Commodities in International Trade: Current Trends and Policy Issues Implications for Caricom Countries

Olle stensson, UNCTAD

www.unctad.org/infocomm www.natural-resources.org/minerals

Commodities: an attempt at a typology

Physical characteristics
Homogeneous quality Can be shipped in bulk Low degree of processing

Economic characteristics
Few barriers to entry Productivity gains tend to be passed on Fluctuating prices

Commodity groups
Shares of world exports, 1997 - manufactures: 75.1% - food items: 8.6 % - fuels: 7.8 % (1980: 24%) - ores and metals: 3.3 % - agricultural raw materials: 2.4% - non-classified, including nonmonetary gold: 2.8% Growth rates, 1980-97 8.1 % 4.5 % -0.8 % 3.8 % 3.4 %

Change of shares in world commodity exports

19701970-72
Developed countries Developing countries United States European Union 59% 33% 12% 28%

1998-99 199866% 29% 12-13% 39%

Change of shares in world commodity imports

19701970-72
Developed countries Developing countries United States European Union 75% 16% 12% 46%

1998-99 199870% 26% 12-13% 42%

As a group, developing countries have become less reliant on commodity exports However, out of 140 developing countries, 83 depend on commodities for more than half of their export income, almost the same number as in 1990.

Nonfuel commodities share of exports, %

90-92
Antigua and Barbuda Barbados Belize Dominica Grenada Guyana Jamaica Saint Kitts and Nevis Saint Lucia Suriname Trinidad and Tobago 6 28 88 67 66 88 80 47 66 95 7

97-99
44 31 84 47 74 65 74 48 65 82 10

Share of export earnings of three most important commodities, 97-99

Antigua and Barbuda Barbados Belize Dominica Grenada Guyana Jamaica St Kitts and Nevis St Lucia St Vincent and Gren Suriname Trinidad and Tobago 2.6 19.4 52.5 34.1 23.2 91.0 61.2 36.6 55.7 68.5 84.5 51.2 Fish, Alc beverages, Wood Sugar, Alc beverages, Fuels Sugar, Bananas, Fish Bananas, Oil of coconuts Spices, Fish, Wheat+flour Gold, Sugar, Bauxite Alumina, Sugar, Bauxite Sugar, Beverages Bananas, Fresh fruit, Pepper Bananas, Wheat+flour, Rice Alumina, Rice, Fuels Fuels, Non-alc bev, Sugar

Dynamic and stagnating sectors

Changing consumption habits Improved storage and transportation
For example, tropical fruits, fishery products

Changes in the organization of trade

Direct contacts between exporters and retailers allow adaptation to consumer preferences

Technological change and substitution

Mainly for raw materials

Agricultural protectionism
Dynamic sectors least protected

Changing consumption habits food

In rich countries
Health concerns Convenience - less time to cook and prepare Desire for variety Environmental awareness Rising incomes Tourism Increasing incomes Current low levels for basic foods Increased calory intake Also, globalization of consumption

In poorer countries

Example of a dynamic specialty item: Organic products

Markets less than 2 % in general but in Austria, Switzerland, Denmark, 5 to 10 % Increasing rapidly in UK by 40 % per year Import demand likely to remain high 80 per cent of organic products imported into the UK

Commodity prices in constant US$, 1980-2002

120 100 80 60 40 20 0

19

19

19

19

19

19

19

19

19

19

20 M

Combined index

Tropical beverages

Food

Agricultural raw materials

ay

20

02

82

86

88

90

92

94

96

00

80

84

98

Minerals and metals

Commodity prices in current U$, 1980-2002

300 250 200 150 100 50 0

81

83

85

86

90

93

95

96

80

87

97

00

84

88

91

94

98

82

89

92

99

01 M ay

19

19

19

19

19

19

19

19

19

19

19

19

19

20

20

19

19

19

19

19

19

19

Minerals and metals

Tropical beverages

Food

Agricultural raw materials

Minerals and metals

20

02

Margin increasing between international and retail prices

Widened since 1970s, and at an accelerating rate since 1980s Margin greater in countries where there is more concentration Cannot be attributed to costs Also, for same products, with similar retail prices, producers in developing countries receive less

Developing countries and agricultural commodities

Why is agriculture important to developing countries?

2,500 million people in developing countries depend on agriculture, and most of them are poor Comparative advantages are clear A window of opportunity in a new round?

Main developing country agricultural exports (% of agricultural exports)

0%
ils eg. o V Fis h d Woo Fruits e Coffe als Cere o bac c To r Suga ar n n&y Cotto Meat r ubbe R a Coc o

5%

10%

15%

New dynamic sectors have emerged

1970-72 1996-97

Traditional commodities are losing importance

Obstacles to increasing food exports

Border measures Tariffs Seasonal limits Minimum import prices Health and safety standards Other obstacles Domestic support Oligopolistic markets Importing firms standards Exporters (un)competitiveness

Agricultural tariffs:
- Agricultural tariffs (average 62 %) much higher than for manufactured products (average 5 %) - Complicated mixed with TRQs, ad valorem and specific tariffs, complex technical relationships - Multitude of preferential rates - Tariff escalation especially for meat, sweeteners, vegetable oils
High tariff sectors Tobacco, meat, dairy and sugar Low tariff sectors Fruit, vegetables and fish BUT Few TRQs, minimum prices, vary with prices

How important a barrier are tariffs?

1970-72 to 98-99, successful countries had few, if any preferences: share increased from 9 to 12 % ACP countries and LDCs had preferences: shares declined from 8.4% to 2.4% and from 4.7% to 1%, respectively

Health and safety standards

Official SPS and TBT bring discipline HACCP generally accepted Implementation costly Management skills required Unofficial Importing firms requirements Determined by consumers tastes and public opinion Quality, traceability Implementation costly Standards vary

Subsidized exports from developed countries displace developing countries in their own and third country markets
Total support to agriculture in OECD in 2001 was $311 billion; support per farmer was US$ 33,000 in Switzerland, US$ 20,000 in the E.U., Japan and the United States

A useful comparison (billion US$, 2000)

350 300 250 200 150 100 50 0
Support to OECD agriculture OECD agricultural exports FDI in developing countries Developing countries' debt service (1998) ODA

Increasingly, traditional developing country products are processed and/or branded in developed countries, and re-exported
Developed countries are accounting for larger shares of tropical product exports. US exports of coffee and coffee products continue increasing and reached a record level of $250 million from about $175 million five years ago. (Largest exporter Brazil and all of subsaharan Africa - about $2 billion each)

Losing out in the value-added: the example of the cocoa sector

100% Share in value cocoa trade 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

Chocolate Cocoa products Cocoa beans

1970-72
Developing country exports

1990-92

1998-2000
Developed country exports

The evolution of productivity: Change in yield 1980-2001, %

50 40 30 20 10 0 -10
Developed countries Developing countries

its

ac co

Ri ce

rc an

Fr u

Su ga

To b

Ve ge

ta b

le s

The gap is closing: Yield in developing countries in % of developed

100 80 60 40 20 0
1980 2001

Fr ui ts

Ri ce

ca

cc o ba To

ar

Su g

Ve g

et

ab

les

ne

Changing market structures

At the national level:
liberalization: foreign entrants, foreign product competition, increased price risk exposure pressure to meet exigencies (eg. HACCP)

At the level of international trade

growing concentration of trade: mergers cheaper finance and good logistics are now key factors need for greater capital resources and more skills

At the level of consumer demand

increasing importance of supermarkets globalization of consumption patterns new demands linked to production technology (e.g. organic foods)

Value chains are changing

International trade:
Firms becoming larger and vertically integrated Mergers and acquisitions Disappearance of traders

Retail sector
Global supermarket chains

Liberalization of agriculture in developing countries Closer integration of trade and production

Impact on not only WHAT to produce but HOW and by WHOM

Policy issues
International community
Reduce agricultural protectionism and subsidies Harmonize standards Allow protection of crucial sectors for single commodity exporters and food importing countries Establish safety nets against catastrophic price falls Provide market information

Governments
Integrate subsistence farmers in the monetary economy Facilitate access to credit, regulatory frameworks Improve transportation and storage Complement liberalization with institution building Improve information flows

Policy issues, continued

Enterprises
Identify dynamic markets Upgrade business skills and product quality Raise productivity, particularly in small-scale farming Build competitive marketing and distribution networks Use market-based risk management techniques

Market issues and prospects

Bananas
Stagnation of demand in traditional consumer countries, new markets becoming important Organic bananas EU banana regime ends in 2006 No tariffs for LDCs in EU in 2006

Fish
Rapid growth in demand Compliance with standards costly

Market issues and prospects, continued

Sugar
Falling prices (countries exporting to free market lost 1.4 billion US$ 1998-2002) Subsidized production and exports in developed countries No tariffs for LDCs in EU in 2006

Spices
Rapid growth in demand Easy to enter market, risk of oversupply

Developing countries and mineral commodities

Why is mining important to developing countries?

Little employment - but 13 million people work in small scale mining Production-consumption linkages weak but locally important Fiscal linkages provide opportunities for funding development

Developing countries share of world minerals and metals exports, %

45 40 35 30 25 20 15 10 5 0 Share nonprecious metals and minerals Share gold

19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00

Developing countries share of world minerals and metals imports, %

35 30 25 20 15 10 5 0

19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00

Some success in the last decade, taking into account

The share of developing countries in production is higher than in exports (increasing imports) Their share in investment is higher than in production Their share in exploration is higher than in investment

Factors behind the success

Comparative advantages are allowed to work Changed investment climate in developing countries Changed financing methods Security of supply issues politically dead Environmental concerns

International trade regime for minerals

Developed countries apply zero or near zero tariffs on mineral commodities, developing country tariffs decreasing However, anti-dumping actions are common

Investment climate
Most developing countries have updated legislation on FDI, on mining or on both Nationalizations unlikely Political stability

Financing methods
Project lending Gold loans, commodity bonds (not very common now) Equity capital (easy until a few years ago)

Political factors in developed countries

No subsidies to domestic mining Privatization of state owned mining companies Zero environmental tolerance Mining banned on large areas of land

Policy issues: mineral commodities

For mature mineral economies: diversification For new mineral economies: attract and retain investment For both groups:
ensure an equitable distribution of revenue channel government income to investment in human capital maintain macro-economic stability in the face of price and volume variations

Market issues and prospects

Bauxite/alumina
New bauxite mines in new places Chinese competition on bauxite for non-metallurgical uses Energy costs for alumina refineries, mainly brownfield investment

Gold
Low prices, official reserves still a threat Financing for small ventures problematic