Paper No. 2

Developments in global agricultural markets, 1995-1998

Commodity Policy and Projections Service
Commodities and Trade Division

I. Introduction and Summary

1. This paper reviews developments in agricultural markets for the period 1995 to 1998 and considers whether any changes of note may be attributable to the implementation of the Uruguay Round (UR) Agreement on Agriculture (AoA). The analysis covers products that have generally been subject to high levels of protection and support (e.g. cereals, meat and dairy products and sugar) as well as some commodities that have faced relatively lower barriers, such as primary tropical products (coffee, cocoa, tea).¹ This is followed by an analysis of changes in price variability for particular products over 1995-98.

2. For several commodities, the period 1995-98 was a reasonably buoyant one for trade and prices and, in a number of cases, the resilient market was due partly to the implementation of the UR commitments. This is mainly the case for cereals and meat where export subsidy reductions, the opening of minimum access commitments and income-induced demand effects have had some impact. Prices of many products rose during the period because stocks had been drawn down, in part because of the gradual reduction of government intervention in agricultural commodity markets. However, in the case of most of the other major agricultural commodities, the developments in 1995-98 had more to do with special factors, such as weather, the phase of the commodity cycle or developments in other markets, e.g. synthetics or competing products.

3. The subsequent weakness of many agricultural prices in 1998 underlines the important role of other factors, including the financial crises and resulting economic slowdown that have affected many countries. Still, the trend towards liberalisation and the reduced role of government in commodity markets - whether or not due to the UR - have also played their part in recent developments.

II. Commodity by Commodity Analysis

Wheat

4. During the period 1995-98, world wheat production was about 10 percent above the average for 1984-94, while both world trade and opening stocks were below average (Table 1 and Figure 1). World prices rose strongly in 1995-96, because of successive poor crops in 1994 and 1995 and the low level of stocks in major exporting countries. The latter was due largely to a deliberate policy to cut carryover stocks, which was associated with the adoption of market-oriented policies consistent with the UR in a number countries. In addition, export subsidies fell well below UR commitments (in 1995 only 6 percent of the total allowed was used). The surge in prices caused a strong expansion in output in 1996 and 1997, which led to stock replenishment and falling prices. Despite falling in 1997 and 1998, prices for the period 1995-98 were nearly 9 percent higher than the average for 1984-94.

Coarse grains

5. During the period 1995-98, global production of coarse grains was 7 percent higher and trade was 2 percent higher than the 1985-94 average. On the other hand, opening carryover stocks were as much as 28 percent below the average for the previous decade. During 1995-98, export prices for maize of United States and Argentine origin were above the pre-UR average.

6. World prices of coarse grains increased steeply in 1995-96. This rise can be explained by a 10 percent decrease in production - due to a combination of bad weather and policy measures - precisely at a moment when stocks had been drawn down and demand was firm. Furthermore, during 1995, imports by Japan, the Republic of Korea and Thailand, exceeded their tariff quota levels, and World Trade Organization (WTO) members used only 27 percent of their export subsidy ceilings, putting additional upward pressure on prices. Following the sharp price rise, production of coarse grains recovered during the 1996-97 period and demand weakened, causing prices to fall. Some of the recent price declines can be ascribed to relatively weak demand for livestock products, in part due to the Asian financial crisis.

Rice

7. Compared with the 1985-94 average, production of rice (in its milled equivalent) in 1995-98 was 12 percent (41 million tonnes) higher, trade as much as 70 percent higher, and stocks 7 percent lower. Prices of Thai long grain rice were well above the previous period levels and remained so in 1998. The same was true of US long grain and Thai broken rice.

8. It would be inappropriate to ascribe the tightness of global rice markets during 1995-98 entirely to the UR, because other factors have also played a role. For example, the sharp price increase observed in 1994 and part of 1995 was mainly related to the drought in Japan. Some slackening of prices during 1996 and 1997 reflected a general improvement in production in all major importing countries. Conversely, the price increases in 1998 reflected the poor harvests in major rice importing countries in Southeast Asia and in South America, due to El Ni�o-related weather anomalies, which offset the price depressing effects of the Asian financial crisis.

Sugar

9. Broadly speaking, the UR was not expected to have a significant effect on the world sugar economy because concessions on market access by the major consuming developed countries were limited. The reduction in subsidized exports was not expected to have much effect as these exports accounted for only 5 percent of world trade. The main stimulus to sugar trade was expected to come from tariff reductions in the developing countries. Production, trade and prices were all expected to be slightly higher, but for reasons not necessarily linked to the AoA. During 1995-98 world sugar production, trade, stocks and prices all exceeded the values of the period 1985-94 prior to the entry into force of the UR agreement. Nevertheless, with record crops again last year, prices decreased significantly in 1998.

10. The rise in production and stocks was due to relatively favourable producer prices, while economic growth and, sometimes, subsidized consumer prices stimulated demand and trade. Weaker import demand in 1998 in the Russian Federation, China and some other countries in Asia affected by the financial crisis, along with expectations of large crops in 1998-99 led to a significant fall in prices in 1998. Greater availability from Brazil, due to the devaluation of its currency, further exacerbated the over-supply situation driving world prices to their lowest levels in 20 years. During the decade 1985-94 there was some tendency for price stability to improve, with the exception of the late 1980s, when the full impact of the termination of the economic provisions of the international sugar agreement was felt.

Fats and Oils

11. In 1995-98, world production and trade of fats and oils exceeded significantly the levels of the period 1985-94. Although prices declined from their 1994 peak, they were higher in 1995-98 than in the previous decade.

12. Expectations were that the UR would give a slight boost to production and trade partly because of the reduction in export subsidies and partly because of the effects of higher incomes on demand. The main expectation was for a boost to production and exports of palm and palm kernel oils in South East Asia and to a lesser extent, soybean oil in South America.

Oilmeals

13. In 1995-98 world production and trade of oilmeals were well above the levels attained in 1985-94. The UR was not expected to have a significant direct effect on volumes or prices because oilmeals were already traded with few major distortions, although some relatively small indirect effects were expected due to changes foreseen in livestock products and other feedstuffs. The increases in production, prices and trade in 1995-98 were largely due to continuing expansion of demand from the livestock sector and to the boost provided to demand by the surge in feed grain prices in 1995-96. The short-term outlook is for a decline in prices to pre-1995 levels because of the higher production of 1998. Indeed some significant price falls took place in 1998. For the medium-term, continuing fairly strong demand is foreseen, tempered, nonetheless, by the effects of the slowdown in economic growth on the livestock sector in South and East Asia.

Meat

14. Bovine meat production, trade and prices were generally below trend during the 1995-98 period, and production and prices were below the averages of the previous decade. Most of the decline in prices was due to factors such as the Bovine Spongiform Encephalitis (BSE) crisis and other health-scares that depressed demand for beef. Before the UR, export subsidies and non-tariff barriers were more prevalent in the global beef market and the AoA commitments on export subsidies and market access were stronger than for other types of meat.

15. The European Community (EC), the world's second largest meat exporter, used export subsidies for nearly all of its beef shipments before the UR. EC beef exports are presently limited by ceilings on both the subsidized volume and value, which suggests that in the absence of such limitations, subsidized exports would have been higher and world prices lower than what actually transpired. The recent rebuilding of EC beef stocks, after they had been almost eliminated before the implementation of the UR, confirms the important role the UR has played in constraining the volume of subsidised supplies on global markets.

16. Tariff quota access opportunities for beef exceed, by far, those for the competing types of meat taken together. Consequently, improved market access commitments, mainly in the United States and the Republic of Korea, were expected to boost both trade and prices for beef. Nevertheless, trade and prices weakened in 1996 and early 1997, due to health-related reductions in demand. This situation was further aggravated in 1997 and 1998 by the financial crises in Asia, Russia and elsewhere. The general slowdown in beef production was the consequence of downsizing of the meat sectors in many countries in transition.

17. In the case of pigmeat, prices in 1995-98 were significantly below the 1985-94 average, while world trade and production were above average. The AoA was expected to boost trade and prices on the basis of improved market access commitments and disciplines on the use of export subsidies.

18. In 1995 and especially 1996, trade was boosted by a reduction in minimum import prices ("gate prices") and tariffs in Japan and by substantial purchases by the Russian Federation. Subsequently, however, the surge in Japanese import volumes triggered the UR special safeguard clause resulting in much higher gate prices that cut imports. The strong gains in global pork trade receded in 1997 and 1998 due to a number of health scares and to the economic slowdown that depressed import demand in Asia. Record supplies of pork in the major exporting countries exerted further downward pressure on prices in 1998.

19. The AoA provided some flexibility in terms of export subsidy utilisation between years. The EC used this flexibility to rollover the unused portion of previous years' commitments for pork, thereby exporting more in 1998/99 than their ceiling for the year would have permitted, perhaps putting additional downward pressure on global pork prices.

20. In the poultry sector, world production and trade in 1995-98 were significantly above the averages for the previous decade, although prices were below average. The main effect of the UR was expected to be some firming of prices, reflecting higher incomes, higher feed prices and reduced export subsidies. Among the meat sectors, the fewest market access commitments were created for poultry. Overall, the strong performance of the poultry sector can not be attributed to the UR. Rather, growing demand from Russia and China - neither of which are WTO members - accounted for nearly 80 percent in the gains in trade over the 1995-98 period.

21. For sheepmeat, world production trade and prices were all above the 1984-94 levels. The UR was not expected to have much effect on production and trade, although prices were expected to be firmer. Tariff quota access opportunities in this sector reflect almost entirely the conversion of the EC's previous access agreements. Some boost to trade appears to have occurred in the United States following the abolition of the Meat Import Law, but this was offset by negative market developments in other countries unrelated to the UR.

Milk

22. For milk and milk products, little change was foreseen as a result of the AoA for the volume of world production and trade, but prices were expected to be slightly higher because of minimum access commitments and reduced export subsidies. The period 1995-98 saw production and trade above the 1985-94 period. Developments in production during 1995-98 largely reflected, on the one hand, the continued decline of output in the Commonwealth of Independent States (CIS) and, on the other, the rising output in Australia, New Zealand and in several developing countries in Asia and Latin America.

23. Prices during 1995-98 were, to varying degrees, above the pre-AoA levels, including those of skim milk powder, butter, and cheese. The prices for cheese on world markets were helped to some extent by the reduction in export subsidies. However, the prices for most other products were affected by factors outside the URA, as, in most cases, commitments to reduce export subsidies were easily met within patterns of trade prevailing over the period. In particular, the prices of butter have been influenced by the much lower levels of surplus stocks in recent years - compared with the levels in the early 1990s - as well as by the strong import demand from the Russian Federation. Since 1998, international dairy prices have fallen as a result of a decline in demand, due to the economic slowdown in Southeast Asia, the Russian Federation and Brazil, all of which are important net importers of dairy products.

24. Dairy products have been the subject of two WTO panel cases: one concerning the Canadian pricing system for milk (which opponents argue cross-subsidises exports via high returns from the domestic market), and the other regarding imports of spreadable butter from New Zealand into the EC.

Bananas

25. The volume of banana exports in 1995-98 was above the 1985-94 levels. The trend in global trade over the 1985-94 period was strongly upwards, particularly as shipments to the EC were unusually high in the period preceding the mid-1993 entry into force of the common market regime for bananas, with countries seeking to establish quota positions prior to the coming into force of the EC tariff quotas. Since then, global trade has continued to grow on trend. Slower growth in imports into the EC coincided with faster growth in exports to some other regions and countries, notably Eastern Europe, the CIS and China.

26. Three markets (i.e. the United States, the EC and Japan) account for more than two thirds of world banana imports. The United States, the world largest banana import market, applies no duties or quantitative restrictions to banana imports. Japan has no quantitative restrictions on banana imports, but does apply a seasonal import tariff. As a result of its UR commitments, its Most Favoured Nation (MFN) tariff rates are being gradually lowered; however, practically all banana imports into Japan come through preferential tariff rates lower than the MFN rates. Expectations of the effect of the UR on the banana market were largely foreseen in connection with the EC Framework Agreement, including its tariff quotas.

27. Through the Dispute Settlement mechanism, the UR has had an important indirect effect on the world banana economy. Based on cases brought by the United States and Ecuador against the EC, the Dispute Settlement Panel (DSP) found that the EC banana import regime violated several sections of the General Agreement on Tariffs and Trade (GATT), particularly Article XIII and also elements of the General Agreement on Trade in Services (GATS). The DSP ruled that due to the EC banana import regime the United States had suffered losses equal to US$191.4 million. This ruling enabled the United States to impose tariffs totalling an equivalent amount on a series of EC products. The EC is currently working towards adopting a WTO compatible banana import regime.

28. Although the EC has not yet decided on an alternative import policy for bananas, a revised regime may open up the possibility for some developing countries to sell more fruit in the EC market, and thus increase their export earnings. At the same time, it may lift some of the protection that the current system provides to other developing countries, and these in turn may lose some market share and corresponding export earnings.

Citrus

29. The UR has not had a significant short-term effect on world fresh citrus trade. While exports had grown at the annual average rate of 7 percent in the 1991-94 period, they grew at only 1 percent annually over the 1994-1997 period.

30. In the EC, the world's largest fresh citrus importer, the AoA resulted in a change in the import regime for fruits and vegetables. The new regime has substituted entry prices and maximum tariff equivalents for the former reference prices and countervailing duties. However, the new system works in a similar fashion (although not exactly identical) to the former one, and the entry prices for citrus fruit were fixed at similar levels to those of the former reference prices (except for oranges, where the entry price was established at a higher level than the ex reference price). As a result, there has been no major change in the EC's total imports of citrus in the post UR era.

31. Under the AoA, the United States is to reduce its MFN import tariff for Frozen Concentrated Orange Juice (FCOJ) by 15 percent by the year 2000. This concession however, has had no major impact on the FCOJ market so far. "New" groves planted in the State of Florida to replace those lost by freezes in the mid-1980s have reached full maturity and as a result record crops were harvested in recent seasons. As domestic output of orange juice has grown in the United States, the demand for imports has declined.

32. In the longer run, the main effects of the UR on global citrus trade may well be through the Sanitary and Phytosanitary (SPS) Agreement. The current process of harmonising testing procedures may lead to freer trade and should benefit citrus exports. Several major importing countries have recently agreed to lift bans on citrus imports that were based on phytosanitary grounds when it could be demonstrated that risks were kept very low. For example, Japan has agreed on import protocols for Australian mandarins while the United States Department of Agriculture (USDA) has proposed to allow imports of Argentine citrus into the United States. In the EC, SPS negotiations continue with Argentina and Uruguay, with a view to further opening the EC market for citrus fruit from those destinations.

Tropical Beverages

33. The volumes of coffee production and trade in 1995-98 were slightly above the 1985-94 levels. Coffee prices had been on a pronounced downward trend from the mid-1980s to 1993 when weather damage to crops led to severe shortages. The UR was not expected to have much effect as trade in coffee was almost free of non-tariff barriers and tariffs were generally low. Price developments of 1995-98 thus mainly reflected the cyclical nature of the crop, the incidence of frosts in Brazil, as well as to some extent, the operation of the export retention scheme.

34. The situation in cocoa closely mirrors that of coffee, with world production and trade slightly above the 1985-94 values. Again, prices had been on a strongly declining path during the decade prior to the signing of the International Cocoa Agreement (ICA) in 1993. The UR was expected to have only a small positive effect on trade and prices via the effect of higher incomes. Hence, the rather high prices in 1995-98 were mainly the result of a cyclical upturn in prices following the new cocoa agreement and concerns about production constraints in some of the main supplying countries.

35. For tea, world production and trade were above the 1985-94 levels; however, prices were below the 1985-94 average. It was expected that the UR would have little impact on the global tea economy because import tariffs are already low or zero in major import markets. Nevertheless, there is scope for some expansion in potential growth markets in developing countries. The current global economic crisis has stifled growth somewhat.

Agricultural Raw Materials

36. Agricultural raw materials are generally traded with few tariff restrictions, and have not been directly affected by the UR Agreements. Cotton, rubber, hides and skins, as well as natural fibres such as jute have not been subject directly to any significant changes. Many of these materials are suffering from low prices due, in some cases such as rubber and hides and skins, to the economic difficulties faced by some importers in the past year or two, and in others such as cotton and jute, to cyclical factors associated with high levels of production and an accumulation of stocks in recent years.

37. However, products manufactured from these materials will be affected, in some cases quite significantly, by the UR Agreements. The Agreement on Textiles and Clothing (ATC), in particular, is likely to result in a considerably increased trade in textiles and consequently in changes to the geographical pattern of trade in cotton. Some increase in overall demand for cotton is expected to result, but any impact is unlikely to be felt until the agreement is fully implemented in 2005. In addition, tariffs on imports of some leather products, particularly footwear, have been reduced. This also is likely to affect mainly the pattern of trade, as processing is further concentrated away from the consuming countries, but may result in some increase in demand for these products and, hence, for raw hides and skins.

38. The period 1995-98 saw global cotton production, trade and prices above the 1985-94 levels. The recent weakness of cotton prices from 1997 to 1998 has had more to do with competition from man-made fibres in China and India, increased cotton supplies and the Asian financial crisis, than with the phasing out of the Multi-Fibre Agreement (MFA), in particular.

39. While jute trade volumes were at similar levels than those reached in 1985-94, production was below. Jute was not included in the AoA and any changes occurring to the jute industry because of the UR were expected to be mostly those associated with improved access for synthetic fibres as a result of the implementation of the ATC. The increase in prices in 1995-96 has been followed by extremely low prices from 1997 through into 1998-99.

40. Rubber production, trade and prices in 1995-98 were above the 1985-94 levels. This was not due to the UR, as rubber was already traded fairly freely and the price-boosting effects of higher incomes flowing from the UR on demand for motor vehicles, and hence of rubber, were estimated to be limited. The relative firmness of prices in 1995 and 1996 was attributed to the strengthening of the import demand for rubber in the major motor vehicle exporting countries, although prices fell in 1998 and have remained weak due to increased supplies and the effects of the Asian financial crisis.

III. Analysis of Changes in Agricultural Price Instability

41. This section analyzes the variability of international agricultural prices in the period 1995-98 in comparison with the period 1990-94, immediately prior to the coming into effect of the UR AoA. The focus is on within-year price instability, based on the 48 months of data for 1995-98 compared with 1990-94. The results are reported in Table 2.

42. The variability of monthly international prices as measured by within-year coefficients of variations is fairly evenly distributed across agricultural products; some (13 commodities) were higher in 1995-98 than in 1990-94, while others (12) were lower. There was no overall trend and, although some of the changes would seem to be significant statistically, they cannot be fully explained by the entry into force of the UR. In the case of cereals, there were significant increases in the coefficients of variations of wheat, maize and one variety of rice. This is also true for meat and some vegetable oils Although these increases might not be directly attributable to the entry into force of the UR, they can be partly explained by the adoption in the main grain exporting countries of market oriented UR-compatible agricultural policies, which have led to declining stocks and increasing price volatility. For most of the other commodities, price instability actually declined.

IV. Conclusions

43. From the foregoing analyses, two major conclusions stand out.

44. First, for a number of agricultural commodities, the reasonably buoyant market conditions in the second half of the 1990s can be partly attributed to the UR. This is true mainly for the cereals and meat sectors where the boost was due to export subsidy reductions, the opening of minimum access, reduced intervention in the market and hence lower stocks, and the effect of higher incomes. For most other agricultural commodities, however, the impact of the UR was probably negligible on the volume of trade and level of prices. Developments in 1998 illustrate the degree to which agricultural markets are affected by sudden changes in weather or in economic conditions, which can offset the more gradual effects associated with structural changes, such as those due to the UR.

45. Second, there is little evidence that there has been a significant across-the-board change in within-year world price instability since 1995. However, the view of experts is that during the next few years, while policies adjust to the new trading environment, prices are likely to be unstable.² Compared to the situation in the past, the outlook is for the new international trading environment to be characterised by lower levels of overall stocks; however, markets are likely to be more resilient due to faster response to production/demand shocks. Hence, it is not clear whether price instability will be higher or lower in the future or whether the probability of price spikes will be greater or smaller. The variability of prices in the new market environment will depend on several factors, including the effect of the implementation of the commitments agreed under the UR, as well as other factors affecting market developments.³

Table 1. Average World Production, Trade and Prices for Agricultural Commodities in 1985-94 and 1995-98

^a/ Soybean oil ^b/ Soybean meal ^c/ SMP

¹ Wheat HRW No.2; coarse grains maize US yellow No.2; milled rice Thai 100%; sugar raw ISA. Prices for wheat and coarse grains are from July/June years.

Table 2. Coefficients of variation of monthly nominal prices (percent)^*

*The coefficient of variation (COV) is calculated as follows:

COV = [ (_(monthly price- monthly average price)²/12)^1/2x100]/monthly average price.

1 See also FAO, Commodity Market Review, 1998-99, for additional discussion of commodity market developments.

2 Report of a Meeting of Experts on Agricultural Price Instability, Rome, 10-11 June, 1996, ESCP No.2.

3 Sarris, A. (1996) "The Evolving Nature of International Price Instability in Cereals Markets," FAO, ESCP No. 4.