Commodity price recovery to be short lived

The downward trend in commodity prices in major world markets that became highly pronounced in the second half of the 1990s seem to have reversed, or leveled off in some cases, over the past two years.

But, the recovery does not appear to be secure and the long-term prospects for commodity-dependent farmers and countries in the developing world are not bright, warns the United Nations Food and Agriculture Organisation (FAO) report on the state of agricultural commodity markets, issued recently.

The downward trend, which took the prices of many commodities exported by the developing countries to their lowest level since the Great Depression, was attributed to commodity supplies having grown more rapidly than demand, fuelled by increased productivity and the emergence of major new producers.

However, despite the recent rebounds, the agricultural commodity prices remain highly volatile. The tendency for growth in supplies to outpace that of demand will continue, the report points out.

The FAO's analysis has indicated that, overall, real prices for all farm commodities have declined over the past 40 years though the rate of decline has varied in different commodities.

In general, raw materials, tropical beverages, oil crops and cereals have experienced the steepest declines. The real price fall in horticultural products, meat and dairy goods has not been so dramatic.

The price recovery in the past two years has been noticed largely in cereals, oil crops, dairy products, fibres and raw materials. Horticultural product prices have tended to remain sensitive to market balance and meat prices were influenced by animal disease outbreaks.

However, relatively more advanced developing countries have managed to read the trends and accordingly shift their production and trade to higher value sectors, such as horticulture, animal husbandry and the like.

As a result, the advanced developing countries have more than doubled the share of horticulture, meat and dairy products in their agricultural exports.

In the 1960s, tropical beverages and raw materials made up 55 per cent of their agricultural exports, but by 1999-2001, it dropped to 30 per cent thanks to a shift in production and trade priorities.

The report points out that government policies in both developed and developing countries have seriously distorted the over-supply problem in agricultural markets.

"Tariffs on agricultural imports in both developed and developing countries have impeded growth in agricultural exports from developing countries", the report says.

It adds that farmers in many developing countries that do not have, or use, possibilities to apply tariffs on food imports face competition from highly subsidised and mechanised producers in industrialised countries. The report lays out an agenda for action to combat the growing problems caused by oversupply and market distortions.

It has called upon the World Trade Organisation (WTO) to give priority to reducing agricultural tariffs, producer support and export subsidies in the developed countries. It suggests elimination of tariff escalation that penalises exports of processed goods from the developing countries.

At the same time, it urges the developing countries to reduce their tariffs to encourage trade among themselves and to allow their consumers to benefit from lower world prices.

To reduce the impacts of commodity price shocks and spikes on the producers and consumers, the report recommends helping farmers as well as consumers to protect themselves through instruments like market-based price insurance or forward pricing systems.

The report also recommends diversification into the production of higher value crops or value-added processed goods which would contribute to reducing the supplies of traditional export goods.

Downslide

• The downward trend was attributed to the commodity supplies having grown more rapidly than demand
• Despite recent rebounds, the agricultural commodity prices remain highly volatile
• Overall, real prices for all farm commodities have declined over the past 40 years though the rate of decline has varied in different commodities