COMMITTEE ON COMMODITY PROBLEMS
Rome, Italy, 11-13 April 2005
RECENT DEVELOPMENTS IN AGRICULTURAL
1. In accordance with the mandate of the Committee on Commodity Problems, this document reviews recent developments in markets for major internationally traded agricultural commodities.1 In general, international prices of agricultural commodities have made a hesitant recovery following the prolonged slump though the second half of the1990s. However, for most commodities real prices have remained at historically low levels and the longer term trend continues downward. Variability continues to be the dominant feature of commodity price behaviour. The current document concludes with an overview of some strategic considerations in responding to these features of price behaviour. This is intended to provide a basis for discussion of priorities in international actions on commodity problems and provide guidance for FAO work programmes.
2. On annual basis, the average wheat price in 2003 was similar to 2002 but rising wheat prices between October 2003 and April 2004 resulted in the average price in 2004 exceeding the 2003 level. This development is also reflected by changes in the International Grain Council (IGC) wheat index (rebased to July/June 1997/98-1999/00=100) which, for 2002 and 2003, remained stable at around 114 but rose by 6 points in 2004 to 121. Overall, international wheat prices started to decline in December, influenced by favourable winter wheat planting conditions, large supplies in Canada and the EU as well as the arrival of new crops from Argentina and Australia.
3. Average coarse grains prices moved upwards between 2002 and 2004 but started to drift lower in recent months as a result of record world production and a significant expansion in world exportable supplies. The FAO maize index (July/June 1997/98-1999/00=100) averaged 114 in 2004, up 7 percent from 2003 and 14 percent since 2002. In spite of a weaker United States (US) currency and another year of strong demand for the production of fuel ethanol, US export prices have remained under downward pressure as sales continued to fall short of expectation. The maize market has continued to be weighed down by not only large supplies but also substantial availabilities of cheaper feed wheat and increases in freight rates from the US Gulf to the Far East.
4. A tightening of world rice export availabilities, in spite of increased world paddy production, resulted in a strong recovery of prices throughout 2004. The FAO All Rice Price Index (1998-2000=100) increased from an average of 82 in 2003 to 104 in 2004. World trade in rice in 2004 is estimated at around 26.1 million tonnes (in milled equivalent), down from 27.7ámillion tonnes in 2003 due to reduced export availabilities in some major suppliers especially China, India, Myanmar, Pakistan and the US. World rice consumption outpaced production again in 2004, and world ending stocks were estimated to have dropped by 4 million tonnes to 99 million tonnes. Much of the decline was concentrated in China, India and Thailand. Tight market conditions are expected to continue with the likelihood of further increases in international rice prices in 2005.
5. International prices for oilseeds, meals and oils remain highly variable. During the first half of the 2003-04 season (October-September), prices continued the strong rise of the previous two years due to continuing production shortfalls, exceptionally low stock levels and sustained demand growth. Demand growth has been strongest in Asia, and especially in China which now accounts for nearly 20 percent of global demand. Non-food uses, notably biodiesel in the EU and USA, have added to overall demand. By April 2004, prices for oilcakes/meals and oils/fats had risen to levels not recorded since 1980 and 1998 respectively. Soybean prices rose to a 15-year high in March 2004, followed by price increases for other oilseeds and meals. However, the upturn in prices halted on expectations of a strong recovery in oilseed production in 2004-05 in response to the recent run of high prices. By October 2004, the FAO price index for oilseeds had fallen by one third from the April level. Meal prices fell correspondingly although oil prices held up as demand was expected to remain firm. Global demand and trade for oilmeals continues to reflect trends in livestock production and has been adversely affected by disease outbreaks.
6. The global meat market has been characterized over the 2002-04 period by considerable instability as vacillating market prices and animal disease outbreaks led to governments adopting policies to protect their livestock sectors. Animal disease outbreaks, combined with exchange rates movements, have prompted a significant shifting in trading patterns with South America, the biggest exporter among the developing countries, increasing its share of world trade from 13ápercent in 2000 to an estimated 28 percent in 2005. The FAO trade-weighted meat price index rose in mid-2004 to an eight-year high as market closures due to animal disease and food safety concerns pushed up yearly average international poultry and beef prices by 24 percent and 12ápercent respectively. However, prices have stabilized in recent weeks as import bans on products from previously disease-affected areas have been lifted and exportable supplies have subsequently increased. While some recovery in meat production and trade is expected as a result, the widespread incidence of market closures and food safety concerns among consumers during most of 2004 led to an estimated 2 percent drop in global meat trade to 19.1 million tonnes, the first decline since the mid-1980s.
7. The slide in global hides and skins prices beginning in 2002 continued through 2004 as slower economic growth in consuming countries weakened demand for leather and leather products. European producers, buying raw materials in euros but selling their products in dollars, became less willing to offer higher prices for raw materials as the euro strengthened. Leather stocks were also high due to over-production in recent years, based on unrealised expectations of higher market growth. Consequently, many big tanners were forced to scale-down their operations. Meanwhile, production of hides and skins has continued to increase with the expansion in developing countries more than offsetting a decline in developed countries. The tanning industry continues to seek ways of cutting production costs, including relocation, particularly to Asia where labour and environmental costs are relatively lower.
8. International dairy products prices increased throughout 2004, continuing the climb from the most recent trough of 2002. The FAO dairy product price index was 26 percent higher in November 2004 than the previous November, and the highest since 1990. Export prices for cheese increased by 33 percent; for butter by 28 percent; for skim milk powder by 20 percent; and for whole milk powder by 17 percent. These increases reflect growing demand in Asia prompted by income growth against limited export supplies and reduced export subsidies. As prices increased in 2004, export subsidies fell – by around a third in the EU – bidding market prices up further. However, currency appreciation against the dollar offset these higher prices for key dairy exporters such as Australia and New Zealand.
9. International sugar prices trended downward after the mid-1990s reaching a record low in 1999. The lower prices reflected a new market reality as adjustments in the Brazilian supply structure have resulted in a lower clearing price. Prices crept up to US9.1 cents per pound in 2003 due to a supply deficit in the market as demand outstripped supply. Global sugar consumption in 2004 is estimated to have exceeded global sugar production for the second consecutive year and second time in eight years, largely as a result of smaller harvests in India and China and continuing demand growth in developing countries. This has maintained the International Sugar Agreement average daily price slightly below US9 cents per pound. The forecasted deficit for 2004/05 should sustain prices at these levels. Domestic support to sugar production in some countries continues to be a major trade policy issue, with Australia and Brazil winning a WTO panel decision against subsidised EU sugar exports. Pressure for policy reforms particularly in Europe and the US continue to mount.
10. Low supplies from Latin America due to adverse weather conditions, crop diseases and industrial disputes kept banana prices firm through 2001 and into 2002. Prices fell in the second half of 2002, as Latin America and Caribbean exports returned to normal levels and demand was constrained by the slowing down of the world economy. Low prices continued throughout 2003 and into 2004. These lower prices reflected a variety of factors including abundant supply, trade disruption in the Gulf due to the war in Iraq, expensive freight rates, and weak demand in the US blamed partly on the popularity of low carbohydrate diets. Trade expanded in mid 2004, and prices improved in dollar terms. The major current issue is the replacement of the EU’s tariff rate quota system by a tariff-only system in January 2006. The EU’s initial proposal for a €230/tonne tariff reflects the estimated price gap between internal and external EU prices. ACP countries, enjoying duty-free access, argue that this is not enough to allow them to compete with bananas from Latin America. Latin American suppliers consider €230/tonne too high and have rejected any increase from the current tariff of €75/tonne.
11. World citrus production and exports increased steadily through the 1990s, though more recently growth in orange production has slowed, while tangerine output has continued to grow more rapidly. World citrus consumption has seen steady growth, though with diverging trends in developed and developing countries. In the former, fresh citrus consumption per capita has declined with a shift towards processed citrus, especially juice, but also because of competition from the wider variety of fruits now available year round from southern hemisphere suppliers. Suppliers have responded with new production and marketing strategies based on product differentiation - organic production or geographic indications, for example. Fresh citrus consumption is increasing in developing countries, especially in China following accession to the WTO. Trade policy reform has reduced tariffs, stimulating consumption, but the benefits of this have been offset by the increasing importance of phytosanitary barriers and stricter regulations on maximum residue levels.
12. Much citrus output is processed, primarily into citrus juices. International trade is mainly in orange juice, with the United States, Europe and Japan the main markets. Per capita juice consumption has increased strongly in developed countries, but is still very low in developing countries. Export growth had been steady through the 1990s but slowed after 2001. Large inventories in Brazil and Florida depressed concentrated orange juice prices in the late 1990s and led to a price war between large processors in Brazil. Prices firmed up in the early 2000s due to smaller crops, fewer processing firms and reduced inventories. As for fresh citrus, product differentiation in juices, notably into not-from-concentrated juice (NFC) is a major development. Sales of “fresh cut” citrus in plastic containers are also growing. Trade in processed citrus is hampered by significant tariff escalation. The Free Trade Area of the Americas, especially since it includes Brazil and Florida, would have significant impacts on world orange juice trade.
13. Production of tropical fruit in 2003 is estimated at about 64 million tonnes. Only 5ápercent was exported as fresh fruit, but generated export revenue of about US$2.3 billion, about 25ápercent higher than 2002. Mango, pineapple, avocado and papaya, the major tropical fruits traded, have enjoyed strong market growth and improving prices. Mango export volumes grew by 38 percent (reaching US$575 million in value), mainly due to the expansion in demand for processed mango. World pineapple production declined in 2003, but international trade volumes increased by 18 percent to reach 3.3 million tonnes, valued at US$1.9 billion - 32 percent up due to higher prices as demand continued to grow against tight supplies. Value of exports of processed pineapple increased to US$1.1 billion in 2003. The value of world trade in papaya increased by 24ápercent in 2003 to US$162 million. However, significant expansion of exports from Brazil has depressed European prices.
14. Oversupply, sluggish demand and rising stocks resulted in a 58 percent fall in international coffee prices between 1998 and 2001. Persistent low prices resulted in supply reductions which has strengthened prices recently. Coffee prices rose 33 percent between 2001 and November 2004, as total production for the crop year 2003/2004 reached 6 million tonnes, the lowest since 1998/99. Coffee prices were quoted above $US1/pound in December 2004 for the first time since July 2000. Prospects of a similar crop size in 2004/2005 could result in a continued upward trend in prices. The challenge for the coffee industry is how to sustain these better market conditions to avoid a return to the boom and bust cycles. Structural changes have occurred in the coffee market as a result of depressed conditions including the exit from the industry of higher cost producers and several product differentiation initiatives stimulating demand.
15. Cocoa bean prices more than doubled between 1999/2000 and 2002/03, reaching US$1á873/tonne, as a result of reduced production and stock levels. However, an estimated surplus of 240 000 tonnes in 2003/04, the highest in 14 years, led to prices declining by 18ápercent to average US$1 553/tonne between October 2003 and March 2004. Estimates for 2004/2005 indicate further growth in production and exports. World cocoa grindings is forecast to reach 3.1ámillion tonnes in 2003/2004, dominated by consuming countries in North America and Europe. Grindings in Europe and North America are expected to increase by 3 percent and 2ápercent, respectively. A growing share of cocoa processing is also taking place in cocoa producing countries, with C˘te d’Ivoire expected to process 30 percent more of its production in 2003/2004 than in 1999/2000 and Ghana 29 percent more.
16. Despite record production in the past three years, tea prices have remained relatively stable mainly as a result of increasing demand in the Russian Federation and in developing countries. Tea trade continued to expand reaching US$2.6 billion in 2003. The FAO Composite price averaged US$1.51 per kg in 2003, two percent higher than in 2002, but four percent lower than 2001. More processing and packaging is taking place in tea producing countries as part of a value addition strategy. Kenya has increased the volume of value-added tea exports from below 5ápercent of global sales to about 12 percent between 2002 and 2004. Similarly, major supermarket chains in Europe have entered into partnerships to process their own branded tea in producing countries in response to growing demand for specialty and high quality teas. Organic production has also increased with China and India producing 56, and 33 percent of world output, respectively.
17. International cotton prices continue their long term decline. In real terms, the Cotlook A Index in 2004 was 34 percent of the price in 1980 and 56 percent of the price of 1990. New technologies which increase productivity and reduce cost, expansion of production by new and low cost suppliers, competition from man-made fibres, and domestic support in certain developed countries have all contributed to price decline. Brazil’s challenge to US cotton policy in the WTO is currently under appeal. Prices remain volatile in the short term. After reaching a record low at US$0.89/kg in November 2001, the world cotton price increased by more than 60 percent during 2001-2003 and reached US$1.87/kg in November 2003, largely due to a production shortfall and increased mill consumption in China. However, the Cotlook ‘A’ Index weakened, particularly since March 2004, falling to US$1.04/kg by December 2004, about 44 percent lower than in November 2003, as major cotton producing countries set a new record output at 24.5 million tonnes for the 2004/05 season.
18. Jute prices recovered strongly in the second half of 2004 to around US$370/tonne, 50ápercent higher than prices one year earlier. Demand for jute manufactured goods, in India and in importing countries, helped maintain prices despite higher production and increasing stocks. Global output of jute, kenaf and allied fibres is estimated to have increased by 3.5 percent from the previous season to an estimated 3.3 million tonnes in 2003/04, due almost entirely to a 20ápercent increase in Bangladesh. Global exports of raw fibre decreased by 30 percent as mill consumption in producing countries increased to meet domestic and export requirements for manufactured goods. Shipments from India, the world’s leading supplier of jute products, were 28ápercent higher in 2003 than in 2002, as competitiveness relative to synthetic products improved. Polypropylene prices have continued to rise in 2004, as oil prices increased, and this is likely to maintain the competitiveness of jute products in the near future. However, stocks in producing countries now equalling 46 percent of mill consumption, are likely to pressure prices.
19. The global market for sisal continues to tighten, continuing the recovery which began early in 2003. Brazil has benefited from China’s growing import demand which had increased to more than 30 000 tonnes in 2003 from 4á300 tonnes in 2000. African sisal is strongly demanded for various non-traditional applications and prices have strengthened markedly in the past two years: African 3L prices from around US$750 per tonne in early 2003 to almost US$1 000 at the end of 2004; African UG from US$650 to US$885; Brazilian No 3 from US$400 to US$670. World production of sisal and henequen is estimated to have increased by 5 percent to 287á000 tonnes in 2004 following a smaller increase in 2003. The additional production is concentrated in Brazil, but with some increase also in Tanzania.
20. Prices of abaca peaked late in 1999 and fell markedly through to early 2002. The indicator (average) price reached a trough of US$100 in March 2002, with supply in excess of demand. Reduced production in 2002 and 2003 contributed to some stabilisation of prices which, buoyed by strengthened demand in the course of 2004, have risen by more than 20 percent to US$132 in October 2004. In 2003 in both the Philippines and Ecuador (which account for over 95ápercent of global production) production of abaca expanded to a total of 84á100 tonnes, and it is estimated to have increased to 85 000 tonnes in 2004. These increases follow two years of reduced production. International trade in abaca, in total fibre equivalent terms, expanded in 2003, and again, more modestly, in 2004. Increasingly, exports as pulp rather than fibre.
21. Production of brown coir fibre in India, the world’s largest producing and consuming country, expanded in 2003 and is estimated to have expanded by a further 10 percent in 2004. SriáLanka’s production of coir fibre contracted by 16 percent in 2003, but recovered marginally in 2004. Global production of brown plus white coir fibre increased by around 4 percent to 475 000 tonnes in 2004. Preliminary estimates of yarn production, which is dominated by India, show an expansion of around 10 percent in 2004. Fibre exports, mainly from Sri Lanka, contracted in 2003, to close to their 2001 levels. Exports of manufactured products from India, the major exporter increased in 2003, and the global total increased by around 6 percent. Preliminary estimates point to significant further growth in these exports in 2004.
22. From a historical low in 2000, international rubber prices continued to recover in 2003 and early 2004: the average price of RSS3 rubber in 2003 in Thailand was 44.5 baht/kg (around US$1.07/kg), 36 percent higher than in 2002 and 77 percent higher than 2001. However, after reaching 55.9 baht/kg in June 2004, the price of RSS3 rubber in the Thai market weakened because of expected higher production in 2004 and lower growth in demand from China. Nevertheless, the average price in August 2004 was still around 52 bhat/kg, about 16 percent higher than in 2003. Increases in the price of oil, the raw material for synthetic rubbers, conferred a comparative price advantage on natural rubber. World natural rubber production in 2004 is estimated at 8.4 million tonnes, five percent higher than 2003, driven mainly by a 25 percent increase in Malaysia. Higher demand for motor vehicles, and hence for tyres, stimulated by stronger economic growth in several key markets, especially in China and Asian countries, and the spike in oil prices have contributed to slightly stronger demand for natural rubber in 2003.
23. The recent history of agricultural commodity prices illustrates the high degree of variability around a tendency towards longer-term decline in real prices which pose continuing economic problems for commodity dependent developing countries. For those countries dependent upon few agricultural commodities for a significant share of their export earnings, variability in export prices has major macroeconomic impacts through its effects on incomes, employment and government revenues. For those countries reliant on food imports for an increasing contribution to overall food availability, import price variability can pose balance of payments problems and threaten food security.
24. Actions proposed to cope with declining real prices in world agricultural commodity markets or to limit price variability have included specific interventions mainly aimed at controlling supply but also at expanding the demand for particular commodities, as well as more general progress towards trade liberalisation for all commodities. Measures have also been proposed to compensate for price variability or to manage the price risks involved. The feasibility of different measures depends upon the particular characteristics of commodity price behaviour.
25. Recent discussions of international agricultural commodity markets have been dominated by the issue of trade liberalisation and the negotiations on market access, limitation of export subsidies and the role of domestic support. While improving market access may be important for some agricultural products, tariff levels for tropical products and raw materials at least in their less-processed forms are typically not high so those developing countries dependent on exports of these products may have little to gain. For these countries, tariff escalation may be a more significant issue. For some products, notably sugar and cotton, reduction of domestic support in developed countries should lead to a strengthening of international prices. However, where liberalisation also implies the erosion or ending of preferential trade arrangements, some producing countries - some ACP banana and sugar exporters, for example – will also lose. Some of these issues are addressed in documents CCP 05/10 and CCP 05/11.
26. In the past, commodity price problems were addressed by the international commodity agreements involving export quotas or stock management to stabilize prices. The record was not convincing, and existing agreements focus on measures to improve the functioning of markets. Nevertheless, there has been a revival of interest in controlling supplies on to world markets, for example in the case of coffee and rubber. However, maintaining continuing commitment of parties to the discipline of such agreements is difficult, and free rider problems persist with those suppliers outside. National level attempts to guarantee prices using stabilization funds and buffer stocks to suppress market forces have typically proved unsustainable, generating significant losses.
27. Volatility in agricultural commodity prices creates risks for market participants whether as producers facing revenue and export earnings risk, or as consumers facing food import bill risk. Risk management and market-based tools, notably the use of futures and options, might be used to cope with price variability. This is the subject of document CCP 05/13.
28. Market interventions, compensation schemes and risk management cannot counter long-term decline in real commodity prices. This requires a permanent improved balance between supply and demand. Ultimately, non-competitive producers must diversify into more profitable, non-traditional forms of agricultural commodity production or out of commodity production altogether. Public assistance may be necessary to identify market opportunities and to obtain the necessary knowledge, skills and resources to exploit them. For many countries the most viable alternative is to seek to enhance earnings from the production and export of their agricultural commodities. For some producers, product differentiation can help penetrate profitable niche markets. Processing of the basic commodity into value-added forms can increase the producer’s share of the final product value, and is appropriate to the circumstances of poor developing countries where agriculture is the mainstay of the economy. However, scope for such vertical diversification may be limited by barriers to entry into oligopolistic markets and tariff escalation.
1 For the most recent analysis, see the latest Food Outlook.