Prsentation PowerPoint

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Commodities in the International Trading System

Training Seminar
Module 3
UNCTAD
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Structure of presentations on commodities

• Commodities in the International Trading System
• Overview
• Developing countries and agricultural commodities
• Developing countries and mineral commodities
• International Commodity Policies A Short History
• Intervention
• Disengagement
• Facilitation?
• Risk Management and Finance
• Why manage price risks? Alternatives
• Forward contracts, futures, options, swaps
• Structured finance
• Limitations of price risk management and
  structured finance, obstacles

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What are commodities?
Statistical definition specific SITC sections -
section 0 (agricultural commodities - largely
foods, including processed ones) - section 1
(agricultural commodities - drinks 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)
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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, although they are 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
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Commodities an attempt at a typology

• Physical characteristics
• Homogeneous quality
• Can be shipped in bulk
• Low degree of processing
• Economic characteristics
• Few barriers to entry
• Productivity gains tend to be passed on
• Fluctuating prices

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Commodity groups
Shares of world exports, 1997 - manufactures
75.1 - food items 8.6 - fuels 7.8 (1980
24) - ores and metals 3.3 - agricultural raw
materials 2.4 - non-classified, including
non-monetary gold 2.8
Growth rates, 1980-97 8.1 4.5 -0.8 3.8
3.4
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Comparing growth rates for commodities and
manufactures the example of carsExported cars
are often assembled from imported parts. Some of
these parts may, in turn, have been assembled
from imported pieces. The shares of cars, motor
vehicle parts and internal combustion engines in
international trade are, respectively, 5 per
cent, 2.5 per cent, and 1 per cent. Simply adding
the percentages exaggerates the relative
importance of car related items, and consequently
reduces that of other products such as
commodities for which such double counting is
much less significant. As manufacturing has
become more international over the years, and
different stages of processing increasingly take
place in different countries, the double
counting of manufactures trade has increased.
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Main world agricultural exports ( of total
agricultural exports)
New dynamic sectors have emerged
Traditional commodities are losing importance
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Dynamic and stagnating sectors

• Changing consumption habits
• Improved storage and transportation
• For example, tropical fruits, fishery products
• Changes in the organization of trade
• Direct contacts between exporters and retailers
  allow adaptation to consumer preferences
• Technological change and substitution
• Mainly for raw materials
• Agricultural protectionism
• Dynamic sectors least protected

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Changing consumption habits - food

• In rich countries
• Health concerns
• Convenience - less time to cook and prepare
• Desire for variety
• Environmental awareness
• Rising incomes
• Tourism
• In poorer countries
• Increasing incomes
• Current low levels for basic foods
• Increased calory intake
• Also, globalization of consumption

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Example of a dynamic specialty itemOrganic
products

• Markets less than 2 in general but in Austria,
  Switzerland, Denmark, 5 to 10
• Increasing rapidly in UK by 40 per year
• Import demand likely to remain high
• 80 per cent of organic products imported into the
  UK

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Dynamic agricultural exports are mostly new
products, but world demand for cereals and meat
is expected to rise considerably

• This will be mostly in developing countries, but
  by 2020 per capita cereal consumption in these
  countries will still be less than half, and meat
  consumption about one third, of that in
  developing countries
• Increase will be mostly in Asia, not in Africa
  where food consumption is lowest
• The main beneficiary is likely to be the United
  States
• Some developing countries are inherently
  disadvantaged as their staples are not demanded
  internationally, thus not tradable, while those
  of developed countries are

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A perspective to remember
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Commodity prices Indices current prices,
1980-1999...
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...and prices in real terms, deflated price
indices, 1970-1999
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Margin increasing between international and
retail prices

• Widened since 1970s, and at an accelerating rate
  since 1980s
• Margin greater in countries where there is more
  concentration
• Cannot be attributed to costs
• Also, for same products, with similar retail
  prices, producers receive less in developing
  countries

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As a group, developing countries have become less
reliant on commodity exports

• Share 1980 Share 1997
• manufactures 19.5 67.0
• food items 11.8 9.8
• fuels 60 15.0
• ores and metals 4.3 3.7
• agricultural
• raw materials 3.8 2.6
• non-classified, including
• non-monetary gold 0.6 1.9

Growth rates, 1980-97 14.0 4.9 -2.2 5.1
3.7
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But most developing countries still depend on
commoditiesProportion of 97 developing countries
relying on commodities for more than 50 of
their export income, 1980-1997
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Developing countries and agricultural commodities
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Why is agriculture important to developing
countries?

• 2,500 million people in developing countries
  depend on agriculture, and most of them are poor
• Comparative advantages are clear
• A window of opportunity in a new round?

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Main developing country agricultural exports (
of agricultural exports)
New dynamic sectors have emerged
Traditional commodities are losing importance
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Agricultural exports performance
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Impediments to increasing food exports

• Border measures
• Tariffs
• Seasonal limits
• Minimum import prices
• Health and safety standards

• Other impediments
• Domestic support
• Oligopolistic markets
• Importing firms standards
• Exporters (un)competitiveness

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Agricultural tariffs- Agricultural tariffs
(average 62 ) much higher than for manufactured
products (average 5 )- Complicated mixed with
TRQs, ad valorem and specific tariffs, complex
technical relationships- Multitude of
preferential rates- Tariff escalation especially
for meat, sweeteners, vegetable oils

• High tariff sectors
• Tobacco, meat, dairy and sugar

• Low tariff sectors
• Fruit, vegetables and fish BUT
• Few TRQs, minimum prices, vary with prices

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How important a barrier are tariffs?

• 1970-72 to 98-99, successful countries had few,
  if any preferences share increased from 9 to 12
  
• ACP countries and LDCs had preferences shares
  declined from 8.4 to 2.4 and from 4.7 to 1,
  respectively

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Health and safety standardsDue diligence from
producer to retailer

• Importing firms requirements
• Determined by consumers tastes and public
  opinion
• Not official, only informative, not a WTO
  issue
• Codes of good conduct

• SPS and TBT bring discipline
• HACCP generally accepted
• Importing country rules
• Implementation costly
• Management skills required

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Subsidized exports from developed countries
displace developing countries in their own and
third country markets

• Total support to agriculture in OECD in 1999 was
  362 billion support per farmer was US 33,000
  in Switzerland, US 20,000 in the E.U., Japan and
  the United States

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Increasingly, traditional developing country
products are processed and/or branded in
developed countries, and re-exported

• Developed countries are accounting for larger
  shares of tropical product exports. US exports of
  coffee and coffee products continue increasing
  and reached a record level of 250 million from
  about 175 million five years ago. (Largest
  exporter Brazil and all of sub- saharan Africa -
  about 2 billion each)

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The evolution of productivity
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Changing market structures

• At the national level
• liberalization foreign entrants, foreign product
  competition, increased price risk exposure
• pressure to meet market exigencies (eg. HACCP)
• At the level of international trade
• growing concentration of trade mergers
• trading purely on price differentials no longer
  possible
• cheaper finance and good logistics are now key
  factors
• need for greater capital resources and more
  skills
• At the level of consumer demand
• increasing importance of supermarkets
• globalization of consumption patterns
• new demands linked to production technology (e.g.
  organic foods)

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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

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Changing international market structures
Trading houses are no longer able to make
profits on simple trade transactions
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)
Concentration/ consolidation medium-sized
players are disappearing
Penetration into trading at domestic level
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Policy issues agricultural commodities

• Reducing agricultural protectionism
• Integrating subsistence farmers in the monetary
  economy
• Raise productivity, particularly in small-scale
  farming
• Solve transportation and storage problems
• Harmonization of standards
• Facilitate access to credit
• Build competitive marketing and distribution
  networks

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Developing countries and mineral commodities
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Why is mining important to developing countries?

• Little employment - but 13 million people work in
  small scale mining
• Production-consumption linkages weak but
  locally important
• Fiscal linkages provide opportunities for funding
  development

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Developing countries export performance for
minerals
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Developing countries becoming more important as
importers than as exporters
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Some success in the last decade, taking into
account

• The share of developing countries in production
  is higher than in exports (increasing imports)
• Their share in investment is higher than in
  production
• Their share in exploration is higher than in
  investment

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Factors behind the success

• Comparative advantages are allowed to work
• Changed investment climate in developing
  countries
• Changed financing methods
• Security of supply issues politically dead
• Environmental concerns

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International trade regime for minerals

• Developed countries apply zero or near zero
  tariffs on mineral commodities, developing
  country tariffs decreasing
• However, anti-dumping actions are common

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Investment climate

• Most developing countries have updated
  legislation on FDI, on mining or on both
• Nationalizations unlikely
• Political stability

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Financing methods

• Project lending
• Gold loans, commodity bonds
• Easy to raise equity capital (until relatively
  recently)

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Political factors in developed countries

• No subsidies to domestic mining
• Privatization of state owned mining companies
• Zero environmental tolerance
• Mining banned on large areas of land

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Policy issues mineral commodities

• For mature mineral economies diversification
• For new mineral economies attract and retain
  investment
• For both groups
• ensure an equitable distribution of revenue
• channel government income to investment in human
  capital
• maintain macro-economic stability in the face of
  price and volume variations