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In this e-mail I take up the issue of agricultural commodity markets and global poverty. Actually, most of it also applies to mineral commodities and I will use illustrations from those markets too. And the greatest poverty is found in mineral-dependent countries. Among the seven LDCs which are principally mineral exporters, as many as 82 per cent of the population lived on less than $1 a day in the late 1990s, according to UNCTAD's LDCs Report. This was the only one of six export categories among LDCs where the countries' real exports as a whole actually declined in the 1990s, by 1.9 per cent per year. Among agricultural exporters, real exports grew by 6.3 per cent a year. The seven countries include three (DR of the Congo, Liberia and Sierra Leone) which suffered major civil wars; was the collapse of the state the cause of their economic distress, as it is often portrayed, or a consequence of it? However that may be, agriculture now assumes a much greater role in their fight against poverty than in the past, because minerals investments are made less and less in the poorest countries. Africa in particular is no longer the great metal-mining continent that it was 40 or 50 years ago. There is a series of problems in the way that commodity markets work which, at best, can exacerbate poverty problems in countries that rely on them for their exports. I will look at each of them in turn. 1. The long-term tendency of prices to decline in real terms - the old Prebisch/Singer hypothesis, which I think has been amply demonstrated over the last 20 years. As a long-term tendency maybe nothing can be done about it, but it was made far worse by the export-orientation policies of structural adjustment, leading to oversupplies. For example, world production of cocoa exceeded consumption by more than 20 per cent in three separate years in the 1990s, and of coffee by 18 per cent in 2000, just when the coffee price collapsed. Over the quarter century from 1977 to 2001, real international prices for coffee fell by 5.1 per cent per year, and for cocoa by 6.9 per cent. I agree with Peter Robbins that the only feasible answer is some form of global supply management, on any commodity markets that will bear it. But as many have stated, it is both technically and - just as important - politically hard to achieve; I will have further comments on it lower down. 2. Price instability over the short term (let's say the crop year for ag. commodities) and the medium term (the length of the business cycle - say five to ten years). Commodity markets are notorious for instability of both sorts, but different means exist to tackle them. Where a futures market exists, those with the capital and financial understanding to do so can guard against short-term fluctuations by "hedging" their purchases or sales on it; this is a form of insurance against adverse price movements. But while the basic principles of hedging are simple, to carry it out effectively requires fine judgments and you can lose an awful lot of money if you get it wrong. (Some developing countries' commodity export agencies have learnt that the hard way.) In answer to one of Duncan Green's questions, I therefore suggest that DFID should be very wary of the World Bank's price insurance scheme, which aims to enable farmers in poor countries to hedge their export crops on futures markets. The instruments chosen are too complicated for the purpose and too many middlemen are taking a cut between the farmers and the exchanges themselves. Just as important, not enough time is being given to enable the farmers to develop their general market expertise sufficiently to make good use of these techniques. I don't know what Peter's view of it is, but I have heard two other senior commodity traders separately describe this scheme as "cynical" - strong language. At worst, it looks like a scheme got up by commodity traders to carve out a new slice of business, taking advantage of the fact that well-meaning people in the World Bank and elsewhere don't know how the futures markets work. Sorry to be so blunt, but that is my understanding of what those traders said. In any case, hedging on futures markets can only take care of short-term price fluctuations, because the markets don't go further into the future than a couple of years. But medium-term price fluctuations can be absolutely devastating for economic planning. The example I always remember is Ethiopia between 1998 and 2001. When coffee prices are good, Ethiopia gets about two-thirds of its export revenues from coffee, and 1998 was one such year; its coffee exports amounted to $420m. Three years later they were just $175m. How can a country with all of Ethiopia's difficulties be expected to handle that sort of macroeconomic reverse on its own? One solution is a return to effective compensatory finance for poor countries which suffer such reverses in their export revenues - like the EEC's Stabex scheme when it started in the 1970s, only better. A useful proposal is made in the report of UNCTAD's "Eminent Persons" meeting on commodities last September. Such price shocks can have severe microeconomic effects as well as macroeconomic ones. Oxfam's coffee report of 2002 quoted an Ethiopian coffee farmer who described some of the things he could no longer afford because of what had happened to coffee prices - a multiplier effect in reverse. One consequence was a sharp fall in prices of the grain that he also produced, since coffee farmers and others who depended on them had been among the main customers for grain, but now they had to supply their own food. 3. Declining share of final market prices accruing to the farmer. This is a worldwide problem, which British farmers also complain about - and for much the same reason. It lies in the excessive concentration of the markets at key points further down the supply chain - for example, grain trading, coffee roasting or supermarkets. In coffee, the biggest roaster companies each buy about 15m standard 60-kg bags of coffee beans every year, while the average farmer sells less than five bags. With such an imbalance in market power, it's little wonder that the roasters are making huge profits at the same time as coffee farmers are falling into destitution. The only serious way of tackling this problem is by global competition policy - not the sort that the EU is trying to push through the WTO, but the anti-trust variety pioneered in the USA in the late 19th century, applied globally to global markets. There should be regulations to prevent such concentrations developing in the first place, and to break up companies involved if they have done (as Standard Oil was broken up long ago). Obviously we're a long way from anything remotely like that at the moment, but if concern for the poorest people in commodity-dependent developing countries is to be more than words, it seems to me this has to be on the international agenda. Besides boosting farmgate prices, the boost to farmers' negotiating strength would give them more say in how integrated supply chains operate. If that's the answer to the third price problem, nos. 1 and 2 must be addressed by supply management, wherever possible. I'm well aware that it isn't easy, but as Kate Gooding and Peter Robbins have pointed out, it has worked successfully over long periods in various forms on many markets. I have three basic points about supply management. One is that it can take many forms, and the right form for any market can only be discovered with reference to that market. Secondly, in designing a supply management scheme it is necessary to be clearsighted about whether the main aim is to counter price instability or to push prices up. Thirdly, while there are serious technical challenges, the problems are just as often political and they should be addressed squarely as such. Supply management is any concerted technique which takes supplies off a market, or puts them back on it, in order to influence price movements. As Peter has pointed out, it includes De Beers' monopoly control over diamond distribution and OPEC's operations on the oil market, as well as the international commodity agreements (ICAs) between producer and consumer countries before 1990. Other examples were the control of aluminium and nickel prices by the MNCs which dominated those markets until the 1980s. The aluminium one was spectacularly successful for the first 90 years in which that metal was traded. Each of those examples works quite differently from each of the others; that is no accident, as every commodity market is different. Maybe one of the failings of the UN-sponsored ICAs between the 1950s and the 1980s was that they followed a one-size-fits-all policy, requiring negotiation between the principal countries on both sides of the market and operating either through export quotas or buffer stocks. But OPEC isn't like that - it's never included all the leading oil exporters - and yet it's been very successful in its own terms over the years. So what are the criteria for success? First, let's get the technical problems out of the way. The ICAs mostly operated by intervening on the market to keep prices within a predetermined price band, considered to be the trend price for the commodity in question. That requires a degree of foresight about markets in which the very problem being addressed is their instability. But that's not the only way to do it - which, I take it, is what Peter means by saying the people running them should be given more operating flexibility. The second issue is whether you want to stabilise prices or push them up. UNCTAD's aim in the 1970s was to achieve commodity prices which would be at once "stable and remunerative". The one which was most lauded at the time, the tin agreement, appeared to be achieving both - until it collapsed in 1985, because it had taken so much metal off the market to get the price up that the buffer stock effectively went bust. Any supply management system has to decide at the outset which of the two it wants to achieve; it's unlikely to manage both. And as Peter says, limits on actual production should be used wherever possible; I think that's one of the reasons for OPEC's success - admittedly on a market in which supplies can literally be turned on and off, unlike most commodities. It will have to be faced that any scheme can come under severe, unpredictable strain at times, and provisions to accommodate that strain should be built in. There were two reasons why the ICAs collapsed in the 1980s. One is that it was the Reagan-Thatcher era and the US government withdrew its support from anything that smacked of market intervention in favour of poor countries. This was a political reason, not an inherent "failure" in the agreements themselves. The second lay in the sharp economic recession of the early 1980s, which forced down prices and built up stocks on commodity markets. This not only smashed apparently robust ICAs like the tin agreement, but even the previously solid aluminium pricing arrangement. It was not foreseen, but in future the possibility of such severe strains could be built into any agreement - something akin to a "force majeure" provision. On the political side, it seems to me that one of the conditions of success is a dedicated core of countries (or companies, if it's a commercial cartel) which feel solidarity with each other anyway. This clearly applies to the Middle Eastern countries in OPEC and it was also true of Indonesia, Malaysia and Thailand (with a paternalistic post-colonial British interest, not unhappy to keep the Cornish mines open) in the tin agreement. Coffee proved more difficult because of the very large and diverse number of countries exporting it, while an attempt by copper-producing developing countries to intervene in the market in the 1960s got almost nowhere because the countries concerned were too diverse. That suggests that supply management won't work on every market, and certainly not by the same means on every one. But when you look at what's happened on the coffee market since it was liberalised with the end of export quotas in 1989, it seems to me that the trade liberalisation alternative can be worse than the disease. I guess that's about it. Best wishes, Tom Lines Consultant in Trade and Development 57 Victoria Road Oxford OX2 7QF Tel./fax +44-1865-559198 ============================================================= To send a reply to this message that goes to all list members, make sure that you send your reply to <address removed> To unsubscribe from this list, send an email to "<address removed>", with the message body: unsubscribe global-trade <your-email-address>
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