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Commodity Prices, Government Policies and Competition

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Title: Commodity Prices, Government Policies and Competition


1
Commodity Prices, Government Policies and
Competition
  • Steve McCorriston
  • University of Exeter, UK
  • WTO/CUTS Symposium on
  • Trade in Primary Product Markets and
    Competition Policy
  • WTO, Geneva, 22nd September, 2011

2
Structure of the Presentation
  • Recent events (quickly!)
  • Characteristics of world commodity markets and
    commodity price behaviour
  • Government policies
  • Overview of sources of competition concerns
  • Why does competition matter?
  • Issues that still need to be addressed

3
Three broad observations
  • Competition issues in commodity and food markets,
    and how they impact on the behaviour of prices,
    has received comparatively little (but not no)
    attention
  • Need to make the distinction between commodity
    and food markets-this is important in identifying
    where competition issues may arise
  • Why do departures from competition matter in the
    context of commodity and food markets?

4
Brief Overview of Recent Events
  • Recent commodity price spikes
  • .coming against the background of relatively
    previously low prices
  • Spike less significant than the 1972-74
    commodity crisis in real terms
  • Widespread commentary on the potential causes of
    the recent events

5
Figure 1 Monthly Food Price Index, 1990-2010
Source FAO
6
Figure 2 Real (Yellow) and Nominal (Black) Food
Price Index 1961-2008
Source IMF
7
What do we know about the behaviour of commodity
prices?
  • Long term Prebisch-Singer hypothesis.
  • Taken over the long-run, there will be a
    secular tendency for the relative prices of
    primary commodity prices to decline
  • Differences in income elasticities and market
    structure
  • Evidence? Mixed with the challenge of allowing
    for structural breaks.

8
Volatility
  • Prices change (a lot) but the issue here is to do
    with the amplitude and frequency of price changes
    that causes problems for producers and consumers
  • Why? Low demand and supply elasticities
  • Commodity prices may be more volatile than other
    prices but there is no evidence that over the
    medium to long-run that commodity price
    volatility has increased.

9
Commodity price spikes
  • Related to but distinct from volatility
  • Underlying characteristic of many commodities is
    that they are storable-there is an inter-temporal
    aspect to commodity markets.
  • The demand curve is non-linear
  • This changes the way in which we think about the
    impact of shocks depending where we are on the
    demand curve i.e. if stocks are high or low

10
P
Commercial Demand
?P
Commercial Demand plus Storage
P
?P
Q
?Q
?Q
11
Figure 4 Ending Stocks of Calories from Major
Grains
Source Wright (2011)
12
Implications of this for understanding commodity
price behaviour
  • Possibility of stock outs
  • Commodity prices characterised by
  • .asymmetry (long periods of low prices
    punctuated with short lived high prices)
  • .changing variance
  • .positive skewness
  • .excess kurtosis
  • Evidence not overwhelming!

13
Government Policies
  • Agriculture is one of the sectors where markets
    have and are highly distorted by government
    policies.
  • Wide range of policy interventions (domestic and
    trade) that have impacted on the progress of
    trade negotiations
  • Cuts the link between what happens domestically
    and what happens on world markets

14
  • But national policies also impose an externality
    on world markets
  • low (high) domestic prices raises (lowers) world
    market prices
  • as government policies seek domestic security,
    world markets become more volatile
  • the export supply/import supply schedules become
    more inelastic.

15
World commodity and domestic food prices
  • Behaviour can be very different
  • The impact of world commodity market shocks not
    fully transmitted to changes in domestic market
    food prices
  • Horizontal and vertical price transmission
  • Domestic food prices can be more stable than
    world market commodity prices

16
Figure 5 World and Domestic Prices for Selected
Developing Countries
Source IMF
17
Figure 6 World and UK Domestic Producer Prices
and Retail Food Prices, 1998-2010.
Source Davidson et al. (2011)
18
Competition Issues
  • Largely ignored concerns about competition in
    commodity and food markets can arise locally,
    nationally and internationally
  • Can involve the state or private firms and can
    impact within or across borders

19
State Manipulation of Market Structure
  • International commodity agreements (?)
  • State sanctioned cartels
  • State trading enterprisesnot per se associated
    with state ownership but direct manipulation of
    markets both domestic and with respect to trade

20
Competition concerns relating to private firms
  • Cartels, domestic and across borders
  • Downstream markets
  • (i) Export supply chains (Porto et al. (2011) on
    coffee, cotton and cocoa sectors)
  • (ii) vertically-related and imperfectly-competitiv
    e domestic food marketssuccessive oligopoly
  • (iii) Market power concerns (buyer and selling)
    within and between stages

21
Competition issues related to commodity markets
Competition and Regulation throughout Food Chain
Domestic ag. comms
Consumers
Processing Sector
Retailing Sector
Input sector
World Markets
Competition issues in the upstream input sector
22
Characteristics of Food Markets
  • High levels of concentration at all stages
    (processing and retailing)successive oligopoly
  • Tendency towards increasing concentration
  • Consolidation and MAs both domestically and
    nationally
  • Between (not just within) stage issues also
    matter
  • But note, other inputs will matter too for the
    final price of food products at the retail sector

23
Why does it matter?
  • Potential abuse of market power
  • Selling and buyer power may matter
  • Price transmission effects
  • Behaviour of prices for downstream products
    differs from upstream commodity markets
  • Net welfare and distributional effects associated
    with price shocks

24
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25
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26
Observations
  • Competition will matter in a variety of contexts
  • Commodities are only one part of the food chain
    and may represent a small share of the final food
    product
  • So, other issues matter too.
  • But small deviations in competition can have
    large effects particularly on the distribution of
    welfare following shocks

27
Further issues
  • How does competition impact on the volatility of
    prices?
  • How do departures from the competitive benchmark
    impact on risk exposure for farmers and
    consumers?
  • How do departures from competition in domestic
    markets impact on world markets?
  • How do departures from competition and its impact
    on volatility impact on investment?
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