Table of Contents

I. INTRODUCTION

II. COMMODITY BY COMMODITY ANALYSIS

III. SPECIAL ISSUES

IV. CONCLUSIONS

I. INTRODUCTION

1. At its last Session the Committee on Commodity Problems recommended that a study be undertaken on the "assessment of the impact of Uruguay Round provisions as they are being implemented in practice" and that it should include inter alia "an assessment of the food security implications for developing countries".

2. In undertaking this study the Secretariat bore in mind the difficulties inherent in making assessments of this type, as was noted by the CCP at its 60th Session in April 1995 (paragraph 28 of its report). The basic difficulty is in knowing with what to compare the actual developments. If there had been no agreements what would have been the course of world agriculture? If there had been no agreements would countries have adopted similar policies to those that in fact they actually implemented after 1994? In the Secretariat's earlier study - discussed at the 60th Session of the CCP - the comparison made was between projections to the year 2000 undertaken before the Uruguay Round agreements, and projections that took into account the agreements reached at Marrakesh. This time the CCP request refers to the impact of the Uruguay Round provisions "as they are being implemented in practice". Therefore, the point of comparison cannot be some date in the future (the year 2000 or 2005) but with what has happened since 1995 up to the present. The Implementation of the Uruguay Round Agreement on Agriculture started in 1995 and by mid-1998, when this paper was being prepared, just over three years had elapsed. Notifications on implementation of commitments refer to various years but do not cover the whole period to mid-1998 and in many cases refer to 1995 and 1996 only. Notification of action taken as reported to the WTO refer to past action on, for example, tariff quota utilization, compliance with export subsidy commitments and estimates of the Aggregate Measurement of Support.

3. The methodology adopted to undertake this assessment is based on a comparison of developments in the period 1995-97 (and, in some cases into the early part of 1998) with the longer run trend (based on data for the 10 years before the coming into force of the Uruguay Round Agreements, i.e. 1985-94). The differences between actual developments and trends in 1995-97 were then examined to see whether (a) existing studies projected such results from the Uruguay Round and (b) whether in the view of commodity specialists the differences were attributable to special factors (e.g. weather) or to changes in policies related to the Uruguay Round Agreement on Agriculture. The analysis is organized commodity by commodity covering production, trade, stocks and prices. This is followed by an analysis of food import bills and price fluctuations especially in the cereals sector. The last section draws some tentative conclusions.

II. COMMODITY BY COMMODITY ANALYSIS

Wheat

4. During the period 1995-97 world wheat production was slightly above trend but both world trade and stocks were significantly below the trend (Table 1 and Figure 1). Real international prices (HRW No. 2 deflated) were between 20 and 23 percent above trend, depending on how the trend was measured. The lower trend for all commodities has been calculated after allowing for the state of crops in whereas the higher figure is the straightforward trend extrapolation.

5. The earlier FAO (1995) study projected that the effect of the Uruguay Round would be small on world production (a rise of 2-3 million tons) and on trade (a reduction of 3 million tons). The effect on world prices was assessed to be positive but small. Similar findings were made in other studies. Though not quantified in the 1995 study, the expectation was that stocks would be lower than otherwise due to the Uruguay Round.

6. Indeed, the deviations from trend in 1995-97 appear to be in the same direction as was expected. However, within this period there have been sharp changes in direction. In 1995/96 world prices rose strongly due to successive poor crops in 1994 and 1995, and to 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 by a number of countries in the previous few years of policies consistent with the Uruguay Round. In addition, export subsidies fell well below Uruguay Round commitments (in 1995 only 6 percent of the total allowed was used). The surge in prices led to a strong expansion in output in 1996 and 1997, which led to stock replenishment and falling prices. By mid-1998, prices in real terms were below the long-run trend, due in part to expectation of another good crop in 1998 and weak import demand in China and India, among other countries. Food aid in wheat declined by about 30 percent between 1995/96 and 1997/98 though there are signs of some recovery in 1998/99.

Coarse grains

7. In 1995-97 global production was 3 percent above trend while trade was 2 percent below and carryover stocks more than 13 percent higher than trend. Real export prices of United States maize were well above the declining long-run trend; the same was true for maize of Argentine origin.

8. FAO's 1995 assessment of the Uruguay Round put the effect on world production as positive (plus 3 million tons or less than one percent), on trade also positive (about 2 percent) but, while there was no quantification of stocks, it was felt that they would be lower, in common with wheat. Also like wheat and in common with other studies, the Uruguay Round was assessed to have a small positive effect on world prices of coarse grains.

9. Price developments during 1995-97 would appear to be mixed compared with expectations, but it is important to examine more closely what happened during this period. World prices of coarse grains increased steeply in 1995/96, because of a 10 percent decrease in production due to a combination of bad weather and policy measures at a moment when stocks had been drawn down and demand was firm. During 1995, tariff quota levels were exceeded by Japan, the Republic of Korea and Thailand. Moreover, member countries of the WTO used only 27 percent of their export subsidy ceilings in 1995. Following the sharp price rise in 1995/96, production of coarse grains recovered in both 1996 and 1997. In consequence, prices fell but were still above trend in early 1998. Some of the recent price declines can be ascribed to relatively weak demand for livestock products, in part due to the Asian financial crisis.

Table 1 Actual and Trend World Production, Trade, Stocks and Prices,
Cereals and Sugar, 1995-97

¹ Deflated by unit export value of manufactures from developed countries; 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.

Rice

10. The Uruguay Round was not expected to result in significant changes in world production but the volume of trade was expected to rise 5 percent, largely because of the market access commitments by Japan and the Republic of Korea. Prices were expected to strengthen as a result of the Uruguay Round.

11. Compared with the trend, actual production of paddy in 1995-97 was 3 million tons (less than 1 percent) higher, trade 6 percent higher and stocks 16 percent lower. Prices of Thai long grain rice were well above trend and remained so in the first half of 1998. The same was true of US long grain and Thai broken rice.

12. Although the tightness of the global rice markets during 1995-98, relative to the historical trend, is consistent with projections made by the studies that assessed the impact of the Uruguay Round, it would be inappropriate to ascribe the impact only to the Uruguay Round as other factors have also played a role. For example, the sharp price increase observed in 1994 and parts of 1995 was mainly related to the drought in Japan. Some slackening of prices during 1996 and 1997 from the high levels of 1994 reflected a general improvement in production in all major importing countries. The most recent price developments in 1998 also reflect the poor harvests in major rice importing countries in South-east Asia, especially Indonesia and the Philippines, and in South America, especially Brazil, due to El Niño-related poor weather, which have offset the price depressing effects of the Asian financial crisis.

13. For cereals as a whole, the period 1995-97 saw production above trend while trade values were below. Spurred by the tight stock situation in 1995/96, prices were above trend for most of the period but retreated sharply in 1998 to the extent that wheat prices were actually below trend in late 1998.

Sugar

14. During 1995-97 world sugar production, trade and stocks all exceeded trend significantly and prices were correspondingly below the sharply rising trend but were still considerably above those for most of the period 1985-94. With record crops again envisaged this year, prices are once again below trend in the first half of 1998.

15. Broadly speaking, the Uruguay Round was not expected to have a significant effect on the world sugar economy because there were no major concessions on market access by the major consuming developed countries. Although production, trade and prices were all expected to be higher, at most they would be by just a couple of percentage points. The main stimulus to sugar was expected to come from tariff reduction in the developing countries. The reduction in subsidized exports was not expected to have much effect as these accounted for only 5 percent of world trade. Other studies foresaw similar rather small effects. During the decade 1985-94 there was some tendency for price stability to improve, with the exception of the late eighties, when the full impact of the termination of the economic provisions of the international sugar agreement was felt. The rise in production and stocks was due to the relatively favourable producer prices while economic growth and sometimes subsidized consumer prices stimulated demand and trade. With weaker import demand in 1998 in the Russian Federation, China and some other countries in Asia affected by the financial crisis and expectations of large crops in 1998/99, prices fell in the first half of 1998.

Fats and Oils

16. World production and trade of fats and oils exceeded the trend quite significantly in 1995-97 while prices were generally slightly below rising trends (soybeans, sunflower and rapeseed below and palm oil above) that started in 1993 (Table 2 and Figure 1).

17. Expectations were that the Uruguay Round would give a slight boost to production and trade and would reverse a projected decrease in prices (for the second half of the nineties). The main effect largely caused by higher incomes was an expected 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.

Table 2. Actual and Projected World Production, Trade, Stocks and Prices,
Other Agricultural Commodities, 1995-97

¹ Deflated by unit export value of manufactures from developed countries.

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

18. Developments in 1995-97 need to take as a starting point the tight market that had arisen in 1994 so that although prices declined in 1995-97 from their 1994 peak they were still higher than earlier years, partly because of the reduction in export subsidies and partly because of the effects of higher incomes. The short run outlook in 1998-99 is for continuing reasonably firm prices.

Oilmeals

19. World production, trade and prices in 1995-97 were well above trend. The Uruguay Round was not expected to have any significant direct effect on volumes or prices basically because the oilmeals were largely traded without major distortions although there were some relatively small effects from changes foreseen in livestock products and other feedstuffs. On balance, these effects were rather small. The above-trend production, prices and trade in 1995-97 were largely due to continuing expansion of demand from the livestock sector and 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 despite continuing fairly strong demand tempered by the effects of the Asian financial crisis on the livestock sector in South and East Asia, because of the higher production expected for 1998.

Meat

20. In the past three years, bovine meat production, trade and prices have all been below trend. The Uruguay Round was foreseen to give a boost to trade because of lower tariffs in Japan, a progressive opening of Asian markets and reduced export subsidies. World prices were expected to be firmer.

21. The sharp contrast between recent experience and expectations have little to do with the Uruguay Round. The production shortfall was mainly caused by the downsizing of the sector in many countries in transition. Most of the decline in trade and prices was due to factors such as the BSE crisis and some other health-related reductions in demand. It has been widely acknowledged, however, that developments such as the opening of the Japanese beef market to imports has given a boost to trade. However, since this country initiated the liberalization process in 1991, the impact of these policy changes anticipated the implementation of the Uruguay Round Agreement even if the two events were not independent.

22. In the case of pigmeat, the situation is quite different. Production in 1995-97 was below trend, while world trade and prices were well above. The Uruguay Round was assessed to boost an otherwise flagging trade growth and lift international prices, helped by lower export subsidies. The expansion in trade in recent years seems to be partly connected with the implementation of the Uruguay Round commitments. 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 the surge in Japanese import volumes triggered the Uruguay Round special safeguard clause resulting in much higher gate prices from November 1996 to November 1997 that cut imports. While other countries raised exports, the EU's fell, reflecting buoyant demand for pigmeat following the BSE health scare in 1996. By 1997, however, world trade receded due both to lower import demand, partly on account of the Asian financial crisis, and to lower supplies, with exports much affected by outbreaks of swine fever in the Chinese Province of Taiwan and in the EU.

23. Developments in 1995-97 in the poultry sector were even more dynamic, with world production, trade and prices all significantly above trend. The main effect of the Uruguay Round was expected to be some firming of prices, reflecting higher incomes, higher feed prices due to the Round and reduced export subsidies. The increase in world trade in 1995-97 was not related to the Uruguay Round, it was largely the result of a strong growth in imports by the CIS and countries in the Far east, both effects waning in 1998 following financial crises in the Asian region and the Russian Federation.

24. For sheepmeat, world production and trade were marginally below trend while prices were almost 10 percent above. The Uruguay Round was not expected to have much effect on quantities produced and traded although prices were expected to be firmer. The large EU tariff quota for sheepmeat was mainly a rollover from previous access agreements. The market is fairly cyclical which accounts for the below trend level of prices in 1995-97. Some boost to trade on account of the Uruguay Round appears to have occurred in the United States following the abolition of the Meat Import Law, but this was offset by negative developments in other countries unrelated to the Round.

Milk

25. For milk and milk products, expectations regarding the effects of the Uruguay Round were muted, little change was foreseen for the volume of world production and trade but prices were seen to be slightly higher on account of reduced export subsidies, which had been used heavily before the signing at Marrakesh, and minimum access commitments. The period 1995-97 saw production almost exactly on trend while trade was above. Prices varied considerably: those of skim milk powder were over 10 percent below trend while prices of whole milk powder and cheese were on trend and those of butter were 8 percent above.

26. Developments during 1995-97 largely reflected, on the one hand, the continued decline of output in the CIS and on the other the rising output in Australia, New Zealand and in several developing countries in Asia and Latin America. The prices for cheese on world markets were helped to some extent by the reduction in export subsidies and those of butter by the much lower levels of surplus stocks in recent years compared with the levels in the early 1990s and strong import demand from the Russian Federation.

Bananas

27. The volume of banana exports in 1995-97 was on trend and, when continuing the price movements in the main banana importing regions, average real prices were slightly above trend. Banana production statistics are difficult to verify as they include plantains which are almost totally consumed in the countries where grown, and bananas grown for local consumption, which are basically a different product from export bananas. For these reasons production figures are not good proxies for comparison of UR effects. Instead, the focus is on the trade in bananas. 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.

28. The trend in 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 former USSR and China. In light of the effects of the EC banana regime on imports into the Community, some of the larger production originally intended for the EC market was exported to those markets which had only begun to open up in the late 1980s. Thus, the UR overall was not expected to have much effect on the aggregate volume of trade. As regards prices, however, representative market quotations in the EC demonstrate that the UR, in accepting the EC banana import regime, has resulted in higher prices in those markets which had previously enjoyed freer access, and somewhat lower prices in countries where the changes resulted in some liberalisation. Elsewhere, prices were under downward pressure as ample export availabilities were made available to those markets.

Tropical Beverages

29. The volume of coffee production and trade in 1995-97 was slightly below trend but real prices were well above. Coffee prices had been on a pronounced downward trend from the mid-eighties to 1993 when weather damage to crops led to severe shortages. Despite the price recovery in 1995-97, again associated with smaller crops, real prices were still well below their levels of a decade earlier. The Uruguay Round 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 1995-97 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.

30. The situation in cocoa closely mirrors that of coffee, with world production and trade slightly below trend in 1995-97 while prices were well above. Again, prices had been on a strongly declining path during the decade prior to the signing of the International Cocoa Agreement in 1993. The Uruguay Round 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 1995-97 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.

31. For tea, world production and trade were on trend in 1995-97 but prices, as in the case of other beverages, were well above it. It was expected that the Uruguay Round would result in some increase in trade basically because of lower tariffs in some major importing developing countries. However, the long run decrease in real tea prices seems not only to have bottomed out in 1995-97 but to have been reversed, buoyed by increased import demand by the CIS, and supply shortfalls in 1997 associated with abnormal weather in some major tea producing countries, coupled with an increase in the proportion in exports of value-added retail packs.

Agricultural Raw Materials

32. The period 1995-97 saw global cotton production and trade close to trend but prices well above. The Uruguay Round was expected to have some impact on the cotton market, not in the same way as other agricultural commodities but more from the indirect effects of the phasing out of the MultiFibre Agreement (MFA) by 2005. This was expected eventually to boost the demand for textile fibres but cotton's share would depend on competition of other fibres, particularly synthetics. According to the FAO/ICAC model, cotton demand is expected to rise 5 percent due to the phasing out of the MFA with most of the impact expected to be delayed until towards 2005. The recent weakness of cotton prices in 1997 and 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 MFA, in particular.

33. While jute volumes and prices in 1995-97 were above the long run declining trend, this was due to a cyclical upswing in the market when improved prices induced higher levels of production, and trade expanded to allow stock replenishment. Jute was not included in the Agreement on Agriculture and the changes occurring in the Uruguay Round were expected to be mostly those associated with improved access for synthetic fibres as a result of the phasing out of the MFA. The above-trend prices in 1995-96 have been followed by extremely low prices in 1997 and 1998.

34. Rubber production and trade were somewhat above trend in 1995-97 but prices were much above projected levels. This was not due to the Uruguay Round, as rubber was already traded fairly freely and the price-boosting effects of higher incomes flowing from the Uruguay Round 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 have fallen back in 1998 due to increased supplies and the effects of the Asian financial crisis.

35. In conclusion, therefore, experience shows that for several commodities there was a reasonably buoyant period for trade and prices in 1995-97. Commodity prices of most products rose above trend in 1995-97 often because stocks had been run down, in part because of the gradual reduction of government intervention in agricultural commodity markets. In a number of cases the buoyant market was due partly to the implementation of the Uruguay Round commitments. This is mainly in cereals and meat, where export subsidy reductions, the opening of minimum access and the effect on incomes have had some impact. However, in the case of most of the major agricultural commodities the developments in 1995-97 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.

36. The subsequent weakness of many agricultural prices in 1998 underlines the important role of other factors including the financial crises that have affected many countries. Still, the trend towards liberalization, the reduced role of government in commodity markets, whether or not due to the Uruguay Round, have also played their part in recent developments. Indeed, part of the changes in commodity markets since 1995 may well owe their origin to changes in the extent of fluctuations in these markets in recent years, a matter that is examined in Section III (b) below.

III. SPECIAL ISSUES

Cereal Import Bills

37. An important outcome of the Uruguay Round was the Decision on Measures Concerning the Possible Negative Effects of the Reform Programme on Least-Developed and Net Food-Importing Developing Countries. This Decision recognized that during the reform programme leading to greater liberalization of trade in agriculture, least developed and net food importing countries might experience negative effects in terms of the availability of adequate supplies of basic foodstuffs from external sources on reasonable terms and conditions, including short-term difficulties in financing normal levels of commercial imports of basic foodstuffs.

38. The two groups of countries are distinct. The 48 least developed countries (LDCs) had a population of 588 million in 1995, growing at 2.9 percent annually. Their average per caput income was US$235 in 1995. During 1985-95 half the LDCs for which data were available had declining per caput GDP. The Net Food Importing Developing Countries (NFIDCs) numbered 18 with a total population of 368 million in 1995 growing at 2.6 percent per annum. Average per caput income was US$920 and it was rising for 16 of them over the period 1985-95. The percentage of undernourished population has barely changed since the early 1970s - at about 40 percent for the LDCs and 20 percent for the NFIDCs. Given, therefore, the serious extent of undernourishment, even small variations in year to year supply can have considerable implications for the nutritional situation in these countries. Here the situation is not encouraging. In the case of cereals, which account for 52 percent of total dietary energy supplies in LDCs and 45 percent in NIFDCs, per caput production followed a declining trend in the period 1980-1996 - it fell for 29 of the 42 cereal producing LDCs and in 13 of the 18 NFIDCs. Moreover, the coefficient of variation of cereal production exceeded 10 percent in 26 of the LDCs and in 11 NFIDCs. Thus, many of these countries are vulnerable to changes in world food markets, particularly cereal markets.

39. Total food import bills (including non-cereal food) for LDCs increased from US$3.9 billion in 1980 to some US$6 billion in 1995, an increase of over 50 percent. For the NFIDCs the corresponding import bills were US$8.5 billion rising to US$12 billion, an increase of over 40 percent. Cereals are the biggest item in food import bills of these countries accounting for over 40 percent; vegetable oils and oilseeds account for another 20 percent. The other side of the coin is, of course, the ability of these countries to pay for their food import bills. Up-to-date information is not available on the leading indicators of the ability to pay. Export earnings of these countries have been on an upward trend since the mid-1980s, although the per caput merchandise export earnings in 1995 were actually lower than in the early 1980s. The Balance of Payments of the LDCs was negative. The same is true for almost all the NFIDCs. The debt service ratio was 16.7 percent for LDCs and 20.0 percent for NFIDCs in 1991-93.

40. Of particular importance for these countries is the experience during the last few years, and especially during the high price years of 1995/96. From 1993/94 to 1995/96, both groups of countries experienced a substantial increase in their cereal import bills, amounting to 83 percent for the LDCs and 61 percent for the NFIDCs. This increase was to be expected in view of the substantial rise in the world cereal prices in 1995/96. What is also worth noting, however, is that the cereal import bill still persisted at a relatively high level for both groups of countries in 1996/97 and 1997/98, despite the decline in the cereal prices since the 1995/96 spike<sup>1. The explanation is to be found not in the nominal price of cereals only, but also in the volume of imports and two other components of the cereal import bill which were relatively important in the past, namely food aid and export subsidies.
41. The ratios of food aid to the total (commercial and aid) volume of imports show the extent to which food aid has contributed to alleviate the burden of food imports. During 1997/98, food aid in cereals accounted for 23 percent of the LDCs cereal imports compared to 36 percent in 1993/94 and 64 percent in the mid-1980s. The decline in the relative contribution of food aid to cereal imports of the NFIDCs is even sharper, from 22 percent in the mid-1980s to 7.6 percent in 1993/94, down to 2 percent in 1997/98. These drastic changes in the contribution of food aid to the cereal import burden of these countries reflect the substantial reduction in the global volume of food aid in cereals to only 5.5 million tons per annum in the last two years which is at the lowest level since the beginning of the food aid programmes in the mid-1950s. Moreover, a larger share of food aid is now increasingly used to meet emergency needs, in both developing and developed countries, and less is left for countries facing structural food deficits. A similar dramatic reduction has been observed for the other component of food assistance to importing developing countries, i.e. export subsidies. The value of imports under subsidies which accounted for as much as 26 percent of their cereal import bills for the LDCs and 46 percent for the NFIDCs in 1994/95, dropped to virtually nil since 1995/96.
42. The implications of both of these trends, although largely anticipated in the context of the new policy environment under the Uruguay Round, is that a much greater volume of cereals has been imported under commercial terms in the period to 1997/98. There is evidence that it may decrease in 1998/99 from the 1997/98 peak, although the volume of commercial imports is still likely to be well above the 1993/94 level.</sup>

Table 3. Cereal Import Bills - LDCs and NFIDCs

43. In conclusion, it appears that these two groups of countries have had large and growing food import deficits. Their low levels of calorie intake and proneness to production fluctuations make them vulnerable to changes in the world market. A combination of somewhat higher than trend prices, lower food aid and a smaller volume of subsidized exports, together with an increase in underlying cereal deficits have led these countries into facing significantly higher cereal import bills in the period 1995/96 to 1997/98 than before; part of this effect is associated with the UR process and the rest reflects underlying structural changes and contingencies such as weather related effects.

Price Instability

44. One of the looked-for benefits of the Uruguay Round was the anticipation that international food prices would become more stable. The idea behind this view was that more open import policies and reduced export subsidies would improve the responses to international price signals by both importers and exporters. The main difficulty with this idea was that the key role of stocks was often downplayed or even ignored. In fact the policy reform, often associated with the Uruguay Round, undertaken in the late eighties and early nineties, led to a sharp fall in carry-over stocks which could serve to increase the fluctuations in prices. Thus, there was a need to assess the overall import of these various factors.

45. To examine what the possible effect of the Uruguay Round could be on price stability, two types of evidence have been assembled. First, on within-year price instability, a comparison has been made between the 36 months of data in 1995-97 with earlier periods. Secondly, the paper also draws on a new study<sup>2 on cereal price stability where a more detailed assessment has been made.
46. First, regarding the variations of monthly international prices (Table 4), it can be seen that within year coefficients of variations were fairly evenly distributed - some (12) were higher in 1995-97 than in 1990-94, others (13) were lower. There was no overall trend and although some of the changes would seem to be significant statistically, it is hard to believe that the Uruguay Round had a significant effect. This may be seen by comparing the products where the Uruguay Round was expected to have greater effects - the basic foodstuffs - with the others where Uruguay Round effects were anticipated to be smaller. The average coefficient of variation of the cereals, oils and livestock products decreased from 7.6 percent to 7.2 percent in the two periods, while for the other commodities the fall was slightly greater - from 10.1 percent to 9.1 percent. In other words, the improvement in within-year price instability was greater for the agricultural commodities that were less affected by the Uruguay Round than for those where the Uruguay Round effects were expected to be more significant.</sup>

Table 4. Coefficients of variation of monthly nominal prices (percent)

47. Secondly, for cereals, more detailed analysis indicates that, over the period 1970-96:

• average annual world market prices of cereals were fundamentally stable, (trend stationary time series process), in the sense that temporary shocks to the market do not leave permanent effects and, after a while, the market returns to the previous situation. This, of course, does not preclude even large price fluctuations when abnormal weather effects or macro-economic shocks occur, the extent of the price fluctuation depending on factors like the stock position and the purchasing power of the countries when the shocks occur;
• there was no evidence of an increasing trend in inter-year variability in world cereal prices. The 1995/96 price spike did not seem to be much outside the range of the normal pattern of price variations, although the deviations in 1995/96 for wheat and maize were similar to the deviations during the world food crisis in the early seventies, while that of rice was much less than the exceptional price surge in 1974; in other words, the price spike in 1995/96 was exceptionally high;
• there was no evidence of a rising trend of intra-year (monthly) price variability, which reinforces the results given above. This does not mean that the absolute values of intra-year variations do not change. In years of high average prices, the monthly variations are expected to be high while the opposite is true in years of low-average prices. This could be explained by the fact that in years of high prices, carryover stocks tend to be low and hence any news concerning the market tends to lead to larger reactions by market participants. However, this study considered that the proper way to analyse price volatility was in relative terms, using the coefficient of variation, and it is on this basis that the study found that there has not been any systematic trend in intra-year (monthly) price variability.

48. As regards the outlook for price instability following the Uruguay Round, the latest relevant analysis available is that of the FAO Expert Consultation in June 1996 on Price Instability which was discussed at the last CCP and which basically found that in the next few years, while policies adjust to the new trading environment, prices will be more unstable than afterwards when the system is expected to settle down.³

IV. CONCLUSIONS

49. The CCP request to assess the impact of the Uruguay Round "as it is being implemented in practice" on agricultural commodities, including on the food security of developing countries, has been undertaken with the knowledge that such an assessment is very difficult to accomplish basically because there is no clear basis for predicting clear agreement on what the situation would have been without the Round. The approach followed in the present study was to compare the longer-term trends with actual developments since 1995. The following are the conclusions of this analysis.

50. First, for a number of agricultural commodities, the reasonably buoyant market conditions in 1995-97 can be partly attributed to the Uruguay Round. This is mainly in the cereals and meat sectors where the boost was due to export subsidy reductions, the opening of minimum access, the effect of reduced intervention in the market and hence lower stocks, and the effect of higher incomes. For most agricultural commodities, however, the impact of the Uruguay Round 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 slow moving effects associated with structural changes, such as those due to the Uruguay Round.

51. Second, the food import bills of the Least Developed and Net Food Importing Developing Countries rose since the early nineties due partly to the generally higher prices, but also to lower volumes of food aid, a reduced volume of subsidized exports and an increase in the volume of imports required. Part of their increased food import bills can be attributed to Uruguay Round effects or due to policy changes that were consistent with the Uruguay Round (reduced intervention stocks and hence lower food aid volumes), and part was due to other factors that have caused these countries to become increasingly dependent on imports of food, while their capacity to pay has been constrained.

52. Thirdly, there is little evidence that there has been any significant change in world price instability, either year-to-year or within the year. Regarding cereals, although there is no trend in price variability over the longer run, the price rise in 1995/96 for wheat and maize (but not rice), were similar to those during the world food crisis in the early seventies and the drop in 1998 is also possibly quite significant.

53. Finally, although there has been no change in the relative within-year price instability, in absolute terms price instability is greater at higher price levels, probably because such periods are associated with low stocks. Taken together, therefore, the price spike in 1995/96 was a cause of concern in that the price increase was exceptional and the market particularly volatile.

54. Overall, with only three completed years of data available, it is still rather early to assess the impact of the implementation of the Uruguay Round. It may, therefore, be necessary to undertake another assessment for the next CCP when over 5 years of data would be available to make the assessment.

55. The CCP is invited to review the findings of this paper and in particular the Committee may wish to comment on the conclusions given in paragraphs 49-54.

1

There is some evidence that the bill could fall in 1998/99 if current (October 1998) expectations materialize.

2

The Evolving Nature of International Price Instability in Cereals Markets by Alexander Sarris, FAO, 1998.

3

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