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Commodities at a Glance: Definitions and Importance of Commodities for Developing Countries. by Olivier Matringe. UNCTAD. Geneva, 18 April 2006. University of Dar-es-Salaam Study Tour. I. DEFINITIONS. Some Basic Definitions. What are commodities?

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slide1

Commodities at a Glance: Definitions and Importance of Commodities for Developing Countries

by Olivier Matringe

UNCTAD

  • Geneva, 18 April 2006

University of

Dar-es-Salaam

Study Tour

some basic definitions
Some Basic Definitions
  • What are commodities?
  • How Commodity dependence is usually defined?
  • Tariff escalation and Tariff peaks
  • Prebish-Singer Thesis
  • Price instability Index
  • Compensatory Financing Facility
  • Basis
  • Terms of Trade
what are commodities
What are commodities?

Statistical definition: specific SITC sections:

- section 0 (agricultural commodities - largely foods, including processed ones)

- section 1 (agricultural commodities - drings and tobacco)

- section 2 (crude inedible materials - largely oilseeds and raw materials

as well as mineral ores)

but groups 233, 244, 266 and 267 excluded (synthetic materials)

- section 3 (fuels - including electricity)

- section 4 (vegetable oils)

- item 522.56 (alumina - partly also reported in 287.32)

- division 68 (some (semi-)processed minerals and metals)

problems with the sitc definition
Problems with the SITC definition

Somewhat artificial: e.g.:

- gemstones excluded

- gold at times reported as a metal, at times as a financial

transfer (that is, excluded in commodity statistics)

- textile yarns are largely excluded, even though they’re

standardized and require much less processing than

many metals that are included under “commodities”

- products such as paper and plywood are excluded

- the products do not have a lot in common

commodities can also be classified according to other criteria

Share of 15 Leading Commodities in African Total Exports

Commodities can also be classified according to other criteria:
  • Method of production (annual/perennial; wild/organized)
  • Conventional versus non-conventional:
    • Organic, Fair Trade, Eco-friendly, double certified, code of practice&conducts;
  • Traditional versus non-traditional :
    • - Bulk commodities (coffee, cocoa) / Fairly specialized commodities (sheanuts, indium)) – non organized market
  • Degree of processing: degree of value-added processing – transformation into a physically different products (but also constraint, e.g. cocoa in the US). - But also :
  • Commodity as a “financial vehicle”;
  • Regions of production;
  • GM versus non GM:GM commodities in order to emphasize or eliminate traits that are considerable desirable or undesirables (e.g. pest-resistant, pesticide-responsiveness).
defining commodity as a financial vehicle
Defining Commodity as a “Financial vehicle”

It is attractive to think of commodities as products that are:

- fungible

- can easily be described using a few standard parameters

- have a more or less uniform price in any single market

When considering the possibilities for sophisticated financial markets, this is a very useful way of thinking of commodities: it allows to identify for which products it is possible to introduce sophisticated instruments. But:

* it would exclude many products normally considered as “commodities” (e.g. fruits, vegetables, flowers)

* and would include many others (e.g., yarns, fertilizers, computer chips, interest rates, pollution rights, crop yields)

regions of production
Regions of production

Decision to assign commodity to a “region of production” is quite arbitrary

gmo versus non gmo commodities

Share of 15 Leading Commodities in African Total Exports

GMO versus non GMO Commodities
  • “Tracability” (e.g. South Africa), consolidation of patent porfolios, farmers' rights from "seed owners" to mere "licensees" of a patented product)

Share of each production in the global transgenic market value in 2005

Soybean 46%

Corn 36%

Cotton 14%

Canola 4%

Share of each production in the world cultivated area in 2005

Soybean 60%

Corn 24%

Cotton 11%

Canola 5%

Source: ISAAA

Share of the arable land dedicated to GMO cultivation in selected countries

Million ha. % of arable land

2005 2004

United States 49.828.4 27.2

Argentina 17.1 50.84 48.8

Canada 5.8 12.1 12.0

Brazil 9.4 16.0 8.5

China 3.3 2.3 2.6

importance of commodities
Importance of Commodities
  • Share in exports
  • Estimated World Merchandise Trade in 2005: $10.065 billion
  • World Commodity Trade - soft and hard commodities - $2,520 billion
  • Around 25% of total trade
  • Share of oil and mineral: 16%
  • Share of agricultural products: 9%

Africa

74%

Latin America

64%

Asia

23%

Eastern

European

39%

slide12

Share of 15 Leading Commodities in African Total Exports

Share of 15 Leading Commodities in African Total Exports

commodity dependence
Commodity dependence
  • Of 141 developing countries, 52.2% depended on non-fuel commodities for more than half of their export earnings in 1990-92. By 2003, the number had fallen to 38.3%.
  • If fuels are included, percentages rise to 71% and 60.4%.
  • 69 countries received more than half of their export earnings from three commodities in 1990-1992, and 70 in 2003.
importance of commodities in africa
Importance of Commodities in Africa
  • Sub-Saharan Africa is richly endowed with large range of commodities from minerals to metals
  • 26 out of 30 of leading exporting companies are either producing or trading commodities (from coffee and cocoa to precious metals through tropical timbers);
  • For instance, South Africa, world leading gold and platinum company, Anglo American account for one-third of national exports.
slide16
While investments in agricultural commodities are still low, appetite for mineral sector is quite high, including in production and processing. For instance, Africa is evolving as one of the most important aluminium producer in the world.
  • Mozambique and Guinea are a case in point as several billion of dollars are injected into bauxite extraction & production as well as processing of aluminium oxide and aluminium
  • For tropical timber, Asian demand, mainly from China, is driving the market for log (e.g. Oukoumé) while in Europe, processed timber are usually imported
slide22

Sources: enquêtes Canelle Agency (juillet-octobre 2003), missions économiques françaises, MOCI N° 1625, 20 novembre 2003

slide25

The Reshaping of World Soft Commodity Markets

New environment for agriculture and trade new actors directly confronted with price instability issue

Globalization

Liberalization

International

Commodity

Agreements

without economic

provisions

Overhaul Global Financial Architecture

End of National

Price Stabilization

Schemes

(Board, Caisse)

Cotonou Partnership replacing Lomé

Conventions and

impacts of CAP

and US farm

policies

End of

Compensatory

Mechanism

(IMF, EU-ACP

Stabex, Sysmin)

FLEX??

past interventions
Past Interventions
  • Compensation:
    • Keynes (1943): Buffer stocls
    • 1963: Compensatory finance and IMF
    • STABEX (1975)
  • Stabilization, Supply and management:
    • International Commodity Agreements: sugar and tin (1954); coffee (1962); ccocoa (1972), rubber (1980)
    • Convention of Lomé (1975) – commodities protocoles
    • Domestic buffer stocks: Australia (wool), PPNG
slide27
Limited liberalization of agricultural policies in main OECD countries so far, but radical changes are likely to occur over the coming decade with multilateral negotiation on trade-distorting domestic support;

preferences (paragraph 44 of the July framework); and export restrictions (paragraph 50 of the July framework).

slide29

Commodity at a glance - main features -

  • PRICES:
  • Prices are in a continuous downward trend in real terms;
  • Price volatility continue to be very high;
  • COMPETITIVNESS:
  • Developing countries are increasingly important as importers;
  • Non-traditional commodity exports have grown in importance;
  • Africa and LDCs have not kept up with the general development of the commodity sector in developing countries;
  • Developing countries are losing market shares even in traditional commodities, largely due to a failure to capture more value-added on their commodities;
  • MARKET CONCENTRAION
  • Industry & market structures are going through a rapid change.
slide32

Generally passed on to smallholders and/or domestic operators who do not manage it! => Increasing counterpart risk – delivery

  • For some commodities, price instability is increasing –
    • Sugar => trade policy reforms and multilateral negotiation;
    • Banana => trade policy reforms and multilateral negotiation;
    • Pepper => change in production pattern Vietnam and Indonesia and to some extend India
    • Selected vegetable oils => developments in market fundamentals (e.g China)
    • Cotton => both supports (e.g. US, EU and China) and market fundamentals (weather condition in China – e.g. 2003 versus 2005-06)
    • Rubber => Termination of the International Natural Rubber Agreement (INRA) and creation of the International Tripartite Rubber Organization (INRO) + increasing consumption in China

Price instability

volatility in cocoa prices standard deviation measures liffe
Volatility in Cocoa Prices - Standard deviation measures (LIFFE)

Rapid liberalization accompanied by macro-economic instability leads to chaotic markets (cocoa in Côte d’Ivoire, Cameroon, Nigeria)

=>price volatility increased strongly and seasonal effect might increase in the future….

seasonality in world cocoa prices
Seasonality in world cocoa prices

A seasonal effect tends to emerge, in particular when one considers the months of May and June (anticipation regarding next harvesting) as well as period between October and December (pricing period after liberalization).

Let’s take the case of Cameroon to illustrate the pattern of forward sales just before and after liberalization.

slide36

“Instability of export earnings, particularly in the agricultural and mining sectors, may adversely affect the development of the ACP States and jeopardise the attainment of their development requirements ” (art. 68 of the new Cotonou Agreement)

slide37

ACP countries are thus now fully vulnerable to any export earning fluctuation, that means fall in volume (e.g. natural disaster) and/or price fall.

Agricultural production can fluctuate a lot due to climatic conditions, but one of the main source of instability is price fluctuation

slide39

Main countries benefiting from Stabex

under Lomé I.

under Lomé II.

under Lomé III.

under Lomé IV.

%

%

%

%

%

Source: ACP Secretariat

slide40

Main commodities benefiting from Stabex

under Lomé II.

under Lomé III.

under Lomé IV.

under Lomé I.

%

%

%

%

Source: ACP Secretariat

agricultural protectionism a comparative picture 2004

Support

to OECD

Agriculture

Developing

countries

Agricultural

exports

FDI

Inflows to

developing

countries

ODA

Debt

service

Agricultural protectionism:a comparative picture (2004)

GSSE2: 20%

PSE1: 80%

1) PSE: Producer Support Estimate, 2) General Services Support Estimate (OECD data)

slide42
Agricultural tariffs:
  • Agricultural tariffs are on average substantially higher than industrial tariffs
  • Complicated – mixed with TRQs, ad valorem and specific tariffs, complex technical relationships
  • Multitude of preferential rates
  • Tariff escalation especially for meat, sweetners, vegetable oils
slide43

Trade Policies, examples of European Preferential Regimes.

S.G.P.

L.D.C

East Timor

Afghanistan

Qatar

Panama

Myanmar

Yemen

Malaysia

Australia

A.C.P.

Cambodia

Bangladesh

Bil.

Slovakia

Tonga

M.C.A.C.

Nepal

Maldives

Honduras

Lesotho

Estonia

Cape Verde

Togo

Andorra

Bhutan

Samoa

Latvia

El Salvador

Botswana

Ethiopia

Guatemala

Nicaragua

Ctrl. Afr. Rep.

Senegal

Slovenia

Laos

Sao Tome

Costa Rica

Zambia

Cuba

E.E.E.

Tuvalu

Angola

Burkina Faso

Macao

U.S.

Pakistan

Kiribati

Madagascar

Benin

Norway

Sudan

Solomon Isl.

Mexico

Paraguay

Eq. Guinea

Uganda

Liechtenstein

Malawi

Czech Rep.

Vanuatu

Mali

Gambia

Argentina

Iceland

Comoros

Haiti

Guinea-Bissau

Bahrain

Burundi

A.E.L.E.

Somalia

Niger

WTO

Rwanda

Tanzania

Thailand

Switzerland

Guinea

Mauritania

Eritrea

U.A.E

Chad

Kyrgyzstan

Liberia

Sierra Leone

Mozambique

Djibouti

Brunei

Romania

Indonesia

Chile

Japan

Zimbabwe

South Africa

Suriname

St. Lucia

Kenya

Seychelles

Peru

Hong Kong

Dominica

Congo

Barbados

Andean

Nauru

Dominican Rep.

Antigua

Bolivia

Canada

Namibia

Bulgaria

Gabon

Colombia

Cook Isl.

Swaziland

Congo Dem.Rep.

Jamaica

Hungary

Venezuela

Cameroon

Trinidad

Guyana

Palau

Mauritius

Ecuador

Korea, Rep.

Albania

St. Vincent

Micronesia

Ghana

Grenada

Poland

Tokelau

Uruguay

Marshall Isl.

Ivory Coast

Nigeria

India

New Zealand

Kuwait

Brazil

Papua

Montserrat

Belize

Mongolia

Singapore

Bermuda

Niue

St. Kitts

Yugoslavia

Morocco

Israel

Macedonia

Bahamas

Fiji

Sri Lanka

Egypt

Malta

Taiwan

Uzbekistan

Philippines

Turkey

Cyprus

Anguilla

Euromed

Belarus

Turkmenistan

Oman

Tunisia

Russia

Iran

Georgia

Syria

Lithuania

Jordan

Algeria

Vietnam

Libya

Kazakhstan

Lebanon

Gibraltar

Greenland

Iraq

Aruba

Ukraine

Bosnia & Herzegovina

Tajikistan

Korea, Dem. Rep.

China

Armenia

Moldova

Azerbaijan

Croatia

Saudi Arabia

slide44
In developed countries, tariffs on "sensitive" products (i.e. products that receive high protection and support from the government) and processed products are affected by tariff peaks and tariff escalation.
  • Bound agricultural tariffs in developing countries could be as high as 230 % (Nigeria), but applied tariffs are generally much lower (e.g. 5 % plus TCI of 10% for UEMOA countries).
slide45
Tariff Escalation and Tariff Peaks
  • Tariff escalation has been a discouraging factor to DCs’ efforts to diversify agricultural exports from primary commodities to processed products
slide46

Losing out in the value-added:

the example of the cocoa sector

trading companies and market concentration
Trading companies and Market Concentration

M&A in trading in the late 1990s – early 2000s:

Examples:

* Vanishing of international trading companies such as André, Enron, etc.

* Acquisition of Sifca, Unicao and Nord Cocoa by Archer Daniels Midlands (ADM).

* Acquisition of Continental Grain (world cereals n°2) and of Toshoku by Cargill (annual turnover of Cargill = USD 60 billion)

* Merging in May 2004 of leading Ghanian gold company (Ashanti Godfiefds Co Ltd) with South African gold producing AngloGold (51,4% AngloAmerican) – estimated transaction figure USD 1,089 billion to create AngloGold Ashanti. In June 2004, Anglo American increased its share in AngloGold Ashanti from roughly 47% to 48%.

* Quasi vanishing of Metallgesellschaft – joining-up companies such as Cook, Ferruzzi, Tardivat, etc.

other firms involved in the stages of the supply chain
Other firms involved in the stages of the supply chain
  • Extensive mergers and acquisitions in the agricultural biotechnology and seed businesses as well as cross-licensing (e.g. Monsanto, Bayer, SyngentaBASF,Dow, Dupont) – for more info, “Tracking the trend towards market concentration, UNCTAD/DITC/COM/2005/16, to be published in May 2006.
  • Vertically integrated firms traditionally important (e.g. Nestlé, Unilever, ConAgra)
  • Recently, increased competition from supermarket chains which are getting bigger (e.g. WalMart, Metro, Kroger, Carrefour)
  • Nestlé, Danone, Parmalat vs. Metro, Carrefour
slide49

Changing Role of Trading Companies

Role of Trading houses are evolving from traditional trading to a whole range of activities

Information

revolution

Entry of

new actors

Some trading

houses move

into new areas

(e.g. futures trade)

Penetration

into value-added

activities (e.g.

service “packages”,

processing)

Penetration

into trading at

domestic level

Concentration/

consolidation:

medium-sized

players are

disappearing

value chains are changing
Value chains are changing
  • International trade:
    • Firms becoming larger and vertically integrated;
    • Mergers and acquisitions;
    • Disappearance of traders (Internet, fresh and specialty products with smaller sizes);
  • 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 ?