reflect the influence of changes in technology, consumer preferences, and market structures, policies and institutions.
A graph of agricultural commodity prices over the past 40 years reveals several striking features:
Over the past four decades, real prices for agricultural commodities declined by about 2 percent per year. Several factors have contributed to this long-term decline.
Prices of agricultural commodities can be expected to decline relative to industrial products as technological advances reduce costs and make it possible, at given prices, to expand production at a rate that outstrips both population growth and increases in demand spurred by rising incomes.
Prices of some commodities have also been driven lower by oversupply, fuelled by intense global competition in production, reduced transportation costs and new technologies that have increased productivity and introduced synthetic alternatives to some commodities. In some cases, the emergence of major new producers has also affected market balance: between 1985 and 2001, for example, Viet Nam increased its coffee exports from less than 10 000 tonnes to more than 900 000 tonnes, becoming the world's second largest exporter, and continued to expand production even when prices plunged between 1995 and 2001.
Export subsidies and subsidies to producers in some developed countries have pushed down world prices for many agricultural products grown in temperate zones, reducing the export earnings of developing countries that export commodities such as cotton, sugar and rice.
Trends for real commodity prices reveal a distinct “breakpoint”. Prior to the mid-1980s, prices fluctuated widely while the overall trend declined steeply. Since that time, both the fluctuations and the trend have flattened out considerably.
This change in the trend of real agricultural commodity prices is explained in part by a slowdown in the formerly rapid growth of prices for manufactured goods relative to commodities that had eroded the purchasing power of revenues from commodity exports in the past.
A number of global factors helped slow the rise in nominal prices for all traded goods, including trade policy reforms and increased trade in manufactured goods, whose prices have tended to fall more quickly as a result of technological advances and high productivity growth. One key factor was increased production and trade of manufactured goods by developing countries. Between 1980 and 2000, developing countries almost tripled their share of global manufacturing exports, which rose from 11 to 27 percent.
Trade liberalization and technological change have also played a part in diminishing price variability, by reducing the incidence of supply-side shocks. Trade liberalization has permitted a wider range of countries to participate in world commodity markets, reducing the relative importance of the supply situation in any one country, while technological advances have reduced the vulnerability of some crops to climatic influences. The low price levels reached in recent years have themselves limited the scope for extensive variability, at least downwards.
Although real prices for all agricultural commodities have declined over the past 40 years, the rate of decline has varied from one commodity to another. Raw materials, tropical beverages, oilcrops, and cereals have experienced the steepest declines. The fall in real prices has been least severe for horticultural products, meat and dairy. Some developing countries have managed to take advantage of these trends by shifting production and trade into these higher-value sectors. By doing so, they have reduced their dependence on products whose prices have fallen more sharply and remained highly erratic.
For the most part, it has been the more advanced and prosperous developing countries that have managed to do this. Developing countries other than LDCs have more than doubled the share of horticultural, meat and dairy products in their agricultural exports. At the same time, they reduced their reliance on tropical beverages and raw materials, bringing the share of these products in their total agricultural exports down from more than 55 percent in the early 1960s to around 30 percent in 1999-2001. But in the LDCs, dependence on these products for their agricultural export earnings actually increased from 59 percent to 72 percent during the same period.
Many LDCs rely heavily on a few commodities whose prices not only have fallen sharply but have been highly erratic, further complicating economic planning and development. Over the past 40 years, prices have been most volatile for tropical beverages and raw materials - the same commodity groups that have experienced some of the steepest long-term declines. Overall, variability from trend levels has been highest for agricultural commodities traded by LDCs and other developing countries and has been lowest for agricultural products traded by developed countries, both for exports and for imports.
For developing countries that depend heavily on commodity exports for foreign exchange, the cash price is analytically less revealing than is the purchasing power it provides. That purchasing power is reflected by the “barter” terms of trade - the ratio of prices of exported goods to the prices of imports. As this ratio diminishes, the quantity of imports that can be purchased from a given quantity of exports also shrinks.
For countries where agricultural trade accounts for a large proportion of total trade, movements in the terms of trade of agriculture can have important implications for the affordability of food imports and for food security. This is particularly true for LDCs and some other developing countries. During the commodity price boom of the mid-1970s and early 1980s, the prices of agricultural exports of developing countries increased more quickly than the prices of their agricultural (mainly food) imports. Since the mid-1980s, this trend has reversed. Many of these countries have suffered severe losses from deteriorating terms of trade, both between agricultural exports and imports and between the agricultural commodities they export and the manufactured goods they import.
At the aggregate level, terms of trade within the agriculture sector worldwide neither rose nor fell significantly between 1961 and 2002. However, looking at terms of trade separately for countries in different income groups reveals that developing countries experienced large and persistent fluctuations.
From the mid-1980s to the present, terms of trade for both the LDCs and for other developing countries have deteriorated significantly. For the LDCs, for example, agricultural terms of trade fell by half from a peak in 1986 to a low in 2001. Because many of these countries depend on commodity exports to finance food imports, a decline in terms of trade for agriculture threatens food security.
For developed countries, on the other hand, there has been no long-term trend in terms of trade in agriculture, and only minor fluctuations have occurred during the past 40 years.
If deteriorating terms of trade in agriculture have hurt the balance of payments and increased the debt burden of many developing countries, the fall in terms of trade between agricultural commodities and manufactured imports has been even more persistent and more damaging. Between 1961 and 2001, the average prices of agricultural commodities sold by LDCs fell by almost 70 percent relative to the price of manufactured goods purchased from developed countries.
A decline over time in the barter terms of trade between primary goods and manufactured goods, with a consequent transfer of income from developing to developed countries, was noted some 50 years ago by economists Raul Prebisch and Hans Singer. They explained this in terms of the tendencies for economic growth to increase the demand for manufactured goods more than for primary products, and for productivity to increase more rapidly for primary products, thus driving the prices of primary products lower relative to those of manufactured goods. One recent study found that productivity increased 20 percent faster in agriculture than in manufacturing worldwide, and more than 100 percent faster in developing countries than in developed countries.
Most data do indicate a long-term decline in the barter terms of trade. However, the rate of decline varies and, depending on the time period chosen, fluctuations in the data can make it difficult to distinguish trends from shorter-term variability. While there is a clear declining trend in the terms of trade for agriculture versus manufactures over the whole period, the nature of the trend clearly changes in the mid-to-late 1980s, and for the 1990s no significant downward trend is apparent.
Although it may be difficult to confirm and quantify a long-term global trend using statistical data, there is no doubt that terms of trade for agricultural exports from many developing countries have declined significantly. The decline has been most pronounced for the countries that can afford it least. Even during the 1990s, while the terms of trade for developed and other developing countries remained relatively stable, they plummeted by 25 percent for the LDCs.
A decline in the agricultural terms of trade can be counteracted by increases in the quantity produced and exported so as to maintain or increase the real value of export earnings. In fact, for developing countries as a group, increases in the quantity of agricultural exports have more than offset the effect of declining real export prices, such that the real value of their export earnings has risen by nearly 30 percent in the last two decades. In other words, their “agricultural income terms of trade” have increased. However, the evolution of the income terms of trade varied considerably among LDCs and other developing countries. For LDCs, export earnings failed to increase, and rising import prices further eroded their purchasing power. Real agricultural export earnings of LDCs fell by more than 30 percent over the same period. Over the last 40 years their income terms of trade have fallen by half.
The region that has suffered most from declining terms of trade is sub-Saharan Africa. Since the 1970s, their deterioration has led to a substantial reduction in the purchasing power of all African commodity exports. World Bank estimates suggest that between 1970 and 1997 declining terms of trade cost non-oil-exporting countries in Africa the equivalent of 119 percent of their combined annual gross domestic product (GDP) in lost revenues. Export quantities have not grown sufficiently to cover the loss.