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

1. 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

2. I. DEFINITIONS

3. 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

4. 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)

5. 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

6. 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).

7. 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)

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

9. 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

10. Share of 15 Leading Commodities in African Total Exports II. IMPORTANCE OF COMMODITIES

11. 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%

12. Share of 15 Leading Commodities in African Total Exports Share of 15 Leading Commodities in African Total Exports

13. 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.

14. Commodity dependence

15. 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.

16. 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

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

23. Share of 15 Leading Commodities in African Total Exports III. Commodity at a Glance - Main Features -

24. Share of 15 Leading Commodities in African Total Exports III. a Reshaping of World Commodity Markets %

25. 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??

26. 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

27. 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).

28. Share of 15 Leading Commodities in African Total Exports III. b Main Features %

29. 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.

30. Taking a longer perspective, commodity prices remain low

31. Price fluctuations remain important

32. 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

33. 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….

34. 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.

36. “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)

37. 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

39. Main countries benefiting from Stabex under Lomé I. under Lomé II. under Lomé III. under Lomé IV. % % % % % Source: ACP Secretariat

40. Main commodities benefiting from Stabex under Lomé II. under Lomé III. under Lomé IV. under Lomé I. % % % % Source: ACP Secretariat

41. 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)

42. 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

43. 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

44. 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).

45. 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

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

47. 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.

48. 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

49. 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

50. 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 ?