FAO :: Newsroom :: Focus on the issues :: 2005 :: Commodity markets: … :: Food trade deficits…
Food trade deficits threaten poorest countries
Import barriers and subsidies reduce trade opportunities for poor countries
Developing countries have seen their food trade deficit skyrocket over the last 30 years or so - from a surplus of around $1 billion in the 1970s to over $11 billion in deficit by 2001, according to FAO's new report, The State of Agricultural Commodity Markets. "Gross imports of food by developing countries grew by 115 percent over this period. Imports by developed counties, which already import a higher proportion of their food, grew by 45 percent," the report adds.

Measured in constant 1997-99 dollars, FAO projections show that the net food trade deficit of developing countries, the difference between the food they import and the commodities they export, could swell to more than $50 billion by 2030.

A period of dramatic change

Many things -- including technological advances and changes in domestic and trade policies -- influence international commodities markets, but the diets and preferences of consumers also have a major impact on shifts in commodity trading. With the effects of globalization, the spread of fast food in developing countries, and urbanization added to the mix, it is clear that trade in agricultural commodities is undergoing a period of dramatic change.

Both the volume and the composition of world trade in agricultural commodities, which differ considerably between the developed and developing worlds, testify to these changes.

In developed countries, most consumers can already afford the food they prefer. When their incomes rise, changes in diets and food purchases are relatively small. But in developing countries rising incomes have an immediate and pronounced impact on diets, and consequently on trade in both commodities and processed foods, as people adjust their budgets to include higher-value food items.

In addition to rising incomes, SOCO points out that rapid urbanization is contributing to changes in lifestyles, food preferences and even the structure of commodity trade. For example, as their purchasing power grows, people in cities buy more diverse food items and more products that require less preparation time. Imports of high-value and processed food products have risen to meet this urban demand.

In recent years, the volume of gross food imports for developing countries grew at an annual rate of 5.6 percent -- far higher than the 1.9 percent annual growth in developed countries.

This can lead to a hefty bill for the world's least developed countries (LDCs). "Paying for food imports," says SOCO, "can strain the resources of countries where economic growth lags and foreign exchange earnings are limited."

Indeed, LDCs spend 54 percent of their export earnings on commercial food imports while other developing countries spend 24 percent.

Because many developing countries are dependent on commodities for their export earnings, increasing their income through trade is one way they can increase their cash earnings. But the high level of agricultural protection in both developed and developing countries, as well as the enormous support given to agriculture in most developed countries, stifle agriculture export growth from developing countries.

Import tariffs a barrier to development

Tariffs on agricultural imports in both developed and developing countries hinder efforts by developing countries to export their commodities. Tariff escalation -- where processed goods face much stiffer import duty than unprocessed raw products -- reduces opportunities for developing countries to export higher-value processed goods.

In addition to tariffs, farmers in developing countries face competition from highly subsidized and highly mechanized producers in industrialized countries. Producer support to farmers in developed countries is currently running at $230 billion annually. Tariffs and other barriers have also slowed the growth of trade among developing countries, where South-South trade otherwise could expand rapidly.

In countries belonging to the Organization for Economic Cooperation and Development (OECD), the average bound tariff for imported agricultural products is 60 percent, compared with an average rate of 5 percent for industrial goods. Some commodities, such as sugar and horticultural products, even face tariff peaks that are as high as 350 percent, in the case of tobacco, and 277 percent for chocolate.

"If tariffs were reduced by 40-60 percent in developed countries and 25-40 percent in developing countries, with tariff peaks being subjected to the biggest cuts, agricultural exports of LDCs could increase by as much 18 percent," observes FAO in SOCO.

But, the report adds, exports from developing countries face even more hurdles when they try to export goods at more advanced stages of processing. For instance, finished chocolate can face a tariff that is several times that on cocoa beans - this phenomenon is known as tariff escalation.

According to FAO, reducing tariff escalation is one of the most important market access issues in the current round of World Trade Organization (WTO) agricultural trade negotiations. Thirteen of the 45 negotiating proposals that have been submitted to the WTO call for substantial reductions in tariff escalation, particularly in the developed countries.

In addition to tariffs, farmers in net food importing countries, including many of the poorest, face competition from mostly industrialized producers in developed countries, farmers who are often highly subsidized.

Corporate food chains - the power of the few

Increasing concentration of market power in the hands of a few transnational corporations is another development rapidly changing agricultural commodity markets. As a small number of transnational corporations increasingly dominated some commodities, trade, processing and retailing, the market power of farmers and exporting countries has dwindled.

On its way from the farmer to consumer, the FAO report says, "nearly 40 percent of the world's coffee is traded by just four companies and 45 percent is processed by just three coffee-roasting firms."

The trend is repeated for other commodities; indeed, in recent years a small number of vertically integrated companies have gained increasing control over world agricultural trade. FAO says the number of cocoa trading houses in London shrank from 30 in 1980, to around ten in 1999. Similarly, the six largest chocolate manufacturers account for 50 percent of world sales. Just three global companies control 80 percent of the soybean crushing market in Europe, and more than 70 percent in the United States.

At the retail level, SOCO says supermarkets have grown rapidly in both developed and developing countries. The 30 largest supermarket chains dominate almost one-third of grocery sales around the world. The five biggest retailers control between 30 and 96 percent of food retailing in the EU and the United States. "Supermarkets' domination of the market gives them significant leverage over production, distribution and trade, including through direct involvement with developing country suppliers. To simplify operations, most supermarkets prefer to work with a limited number of suppliers who have the resources to meet requirements and delivery schedules," the report observes.

The price that growers receive typically represents a small fraction of the retail price for finished products, ranging from as low as 4 percent for raw cotton to 28 percent for cocoa. SOCO adds: "Even with bananas, which require almost no processing, international trading companies, distributors and retailers claim 88 percent of the retail price; less than 12 percent goes to the producing countries and barely 2 percent to the plantation workers."
FAO/22511/L. Lizzi

Read more…

Commodity markets: global trends, local impacts

Declining commodity export earnings and food import bills

Major commodities profiled in SOCO

Food trade deficits threaten poorest countries

Cotton subsidies in rich countries mean lower prices worldwide


John Riddle
Information Officer, FAO
(+39) 06 570 53259

FAO/G. Bizzarri

A few major supermarket chains consolidate power over commodities.

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