I. DEFINITIONS: I. DEFINITIONS


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   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 49.8 28.4 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 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)


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


Importance of Commodities: Eastern European 39% Importance of Commodities 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% Latin America 64% Africa 74% Asia 23% Share in exports


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.


Slide14: Commodity dependence


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. Importance of Commodities in Africa


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


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


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


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).


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


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.


Slide30: Taking a longer perspective, commodity prices remain low


Slide31: Price fluctuations remain important


Slide32: Price instability 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


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: 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. Seasonality in world cocoa prices


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. Source: ACP Secretariat under Lomé I. % % % %


Agricultural protectionism:a comparative picture (2004): Agricultural protectionism: a comparative picture (2004) PSE1: 80% GSSE2: 20% 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: Guatemala Australia Bulgaria Canada Estonia Hong Kong Hungary Israel Japan Korea, Rep. Macao Mongolia New Zealand Poland Romania Singapore Turkey Swaziland Lithuania Taiwan Korea, Dem. Rep. Algeria Cyprus Egypt Lebanon Malta Morocco Syria Tunisia Micronesia Armenia Azerbaijan Belarus Bosnia & Herzegovina China Iran Iraq Kyrgyzstan Libya Moldova Palau Russia Saudi Arabia Tajikistan Turkmenistan Ukraine Vietnam Yemen Uzbekistan Marshall Isl. Oman Nauru Albania Argentina Bahrain Brazil Brunei Ivory Coast Croatia Cuba Georgia Guyana Indonesia Jordan Kazakhstan Malaysia Mali Mexico Namibia Pakistan Paraguay Philippines Qatar St. Kitts Slovenia South Africa Sri Lanka Thailand Uruguay India Dominican Rep. Kuwait Laos Afghanistan Nepal Bhutan Cambodia Maldives Myanmar Bangladesh Bahamas Cape Verde Comoros Congo Dem.Rep. Eq. Guinea Eritrea Ethiopia Kiribati Liberia Samoa Seychelles Somalia Sudan Tonga Tuvalu Vanuatu Sao Tome Antigua Belize Benin Botswana Burkina Faso Burundi Cameroon Barbados Ctrl. Afr. Rep. Chad Congo Djibouti Dominica Fiji Gabon Gambia Ghana Grenada Guinea Guinea-Bissau Haiti Jamaica Kenya Lesotho Madagascar Malawi Mauritania Mauritius Mozambique Nigeria Papua St. Lucia St. Vincent Sierra Leone Tanzania Togo Trinidad Uganda Zambia Zimbabwe WTO S.G.P. Andean A.C.P. M.C.A.C. L.D.C Euromed A.E.L.E. Chile Rwanda Angola E.E.E. Czech Rep. Bermuda Senegal Niger Slovakia Yugoslavia Macedonia Suriname Latvia East Timor Solomon Isl. Greenland Montserrat Aruba Anguilla Gibraltar Niue Tokelau Cook Isl. Costa Rica Nicaragua Honduras El Salvador Panama Norway Liechtenstein Iceland Switzerland Peru Bolivia Venezuela Ecuador Colombia U.A.E U.S. Andorra Bil. Trade Policies, examples of European Preferential Regimes.


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, Syngenta BASF, 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 Information revolution Role of Trading houses are evolving from traditional trading to a whole range of activities Concentration/ consolidation: medium-sized players are disappearing Some trading houses move into new areas (e.g. futures trade) Penetration into trading at domestic level Penetration into value-added activities (e.g. service “packages”, processing) Entry of new actors


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 ?


Slide51: For further information on this issue: Olivier Matringe Coordinator, INFOCOMM Commodities Branch, DITC United Nations Conference on Trade and Development (UNCTAD) 8-14 Palais des Nations 1211 Geneva 10, Swizterland Tel. 4122 / 917 57 74 Fax. 4122 / 917 02 47 E-mail. Olivier.matringe@unctad.org or Infocomm@unctad.org