I. GLOBAL ECONOMIC CONDITIONS INFLUENCE COMMODITY MARKETS

II. COMMODITY MARKETS IN SUMMARY

III. FOLLOW-UP ACTION TO CONFERENCE RESOLUTION 2/79

IV. CONCLUSIONS

I. GLOBAL ECONOMIC CONDITIONS
INFLUENCE COMMODITY MARKETS

1. Since the last session of the Committee on Commodity Problems (CCP), the world commodity situation has changed significantly in response to changes in market fundamentals, unusual weather patterns and the deterioration in the global economic environment. This document reviews recent developments in world commodity markets and the global economy and assesses the short-term commodity market outlook. It then reviews follow-up action to Conference Resolution 2/79¹ and other developments in international commodity markets. More detailed commodity notes will be provided in an Updating Statement to be tabled.

2. At the 61^st session of the CCP, the outlook was for a gradual weakening of agricultural commodity prices, particularly for grains, as farmers in major exporting and consuming regions were expected to expand planted area in response to the high prices prevailing at the time. The expected decline in grain prices began in late 1996 and continued in 1997 and 1998 as favourable growing conditions enhanced production at the same time that weakening economic conditions dampened global import demand. Prices for most other, but not all, agricultural commodities fell in 1998 in response to a variety of economic and other factors (Annex Table 1).

3. The factors lying behind these changes in commodity prices are several, both general and specific to individual commodities. First, the financial crisis and resulting slow-down in income growth--largely in Asia and the CIS but encroaching into the rest of the world--has had a dampening effect on global import demand for many commodities in 1998 resulting in a fall in prices, particularly for meat, coarse grains, sugar, tropical beverages and most agricultural raw materials. World economic growth is forecast at 2.0 percent for 1998 and 2.5 percent for 1999 compared with 4.1 percent in 1997. The forecast for 1998 is down more than two percentage points from the level forecast a year ago.² Second, the devaluation of a number of currencies associated with the financial turmoil, coupled with sharply lower shipping costs, reduced prices of some commodities produced in the countries affected, such as vegetable oils and tropical fruits. Thirdly, the rise in the supply of temperate food commodities and some tropical products such as coffee and tea triggered by favourable weather in many countries further contributed to weakening prices.

4. On the other hand, a decline in the output of some commodities, particularly rice, resulting from the effects of El Niño in a number of countries, exerted upward pressure on their prices. The fading of consumer fears concerning contamination such as BSE in bovine meat has offset some of the downward pressure on meat prices, but other factors have kept meat prices weak.

5. The deterioration in market prices for most major commodities is due to a number of factors, but it would be very difficult to quantify these effects separately as the economic factors set in motion by the crisis have been overlaid by other influences such as droughts or floods.

6. While data on total agricultural export earnings are not yet available for 1998, it may be expected that export earnings declined because of lower prices and generally flat or declining trade volumes. For cereals, for which partial data are available, export earnings for 1998/99 are expected to decline by, perhaps, as much as 20 percent from the previous year, with most of the reduction being felt in wheat and coarse grains. By the same token, the food import bills for low income food deficit developing countries are also likely to be lower, by as much as 20 percent, both because of lower prices and trade volumes and because of a higher volume of food aid shipments in 1998/99. An examination of the aggregate price indices suggests that the agricultural terms of trade for developing countries did not change significantly in 1998. The price indices of their exports decreased by much the same amount as the price indices of products exported by the developed countries and thus those imported by developing countries.

II. COMMODITY MARKETS IN SUMMARY

7. The interplay of economic, weather and other factors resulted in diverse developments in the markets of agricultural commodities in 1997 and 1998, as set out below. Abundant supplies of wheat and coarse grains from bumper harvests in major exporting and importing countries exerted strong downward pressure on international prices over two seasons in the absence of an offsetting rise in demand. Prices, largely of wheat, have risen recently, fuelled by prospects of larger-scale imports by the Russian Federation, despite their financial difficulties. By contrast, a sharp, weather-related, fall in paddy output in major producing countries in Asia in tandem with continued strong import demand from Asian countries for their basic food staple, have pushed rice prices upwards in the first half of 1998. They peaked in July 1998 with the bulk of import requirements covered and new crop supplies beginning to enter the market. Cassava prices declined despite a drop in global production under the impact of competitively priced feed grains replacing cassava in compound feeds.

8. Tight supplies in the vegetable oil market, particularly emanating from a drought-induced contraction in palm oil availability from major Asian producing countries, boosted prices, while oilmeal prices suffered from a decline in the demand for animal feeds in crisis-affected regions, accentuated by abundant supplies of competing feed grains. The international meat market was governed by different factors for the various types of meat, at times neutralising each other and generating divergent price trends. Thus, while fading fears of consuming beef, pork and poultry meat contaminated by BSE and e-coli, foot-and-mouth disease and avian flu, respectively, led to a modest recovery in demand in a number of countries, the loss in purchasing power in crisis-affected countries had the opposite effect, despite financial incentives granted by major exporting countries. Overall, rising supplies of most meats, supported by lower feed input costs, together with sluggish import demand have kept meat prices under downward pressure.

9. As regards other crops, expectations of record coffee and tea production, and some recovery in cocoa production had induced lower prices which could be further prolonged firstly by reduced import demand in the CIS and subsequently by the effects of the more general economic slowdown which could dampen demand growth elsewhere. For sugar, the deterioration of economic conditions which initially curtailed imports into major Asian markets has also led to a substantial drop in imports into the Russian Federation, the largest single import market. The global economic slowdown is expected to weaken import demand, while export availabilities would remain high with a resultant downward pressure on prices during the remainder of 1998 and early 1999.

10. For citrus and bananas, the markets in the CIS, and particularly the Russian Federation, have contracted significantly. The general tendency for prices to weaken has, however, been reversed in the case of citrus fruit due to early season indications of smaller 1998/99 crops in the Mediterranean region, the United States and Brazil. Temperate fruit imports into some major markets of Asia have contracted in favour of domestically produced tropical fruits. The difficult economic situation has had a serious impact on the markets for a number of raw materials, particularly cotton, rubber, and hides and skins, while for industrial fibres such as jute and hard fibres the impact is slight. Cotton prices are at their lowest for four years as a result of reduced demand in several major consuming countries, while markets for both hides and skins and for rubber have also been seriously affected by reduced demand. On the contrary, the depressed prices for jute are mainly the result of the sharp rise in production following high prices in 1996 while the market for sisal remains relatively strong.

III. FOLLOW-UP ACTION TO CONFERENCE RESOLUTION 2/79

11. Under Conference Resolution 2/79, the CCP is requested to assess the impact of the results of the Multilateral Trade Negotiations, review developments in protectionism and examine the scope for promoting trade between developing countries. Other issues covered by the Resolution addressed the Common Fund and Integrated Programme on Commodities and international commodity agreements. The Committee considered in detail the assessment on the impact of the Uruguay Round at its 61^st Session and a follow-up to that assessment during this Session under a separate agenda item. Activities related to the Common Fund are also dealt with separately in the current Session. Developments in the other areas addressed by the Resolution are reviewed below.

12. The total policy-induced transfers to agriculture from consumers and taxpayers in the OECD continued to decline in 1997 from earlier in the decade, equalling US$280 billion, virtually unchanged from the 1986-88 average (Annex Table 2). Total transfers continued to decline as a percent of GDP, falling to 1.3 percent in 1997 compared with 2.2 percent a decade ago. There are no data available for 1998, but it is possible that the decrease in world commodity prices may have checked the decline in support in some countries.

13. The total Producer Subsidy Equivalent (PSE) was US$145 billion in nominal US dollars in 1997, 10 percent less than in 1996 and 17 percent less than in 1995.³ Expressed as a percentage of the farmgate value of these commodities, the percentage PSE was 35 percent in 1997 and 1996, compared with 40 percent in 1995, continuing its downward trend since 1986-88. The producer Nominal Assistance Coefficient (NAC), which expresses the ratio of domestic prices (border prices plus the unit PSE) to world prices, declined from 1.8 in 1986-88 to 1.5 in 1997.

14. The progressive shift in the structure of agricultural support programmes away from market price supports in favour of direct payments is reflected in the sharp reduction (in absolute value and percentage terms) in the implicit tax on consumers due to agricultural policies, as measured by the Consumer Subsidy Equivalent (CSE). The total CSE fell to -US$91 billion in 1997, down 5 percent from 1996 and 24 percent since 1986-88. The CSE as a percentage of farmgate value dropped to -24 percent in 1996 and 1997, compared with -37 percent in 1986-88. The consumer NAC, which is an indicator of the wedge between domestic and world prices created by policy, declined from 1.6 in 1986-88 to 1.3 in 1997.

15. There remain wide variations in the levels of support to agriculture among the OECD members, with percentage PSEs ranging from 3 percent for New Zealand to 76 percent for Switzerland in 1997. Three major agricultural exporting countries--Canada, New Zealand and the United States-- have recorded substantial reductions in their percentage and total PSEs and CSEs since 1986-88, and along with Australia their support levels are now significantly below the OECD average. Several agricultural importing countries--Iceland, Japan, Norway and Switzerland--have recorded small reductions in their percentage PSEs and somewhat larger reductions in their percentage CSEs since 1986-88 reflecting some movement away from market price supports in favour of direct payments, but their support levels remain well above the OECD averages. In the EU, the total PSE rose considerably in 1995 following the accession of three new member states but the percentage PSE remained virtually unchanged, and both total and percentage PSEs fell in 1996 and 1997 to just above the OECD averages.

16. For crops in the OECD countries, the percentage PSE continued its long-term decline in 1996, falling to 34 percent from 45 percent in 1986-88, but it rose slightly in 1997 (to 37 percent) due mainly to lower world prices for grains. Most of the long term decline in percentage PSEs for crops has occurred for wheat, maize, and oilseeds, with virtually no change since 1986-88 for rice and sugar which continue to have the highest PSEs by a wide margin (80 percent and 49 percent, respectively). The average percentage PSE for all livestock products declined slightly in 1997 (to 32 percent compared with 34 percent in 1996 and 35 percent in 1986-88), and milk continues to have the highest PSE among the livestock products (52 percent) despite having fallen significantly since 1986-88 (from 61 percent).

17. Among other developed countries, the Government of Romania increased import tariffs on wheat and wheat flour to 60 percent in July 1998 effective for one year. The Ukrainian Government introduced seasonal import duties on agricultural products in July 1997 and, in July 1998, announced a doubling or more of the duties for many agricultural products for the last four months of the year, with duties for wheat, rye, oats and maize rising to 60 percent.

18. Comprehensive time-series data on protection rates and support to agriculture are not available for developing countries as they are for the OECD countries, however a forthcoming FAO report⁴ indicates that market-oriented reforms are continuing in many developing countries even as they strive to expand agricultural production and improve farm incomes in the midst of challenges posed by the current international economic situation. In a number of countries, domestic price supports and import tariffs were raised in 1998 to protect domestic producers from the effects of low world prices.

19. In September 1998, the Government of Indonesia announced fundamental changes affecting the importation and distribution of rice, wheat and wheat flour, soybeans and sugar as part of a package of measures to accelerate the implementation of market-oriented policies that were initiated in 1997 and early 1998. Changes include, inter alia, the reported lifting of the monopoly held by the National Logistics Agency (Bulog) on rice imports and the full removal of the exchange rate subsidy for soybeans, wheat and sugar. As part of an effort to target consumer subsidies to essential products, the Government of Indonesia reduced subsidies for sugar and wheat flour in early 1998 and announced its intention to eliminate these subsidies by the end of the year. At the same time, Bulog is expanding the provision subsidised rice for the very poor to a targeted 17.5 million families. In an effort to increase domestic production and boost farm incomes, the Government of Indonesia raised prices for unhusked rice from 700 Rupiah to 1 000 Rupiah in June 1998.

20. The Government of the Philippines adopted a programme of agricultural reform measures in 1997 to alleviate rural poverty and to promote food security and sustainable growth. The government has also announced the goal of stabilising agricultural prices through market oriented stock-holding, improving market transparency, enhancing private sector participation and lowering import tariffs. Applied MFN tariffs on a range of basic agricultural products were cut by as much as half in 1998 and are scheduled to be reduced further by 2000 (wheat, rye, barley, sugar, oilseeds and products, dairy products, meats and others). By 2000 most MFN tariffs on agricultural products will be in the range of 3-10 percent compared with 20-40 percent before the cuts.

21. The Government of India provided a procurement bonus of 550 Rupees (US$14) per tonne April 1998 in an effort to increase wheat procurement, raising the effective support prices for the 1998/99 marketing year to 5 100 Rupees (US$129) per tonne. The Government of Morocco announced, in March 1998, a decision to increase tariffs on hard wheat from 17.5 percent to 50.5 percent and for soft wheat from 64 percent to 101 percent. In January 1998, the Government of Saudi Arabia adopted a seasonal import tariff for many agricultural products, imposing an additional 25-percent tariff during the relevant harvest season. In addition, the tariff on wheat and wheat flour was raised from 12 percent to 100 percent and trade in these products remains in Government control.

22. Brazil raised its external tariff on imports from countries outside the MERCOSUR customs union (Argentina, Paraguay and Uruguay) and free trade area (Bolivia and Chile) by 3 percentage points on all products, with tariffs on most agricultural products rising from 10 percent to 13 percent.

23. Several countries in Africa, notably Kenya, Nigeria, and Tanzania, reduced or suspended import duties for grains in 1997/98 to allow emergency supplies and imports by the private sector to make up a market shortfall arising from the drought. The Government of Zimbabwe announced an increase in the producer price for maize from Z$1 200 (US$64) per tonne to Z$2 400 (US$138) to help offset low world prices and boost domestic production. In Kenya, plans to commercialise operations of the National Cereals and Produce Board (NCPB) were finalised and implementation begun in l997. The Board was divided into two parts, one to operate as a commercial entity and the other to coordinate the government's strategic cereals reserves, with both fully government owned. The commercial NCPB is expected to participate in the trading of grains on a self-sustaining basis, and is no longer required to serve as a buyer of last resort for domestic producers.

24. There were several changes in international commodity agreements in 1997 and 1998. The current International Jute Agreement is to expire in April 2000, and a Preparatory Committee has been established to prepare a new draft Agreement. The first meeting of that Committee, in October 1998, recommended that preparatory work for the negotiation of a new Agreement should proceed. The International Bovine Meat Agreement and the International Dairy Agreement were terminated in December 1997. Both agreements were established on 1 January 1995, for a period of three years.

25. Regional and preferential trade agreements remain an important feature in agricultural trade. Negotiations have begun on a successor agreement to the fourth Lomé Convention, which governs preferential trade and other relations between the EU and 70 African, Caribbean and Pacific countries, due to expire in February 2000. Since its creation in 1996, the WTO Committee on Regional Trade Agreements has continued or begun examinations of more than 40 regional trade agreements, including: enlargement of the EU to include Austria, Finland and Sweden; the North American Free Trade Agreement; the MERCOSUR; and free-trade agreements between both the EU and members of the European Free Trade Association with several countries in Central and Eastern Europe (e.g., Hungary, Poland, the Czech Republic, the Slovak Republic, Romania, Bulgaria, Estonia, Latvia, and Lithuania).

IV. CONCLUSIONS

26. The deterioration in the global economic environment poses risks to the outlook for agricultural commodity markets in the near term, but notwithstanding these problems, it is important to note that economic growth for 1998 is forecast to be positive for most regions of the world and for most developing countries and that growth is expected to recover modestly in 1999.

27. The weakening in agricultural commodity prices in 1997 continued in 1998 for many commodities, with prices falling somewhat more for basic food commodities than for others. Prices for most commodities, in real terms, were similar in 1998 to levels prevailing earlier in the decade. The slowdown in global economic growth was one cause of weaker prices, but other factors including weather were also important. Weaker prices and flat trade volumes imply a reduction in agricultural export earnings for 1998 as well as lower food import bills for developing countries. While conditions for 1999 are difficult to forecast, there are some indications that the decline in commodity prices may bottom out as economic growth recovers and agricultural output adjusts to the weakness of current market prices.

28. There were few developments of note in international commodity agreements, the main being the termination of the International Agreement on Bovine Meat and the International Dairy Agreement. Another recent feature of international agricultural markets, and one that is expected to grow in the future, is the extension and deepening of regional trade agreements.

29. Although protectionism in the OECD agriculture is still high, the trend up to 1997, the last year for which data are available, is one of decline. In particular, market price support to agriculture declined in both the United States and the EC and there was a shift towards de-coupled support to producers. In developing countries, the trend is one of further liberalisation and greater market-orientation. It remains to be seen whether the difficult economic situation experienced by many countries and the weak commodity prices in 1998 have checked the trend toward lower support levels and more market-oriented reforms.

ANNEX TABLE 1: Index of export prices of major agricultural commodities (real values, 1980=100)1/
Commodities	1980-84	1990-94	1995	1996	1997	1998 2/
Cereals	92	53	57	71	58	54
Meats	91	61	44	49	54	47
Dairy products	94	83	89	90	89	90
Bananas	107	92	78	79	86	90
Sugar	48	25	28	27	26	23
Tropical beverage crops	90	37	51	42	58	51
Fats, oils and oilseeds	97	53	57	62	65	64
Agricultural raw materials	90	51	62	56	53	47

Aggregates 3/
	World
		Basic foods 4/	88	59	51	56	58	53
		Other commodities 5/	90	42	55	47	56	51
		All agriculture	89	50	53	51	57	52
	Developing countries
		Basic foods 4/	82	50	44	48	50	46
		Other commodities 5/	89	40	54	46	57	51
		All agriculture	88	42	52	46	55	49
	Developed countries
		Basic foods 4/	91	63	54	59	61	56
		Other commodities 5/	95	52	58	51	53	50
		All agriculture	92	60	55	57	59	55
1/ Deflated by the export unit value index of manufacturers of industrialised countries
2/ Average for January-October 1998
3/ The index is based on 1986-88 average export values as weights
4/ Basic foods include mainly temperate foods (cereals, meat, dairy, sugar and vegetable oils, cakes and seeds)
5/ Other commodities include mainly tropical products (beverage crops, bananas and agricultural raw materials)

ANNEX TABLE 2: Total transfers associated with agricultural policy in the OECD
	1986-88	1992-94	1995	1996p	1997e
Total Transfers
Billion US$	279.3	332.5	332.2	296.7	280.2
Billion ECU	253.6	273.5	254.1	233.7	244.6
As % of GDP	2.2	1.7	1.5	1.3	1.3
Per caput US$	341	381	375	333	312
ECU	310	313	287	262	273
Producer Subsidy Equivalents (PSEs)
Billion US$	158.9	171.5	174.9	160.9	145.2
Billion ECU	144.3	141.1	133.8	126.7	126.8
As % of farmgate value of production	45	42	40	35	35
Per full-time farmer US$	14 000	19 000	21 000	19 000	17 000
Per ha of farmland US$	148	163	167	152	137
Consumer Subsidy Equivalents (CSEs)
Billion US$	-118.7	-124.6	-118.2	-96.0	-90.8
Billion ECU	-107.8	-102.4	-90.4	-75.6	-79.2
As % of farmgate value of production	-37	-33	-29	-24	-24
Nominal Assistance Coefficients (NACs)1/
Average producer NAC	1.78	1.68	1.60	1.50	1.49
Average consumer NAC	1.61	1.50	1.41	1.31	1.32
Source: Agricultural Policies in OECD Countries: Monitoring and Evaluation 1998, and Measurement of Support and Background Information, 1998, OECD, Paris. Note: 1996 figures are provisional and 1997 figures are estimates. 1/ Producer (consumer) NAC is the ratio of the sum of border price plus the unit PSE (unit CSE) to the border price.

¹Conference Resolution 2/79 "Commodity Trade, Protectionism and Agricultural Adjustment", 20th Session, Rome 10-28 November 1979.

² IMF, World Economic Outlook, October 1998.

³ The "total transfers" not only cover those supports measured by the PSE and CSE but also additional budget outlays associated with certain food, rural and environmental policies that are not directly attributable as transfers to agricultural producers. The PSE only covers a standard set of commodities, although most of the major ones. The 1997 data are provisional estimates and refer to EC-15.

⁴ Cereal Policies Review, 1997/98.