II Food Commodities
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International Monetary Fund
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English
Print Publication Date:
01 Jan 1988
Keywords:
WEFS; commodity price; dollar price; soybean oil; export quota; commodity export volume; food commodity; coconut oil; free market; spot price; soybean meal; groundnut oil; Agricultural commodities; Exports; Oil prices; Eastern Europe
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Abstract

The prices of most food commodities bottomed out in the second half of 1986 and the first half of 1987 and then increased by modest amounts. This turnaround followed a three-year period beginning mid-1984 during which the group price index fell by about 40 percent (Chart 4). The upturn, however, was small in comparison with the increases in the prices of many other commodities during the second half of 1987. The change in the direction of the movement in prices of food commodities was largely a result of changes in supply. Production of food commodities is expected to show a modest decrease in crop year 1987/88, in contrast to an exceptionally large increase in 1984/85 and the substantial increases of the two following years (Table 8). The supply situation has also been altered somewhat on account of a very large increase in 1986/87 in consumption of food commodities, in particular of cereals, principally because of greater use of these commodities in animal feed. The group index of closing stocks of food commodities is expected to fall by over 10 percent in the crop year 1987/88, although stocks of most food commodities are expected to remain at high levels. With reference to individual food commodities, the prices of both cereals and vegetable oils and protein meals in 1986–87 were far below the levels of 1983–84, while the sugar price has been at a low level since 1981. The reasons for these price patterns are discussed in this section.

The prices of most food commodities bottomed out in the second half of 1986 and the first half of 1987 and then increased by modest amounts. This turnaround followed a three-year period beginning mid-1984 during which the group price index fell by about 40 percent (Chart 4). The upturn, however, was small in comparison with the increases in the prices of many other commodities during the second half of 1987. The change in the direction of the movement in prices of food commodities was largely a result of changes in supply. Production of food commodities is expected to show a modest decrease in crop year 1987/88, in contrast to an exceptionally large increase in 1984/85 and the substantial increases of the two following years (Table 8). The supply situation has also been altered somewhat on account of a very large increase in 1986/87 in consumption of food commodities, in particular of cereals, principally because of greater use of these commodities in animal feed. The group index of closing stocks of food commodities is expected to fall by over 10 percent in the crop year 1987/88, although stocks of most food commodities are expected to remain at high levels. With reference to individual food commodities, the prices of both cereals and vegetable oils and protein meals in 1986–87 were far below the levels of 1983–84, while the sugar price has been at a low level since 1981. The reasons for these price patterns are discussed in this section.

Chart 4.
Chart 4.

Prices of Food Commodities, 1980–87

(In SDRs; indices: 1980=100)

Table 8.

Movements in the Prices of Food Commodities and Related Economic Indicators, 1980–87

(Annual percentage changes)

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Sources: Commodities Division and Current Studies Division, IMF Research Department.

Refers to IMF world index of food commodities. These percentages differ from those reported in the World Economic Outlook, April 1988, which refer to the index of commodities exported by developing countries.

Index of dollar prices of food commodities deflated by the index of dollar unit values of manufactured exports.

Overall indices constructed using the same weights for the indices of individual commodities as in overall (world) price index. Crop year data for agricultural commodities are given under the earlier calendar year, e.g., crop year 1980/81 under 1980. The commodity coverage of the indices of consumption and stocks is less comprehensive than the coverage of indices of production and supply.

Supply is defined as production plus beginning-of-year stocks.

Cereals

The prices of all cereals have fallen sharply during the 1980s, except for a temporary increase in the price of feed grains in 1983/84 associated with drought in many countries and acreage reductions in the United States. In 1987, the prices of wheat, maize, and rice expressed in both SDRs and U.S. dollars were, respectively, 33 percent, 37 percent, and 40 percent below their average prices in 1979–80 (Table 9). The price collapse reflects excess supply throughout the 1980s. With the exception of 1983/84, total cereal output exceeded utilization in every crop year from 1981/82 onward, resulting in a buildup of stocks at end-1986/87 to the equivalent of 23 percent of annual utilization—a level not realized since the early 1960s (Table 10). The collapse of prices also reflects a shrinking volume of world trade in cereals, from an average of 208 tons a year between 1980/81 and 1984/85 to 181 tons in 1985/86 and 188 tons in 1986/87. Commercial import demand declined mainly because former large importers, such as China, India, and Indonesia, achieved a high degree of self-sufficiency in the production of major cereals, because financial difficulties in many countries limited the demand for cereals, and because the ready availability of food aid reduced the need for commercial cereal imports.6

Table 9.

Prices of Cereals, 1979–88

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Source: Commodities Division, IMF Research Department.

The weights in the index are as follows: wheat, 48 percent; maize, 36 percent; rice, 16 percent.

U.S. No. 1 hard winter wheat, ordinary protein, f.o.b. Gulf of Mexico ports.

U.S. No. 2 yellow corn, f.o.b. Gulf of Mexico ports.

Thai white milled rice, 5 percent broken, f.o.b. Bangkok.

Table 10.

Cereals; World Supply and Utilization, 1960/61–87/88

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Source: U.S. Department of Agriculture, World Grain Situation and Outlook, December 1987 and earlier issues.

For countries where stocks data are not available, utilization estimates represent “apparent” utilization, that is, they include annual stock level adjustments.

Stocks data are based on an aggregate of differing local marketing years and should not be construed as representing world stock levels at a fixed point in time. World stock levels have been adjusted for estimated year-to-year changes in the U.S.S.R. grain stocks, but do not purport to include the absolute level of U.S.S.R. grain stocks. Data do not include stocks in China, in some countries in Eastern Europe, and in some other countries for which stocks data are not available.

Ratio of marketing year ending stocks to utilization.

U.S. Department of Agriculture estimate.

The growth in world grain output during the 1980s mainly reflected higher yields. While the average yield for all cereals in the 1980s was 21 percent higher than in the 1970s, the area harvested increased by only 2 percent. Improvements in yield reflected the use of high-yielding varieties accompanied by complementary measures, such as greater use of fertilizer, irrigation, and pesticides; also, generally favorable weather conditions have prevailed since 1981/82. In addition, beginning about 1985, policies in industrial countries aimed at reducing excessive stocks, and policies in the U.S.S.R. intended to raise productivity resulted in the idling of the least productive land, thereby raising the average yield of the land remaining in use. Over the past two years, favorable weather conditions have increased the output of cereals and improved the availability of food in developing countries, especially in the low-income food deficit countries of sub-Saharan Africa, which experienced severe food shortages in 1984–85.

Government price support policies in the first half of the 1980s were a major reason slowing adjustment of harvested area to lower world market prices. Until 1985/86, price support policies in effect in the United States, the EC, and Japan, prevented declining world market prices from being reflected in returns to producers. Moreover, the strengthening of the U.S. dollar between 1981 and 1985 offset much of the decline in the dollar-denominated prices for non-U.S. exporters so that there was little incentive for them to reduce production.

In the United States, up to 1986/87 price support loan rates provided a floor to U.S. producer and export prices, but were set at levels high enough to allow less efficient producers in other countries to compete effectively in world markets. As a result, the U.S. share in world grain markets declined from over 50 percent in 1980/81 to 37 percent in 1985/86, and at the end of the 1985/86 crop year, the United States held about 56 percent of global wheat and coarse grain stocks and about 10 percent of global rice stocks. The U.S. 1985 farm bill (officially called the Food Security Act of 1985) had the objective of making agricultural policy more market oriented in order to reduce the budgetary costs of farm income support and storage of government-owned stocks, and to enable U.S. exporters to regain market shares.7 The main feature of the farm bill is the linkage of price-support loan rates to past market prices; loan rates were reduced substantially for the 1986/87 crop year. Acreage reduction programs (a prerequisite for producers to qualify for income support) are mandatory when stocks exceed certain specified levels. Up to 50 percent of income support payments may be made in the form of negotiable generic certificates, which may be redeemed for government-owned commodities. This scheme provides substantial budgetary savings over cash payments,8 and, in the case of maize, the use of certificates has allowed the government to influence market prices to maintain export competitiveness. For wheat, certificates have been issued as payment-in-kind subsidies to exporters to enable them to bridge the gap between domestic prices and prevailing world market prices under the export enhancement program (EEP) provisions of the farm bill.9 For rice a “marketing loan” is in effect, whereby price support loans may be repaid by producers at rates below the loan rate and equivalent to the prevailing world market price. The implementation of the 1985 farm bill, while it promoted more market competition, had the effect of reducing world cereal prices in 1986–87 to levels consistent with the large supply imbalances.

The increasing budgetary cost to the EC of price support policies under the Common Agricultural Policy also led to revisions in the regime for 1986/87 designed to restrain production and link producer returns more closely with market prices.10 A tax on producers, or “co-responsibility levy,” of 3 percent of the intervention price was introduced, thereby lowering net producer prices. Intervention prices in ECU terms for feed wheat and barley were reduced by 5 percent, and there were changes in quality standards which had the effect of lowering support prices. For 1987/88, effective intervention prices in ECU terms were reduced by 6 percent for all grains. In both years, however, adjustments of agricultural exchange rates (“green” rates) partly offset the lowering of ECU intervention prices on prices received by producers in many EC countries so that the impact on cereal output was marginal. For 1988/89 and the three succeeding years, a threshold level for production of all grains of 160 million tons has been established, and if this is exceeded, intervention prices will be reduced by 3 percent in the following year. An additional 3 percent co-responsibility levy will be charged at the beginning of each year, but will be reimbursed if the threshold is not exceeded; it will be partially reimbursed if the threshold is exceeded by less than 3 percent. A paid set-aside (acreage reduction) program will be implemented whereby producers taking at least 20 percent of arable land out of production for at least five years will receive an annual payment of between ECU 100 and ECU 600 a hectare, depending on the quality of the land.11 Finally, a ceiling on agricultural spending of ECU 27.5 billion was established for 1988/89.

In Japan both producer and consumer prices of rice are several times higher than world market prices, and few imports are permitted. For these reasons, the reduction of producer prices for rice by almost 6 percent in 1987, the first reduction since 1956, had little impact on the world rice market. Nonetheless, proposals for more fundamental reforms of agricultural policies are under review by the government.

As a result of the acreage reduction programs in the United States, lower returns to producers in countries where agriculture is less subsidized, especially Australia and Argentina, and the idling of marginal land in the U.S.S.R., the total area planted to cereals declined by 1 percent in 1986/87 and is estimated to have fallen by an additional 3 percent in 1987/88. Owing in part to less favorable weather conditions, global production of cereals is expected to decline by 5 percent in 1987/88 to 1.6 billion tons. Utilization is projected to exceed production for the first time since 1983/84, and global stocks at the end of the 1987/88 crop year are expected to fall to the equivalent of 20 percent of annual utilization.

Wheat

After successive record harvests between 1980/81 and 1984/85 (crop years ended June), global wheat production fell by 2.5 percent in 1985/86 and then recovered by 6 percent in 1986/87 to a new record of almost 530 million tons (Table 11). These fluctuations in output reflect variations in yield, as area harvested declined slightly. The growth of global wheat consumption lagged behind that of production in the first half of the 1980s resulting in a sharp buildup of stocks, which reached one quarter of annual utilization in 1984/85. Global consumption fell by 1.8 percent in 1985/86 as other grains were substituted for wheat in animal feed, but increased by 7 percent in 1986/87 as this substitution was reversed. The ratio of stocks to utilization rose further to 28 percent in 1985/86 and stabilized at this level in 1986/87. Reflecting the rapid buildup of global stocks during the 1980s, wheat export prices in the United States declined from an average of $178 a ton in 1980/81 to $108 a ton in 1986/87.12

Table 11.

Wheat: World Commodity Balance, 1981/82–87/88

(In millions of tons, unless otherwise indicated)

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Source: U.S. Department of Agriculture, Foreign Agriculture Circular: World Grain Situation and Outlook (Washington), various issues.

Estimate.

At the beginning of the 1985/86 crop year, export prices fell to their lowest level since 1978, averaging $126 a ton in the third quarter of 1985. Factors contributing to the price weakness were the large carryover stock from 1984/85 and the prospect of a rebound in wheat production in the U.S.S.R., the world’s largest importer. In the United States, farm prices fell below the loan rate of $121.25 a ton for 1985, which induced producers to place a record volume of wheat under government loan. The resulting tightening of supplies available to the market had the effect of raising prices to an average of $132 a ton in the final quarter of 1985 and the first quarter of 1986. Despite a reduction in the loan rate for 1986 to $88.18 a ton, international prices in this period were supported by lower crops in Argentina, Canada, and Europe, owing to adverse weather.

Following a brief surge in prices in May 1986 associated with the nuclear accident at Chernobyl in the U.S.S.R., prices declined under the influence of a favorable outlook for production in the United States and the U.S.S.R., and the announcement in the United States of a reduction in the loan rate for the 1987 crop to $83.76 a ton, the minimum permitted under the 1985 Farm Bill. In the third quarter of 1986, export prices averaged $103 a ton, the lowest level reached since 1977/78. Prices then rose modestly through the next two quarters, being influenced by a tightening of free supplies to the U.S. market owing to strong participation of producers in the price support program, the possibility of weather damage to the winter wheat crops in the United States and the U.S.S.R., and an improved U.S. export performance under the EEP with sales to Egypt and China and expectations of a resumption of sales to the U.S.S.R. Export prices rose sharply in May 1987, averaging $119 a ton, mainly in response to the announcement at the end of April of the sale of 4 million tons of wheat to the U.S.S.R. under the EEP.13 Also influencing wheat prices at this time were a period of hot, dry weather in the midwest region of the United States and the perception among traders that the recent period of low prices might be at an end, as evidenced by a rise in many other commodity prices.

Export prices weakened again, averaging $107 a ton in June and July, after timely rainfall ensured good yields in the United States. Prices then rallied to $115 a ton by November under the influence of stepped-up export sales to a number of countries, a spillover of high rice prices to the wheat market, and optimism that drought-induced production shortfalls in China, India, and Pakistan would further increase import demand and reduce stocks significantly by the end of the 1987/88 crop year. The upswing, however, was tempered by increased farmer selling to take advantage of higher prices in the light of negative underlying influences including the announcement of a new loan rate for the 1988 crop of $79.74 a ton, the minimum permitted,14 excellent sowing conditions for the 1987/88 crop, and the temporary weakness in commodity prices induced by the stock market collapse in October 1987.

In December 1987 prices rose sharply, averaging $125 a ton owing to strong foreign demand; U.S. export sales exceeded 1 million tons a week for five consecutive weeks with the assistance of EEP subsidies. To ensure that export sales did not tighten the domestic market excessively and thereby raise the rate of EEP subsidy, a weekly auction of government-owned wheat of up to 25 million bushels (0.68 million tons) a week commenced in November.

Global wheat production rose by 6 percent to a record 529 million tons in 1986/87. Output rose in all major producing countries except in the United States, where area harvested declined by 6 percent as a result of the acreage reduction provisions of the price support program.15 Yield in the United States was also reduced by winter damage and spring dryness, and production declined by 14 percent to 57 million tons. Low prices influenced production decisions in Australia and Argentina, where market intervention is relatively small, and area harvested fell by about 4 percent in each country. Improved weather conditions raised yields, however, and output in each country was marginally higher than in 1985/86 at 16.2 and 9 million tons, respectively. By contrast, in Canada and the EC, domestic subsidies (albeit at lower levels than in previous years) insulated producers from low international prices so that area harvested for the 1986/87 crop increased. Income support to farmers in Canada reached a record level in 1986/87,16 and a special assistance program to help offset the impact of subsidies granted by other countries was also introduced in December 1986. Area harvested rose by 3.6 percent, and with a record yield production rose by 29 percent to a record 31.4 million tons. EC intervention prices for the 1986/87 crop were reduced in ECU terms by 5 percent for feed wheat but remained unchanged for breadmaking wheat. Despite the introduction of the 3 percent co-responsibility levy, producer prices in France and the United Kingdom (the major producing countries) remained approximately unchanged because of adjustments to their “green” rates of exchange. For the twelve members of the EC as a whole, the area harvested to wheat rose by 2.6 percent but the yield declined so that output rose marginally to 72 million tons. The area harvested in the U.S.S.R. declined by 3 percent as marginal lands were taken out of production, and, aided by favorable weather and improved distribution of fertilizer, the yield reached a new record as output rose by 18 percent to 92 million tons. Output in Eastern Europe rose by 4 percent to 39 million tons, reflecting both larger area planted and better yield, while favorable weather in China and India together with higher procurement prices were mainly responsible for increases in output of 5 percent and 6 percent, respectively.

After declining by 2 percent in 1985–86 because of lower output in China and lower feed use in the United States, global utilization of wheat rose by 7 percent in 1986/87 to a record 519 million tons. This mainly reflected a sharp increase in feed wheat usage, which rose by 17 percent compared with an annual average growth rate of 5 percent in previous years. The Republic of Korea and Mexico took advantage of low prices for weather-damaged Australian wheat, while increased usage in Canada, the EC, and the U.S.S.R. was made possible by higher domestic production. Although utilization rebounded in 1986/87, it was insufficient to prevent a further buildup of stocks by 10 million tons to a record 147 million tons. Nevertheless, the ratio of ending stocks to total utilization at the end of the 1986/87 crop year remained virtually unchanged at 28 percent.

Higher wheat production in both China and the U.S.S.R., the major importing countries, reduced their need to import wheat in 1986, and the volume of world trade in wheat fell by 9 percent to 96 million tons (Table 12). Among exporting countries, EC countries and Argentina experienced a fall in export volume because of adverse weather, while exports from Australia, Canada, and the United States increased.17 The decline in export volume in 1986 coincided with a 6 percent decline in unit values, and global earnings from wheat exports fell by 15 percent to $13 billion. The intention of China and the U.S.S.R. to improve nutrition and livestock standards and to increase stocks, together with low prices offered by the United States under the EEP, is expected to result in an upswing in the volume of world trade in 1987 to 103 million tons. Although unit values have declined further there is expected to be a small increase in earnings to $13.7 billion.

Table 12.

Wheat: Export Earnings, 1984–87

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Sources: UN Food and Agriculture Organization, 1986 FAO Trade Yearbook (Rome) for exports; Commodities Division, IMF Research Department for prices.

Data on exports are estimates of Commodities Division, IMF Research Department.

U.S. No. 1 hard red winter wheat, ordinary protein, f.o.b. Gulf of Mexico ports.

In the 1987/88 crop year, global wheat production is expected to decline by 5 percent to 501 million tons under the influence of reduced price support and less favorable weather conditions in a number of countries compared with 1986/87. Wet weather in the U.S.S.R. hampered the harvest of the 1987 spring wheat crop and seeding of the 1988 winter wheat crop. As a result, the 1987/88 crop is expected to fall by 12 percent to 81 million tons and to be of lower quality than in 1986/87. The expected reduction of 11 million tons in U.S.S.R. output accounts for over two fifths of the projected decline in global production of 28 million tons. Wheat yield in the EC will also be depressed by the heavy rainfall which occurred in the first quarter of the crop year. Intervention prices were set unchanged in terms of ECUs for 1987/88, but intervention purchases will only be made at 94 percent of the intervention price. The impact of this 6 percent reduction in nominal price support on planting decisions, however, could be offset by devaluations of the green exchange rates. Output is projected to rise marginally, entirely reflecting a small increase in area harvested. In the United States, the target price was reduced by 3 percent for 1988 to $155.43 a ton after being held constant since 1984 at $160.94 a ton,18 and the required acreage reduction was set at 27.5 percent of base acreage, the same reduction as in 1986/87. In addition, deficiency payments provided in advance of the harvest will decline by 27 percent to $56 a ton. Consequently, area harvested is expected to fall by 8 percent, but with a higher yield resulting from the most productive land remaining in use, output is expected to remain at 57 million tons. Initial price support payments in Canada were reduced by 15 percent for the 1988 crop, and a 5 percent reduction in area harvested is expected. Assuming a return to normal yield after the 1986/87 record, output is projected to decline by 16 percent to 26 million tons. In Argentina, area harvested in 1988 is expected to decline only marginally, as wheat farmers have few production alternatives.19 If weather conditions return to normal after two successive adverse years, output is expected to rise by about 1 million tons. Guaranteed minimum prices (GMPs) for wheat in Australia declined by $A 10 a ton in 1986/87 and are expected to fall by a further $A 14-20 a ton in 1987/88.20 As a result, area harvested is expected to be reduced by 20 percent to the lowest level in a decade. Output may decline by nearly 4 million tons (23 percent) to 13 million tons as the extremely favorable weather conditions of 1986/87 are not expected to be repeated.

Global utilization of wheat is expected to rise marginally in 1987/88 to 521 million tons. This mainly reflects higher food use in developing countries where high rice prices will lead to increased consumption of wheat. Utilization in the U.S.S.R. is expected to decline by 6 percent due to lower stockbuilding; although production is expected to fall, both food and feed use should increase, assisted by a substantial rise in imports. Utilization in China and the United States is expected to be largely unchanged from that in 1986/87. With the sharp drop in global production, end-period stocks are projected to fall by 20 million tons (14 percent), and the ratio of stocks to utilization is expected to decline for the first time since 1980/81 to 24 percent.

Maize

The United States has a predominant position in world maize production and trade, accounting for about 45 percent of global output and two thirds of global exports. Consequently, year-to-year variations in supplies in the United States caused by climatic conditions and the U.S. Government’s price support programs have a major influence on international maize market conditions. Owing to the recovery of U.S. production from the effects of drought in 1983/84 (crop years ended September), world output rose by 32 percent in 1984/85 and by a further 5 percent in 1985/86 to a record 480 million tons (Table 13). World maize utilization recovered more slowly than production in 1984/85 (by 6 percent), and then fell by 4 percent in 1985/86 as higher output of other coarse grains in the U.S.S.R. reduced consumption and import requirements for maize. As a result of these developments, the ratio of world stocks to utilization increased from 9 percent in 1983/84 to 14 percent in 1984/85 and to 29 percent in 1985/86, and export prices declined sharply, from an average of $143 a ton in 1983/84 to $97 a ton in 1985/86.21 In 1986/87, global output declined slightly owing to acreage reduction in the United States, and utilization increased by 8 percent as the cattle cycle in many countries entered the rebuilding phase. The ratio of stocks to utilization rose further to 33 percent at year-end, however, and prices continued to decline, averaging $72 a ton, which was the lowest price recorded since 1971/72.

Table 13.

Maize: World Commodity Balance, 1981/82–87/88

(In millions of tons, unless otherwise indicated)

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Source: U.S. Department of Agriculture, Foreign Agriculture Circular: World Grain Situation and Outlook (Washington).

Estimate.

In the first quarter of the 1985/86 crop year (the final quarter of 1985) export prices averaged $104 per ton, or 11 percent lower than a year earlier. The price weakness reflected a record U.S. maize harvest of over 225 million tons on top of already ample supplies. Farm prices in the United States fell below the loan rate for the 1985 crop of $100.39 a ton, and, as a result, a high proportion of the crop was placed under loan. By reducing the “free” supplies available, this lent some support to the market through the first half of 1986 when export prices averaged $104 a ton, or well above the loan rate for the 1986 crop of $75.59 a ton.22 In the third quarter of 1986, however, export prices fell sharply to an average of $75 a ton because of expectations of another large domestic crop for 1986/87, lower than anticipated domestic feed use as cattle and hog numbers continued to decline, and the announcement of a 5 percent reduction in the loan rate for the 1987 crop to $71.65 a ton.23 Export prices fell further to $68 a ton in the final quarter of 1986 (the first quarter of the 1986/87 crop year) as a record stock carryover of 103 million tons and current production of 210 million tons (a decline of only 7 percent from 1985/86 despite heavy participation in the price support program) raised aggregate supply to a new record. Also, export prospects were dimmed by upward revisions to estimates of grain output in the U.S.S.R. Export prices improved marginally in the first quarter of 1987 as the placement of large supplies under loan tightened the supply available to the market. Prices rose to $78 a ton in the second quarter in response to a resumption of purchases by the U.S.S.R., a pickup in U.S. exports to other countries because of smaller-than-expected maize crops in Argentina and South Africa, and an upturn in U.S. feed use of maize. Generally favorable weather conditions during the planting and growing seasons for the 1987/88 crop caused export prices to decline to an average of $74 a ton in the third quarter; prices received by farmers ranged between $63 and $67 a ton. In the final quarter of 1987 (the first quarter of the 1987/88 crop year) prices recovered to $81 a ton despite a stock carry-in even larger than in 1986/87 (124 million tons) and a reduction in the loan rate for the 1988 crop by 4 percent to $68.50 a ton.24 The price recovery reflected the perception that market conditions could tighten considerably by the end of the crop year; 1987/88 production is expected to decline to 182 million tons, the lowest since the drought-affected 1983/84 crop, and there was a surge in exports to the U.S.S.R. and Asian countries owing, in part, to weather-related production shortfalls in other exporting countries, notably Argentina and Thailand.

Farm prices throughout 1986 and 1987 were lower than the export prices quoted above by a differential related to transportation costs to port and were at all times below the respective loan rates. The excess supply situation in the U.S. market, whereby stocks have risen to about 60 percent of annual utilization, was mainly responsible for producer prices falling below the loan rate, which previously had acted as a price floor. An additional factor depressing prices was the widespread use by producers of generic certificates to redeem maize placed previously under loan. Generic certificates have been issued by the government from April 1986 onward as part of advance deficiency and diversion payments to producers participating in the farm support reduction program. They have a fixed face value so that when prices fall, the amount of a commodity for which certificates can be exchanged increases. Since the price at which the exchange takes place (the posted county price) is determined by the government and is related to local market prices, a producer is assured of a profit whenever the market price is below the loan rate.25 The redemption has the effect of channeling maize which otherwise would have remained in government storage into the market, and thereby exerts downward pressure on prices. By adjusting the posted country price, the government can influence the rate of use of certificates, and through them market prices, so that the U.S. maize remains competitive in export markets.

Although maize prices declined sharply over the past two crop years, the response of producers in countries other than the United States was limited. Output in China, the world’s second largest producer, increased by 8 percent in 1986/87 and is expected to rise by a further 13 percent to 78 million tons in 1987/88 in response to improved producer-price incentives, which aim at supplying the domestic livestock industry. In the EC, intervention prices were effectively reduced by 6 percent in terms of ECUs for the 1987/88 crop, but adjustments in green rates meant that national currency intervention prices in France and the United Kingdom were reduced by only 1 percent and 2 percent, respectively. Area planted to maize in 1987/88 is expected to decline by a total of 5 percent for the EC countries as a whole, and a decline in production of about 1 million tons is expected. Production in Brazil, the third largest producer, reached a record 26.5 million tons in 1986/87 because of higher area planted, but is expected to fall by 2.5 million tons in 1987/88. Drought is expected to reduce Thailand’s production by 1.5 million tons in 1987/88. Production in Argentina, however, should rebound by 1 million tons in 1987/88 after weather damage to the 1986/87 crop. Total non-U.S. production is projected to remain stable in 1987/88 after increasing by 10 million tons the previous year.

World maize utilization increased by 32 million tons (8 percent) in 1986/87. Utilization in China rose by 9 million tons (16 percent) while consumption in the U.S.S.R. fell by 4 million tons (16 percent), both changes reflecting developments in domestic production. Utilization in the United States increased by 17 million tons (13 percent) as both the cattle and hog cycles started their rebuilding phase. Continued strong growth of feed consumption of maize is expected in the United States and China in 1987/88, but this may be offset in part by the ready availability of domestic feed-quality wheat and a slowdown in the growth of the livestock sector in the U.S.S.R. Globally, maize utilization is projected to increase by 13 million tons (3 percent) in 1987/88.

After peaking at $10.3 billion in 1984, the value of world maize exports declined to $8.8 billion in 1985 entirely on account of lower unit values (Table 14). The continuing decline in prices together with an 18 percent fall in export volume reduced global earnings to $6.8 billion in 1986. The reduction in volume mainly reflected a 10 million ton drop in imports by the U.S.S.R. owing to increased domestic output of maize and other coarse grains. It is estimated that a small recovery in the volume of world maize exports occurred in 1987. Although import demand by the U.S.S.R. continued to decline, this was offset by increased imports by China, Japan, and the Republic of Korea to support their livestock industries. A further drop in unit values, however, reduced export earnings to an estimated $4.9 billion. The decline in aggregate earnings from maize exports in terms of SDRs since 1984 has been even larger than the decline in terms of dollars.

Table 14.

Maize: Export Earnings, 1984–87

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Sources: UN Food and Agriculture Organization, 1986 FAO Trade Yearbook (Rome) for exports; Commodities Division, IMF Research Department for prices.

Data on exports are estimates of Commodities Division, IMF Research Department.

U.S. No. 2 yellow corn, f.o.b. Gulf of Mexico ports.

Prices are likely to rise modestly in 1988 because global utilization is projected to exceed supply for the first time since 1984. Nevertheless, farm prices in the United States may not rise to the level of the loan rate ($69.68 a ton) because it is the policy of the government to maximize maize exports through competitive pricing. As noted, the government has considerable flexibility to influence the use of generic certificates to maintain prices below the loan rate and this would consequently restrain the upward movement of world prices.

Rice

Since about 90 percent of world rice production and consumption are concentrated in Asia and since production is highly dependent on monsoon conditions, periods of heavy import demand tend to coincide with periods of reduced export availability. Most of the crop is consumed in the countries where it is produced, and only 4 percent of global production enters international trade.26 Therefore, production shortfalls in only a few countries can result in a rapid and significant tightening of market conditions.

Production shortfalls and higher import demand in India in 1980 and in the Republic of Korea in 1981 led to a 45 percent increase in export prices in both years, when prices peaked at $483 a ton on average.27 As production recovered in 1982, prices declined to $259 a ton in the final quarter of that year. Market conditions tightened again in 1983 in response to weather-induced production shortfalls in Brazil, India, Indonesia, the Islamic Republic of Iran, and Iraq, and prices rose to $282 a ton in the final quarter. During the next three years, market conditions eased considerably. Increased output in 1984 in Bangladesh, China, and Pakistan enabled the global production of milled rice to increase by 8 percent in the 1983/84 crop year. Further, albeit much smaller, increases in production occurred in 1984/85 and 1985/86, and with production exceeding utilization, global stocks rose from the equivalent of 6 percent of annual utilization in 1983/84 to 8 percent in 1985/86 (Table 15). Import demand also weakened because former large importers, such as China, India, Indonesia, and Korea, became self-sufficient. Prices declined to an average of $215 a ton in the final quarter of 1985.

Table 15.

Rice: World Commodity Balance, 1981/82–1987/88

(In millions of tons)

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Source: U.S. Department of Agriculture, World Grain Situation and Outlook (Washington, D.C.), various issues.

Rice is harvested over a 6–8 month period; thus crop year 1981/82 represents crops harvested in late 1981 and early 1982 in the Northern Hemisphere and in early 1981 in the Southern Hemisphere.

U.S. Department of Agriculture estimates.

Large-scale imports by Brazil, which anticipated a significant shortfall of its 1985/86 crop below domestic needs, were mainly responsible for a strengthening of world prices to an average of $229 a ton in the first quarter of 1986. But from the second quarter of 1986 onward, the major influence on prices was the start of the U.S. rice support program under the 1985 Farm Bill. The key feature of the program (which is not a part of the wheat or feed grains programs) is the marketing loan whereby producers can repay their loans at the higher of the world market price or 50 percent of the loan rate. This allowed domestic prices to fall below the loan rate28 and enabled U.S. exporters to reduce prices to the extent necessary to regain market shares. As competition between the United States and other major exporters intensified, prices fell to $202 a ton in the second quarter of 1986 and averaged $205 a ton in the second half year.

In the 1986/87 crop year,29 global production declined by 1 percent to 317 million tons (milled basis). Low prices resulted in a smaller area planted in Indonesia and Thailand while yields in India and Thailand were reduced by dry weather. Output in China, however, increased by 2 percent and Brazilian production recovered, increasing by 5 percent. Global utilization continued to rise, reaching 319 million tons, because the rise in China’s output made increased domestic consumption possible, and low import prices allowed the substitution of rice for coarse grains in the diet of many countries, particularly in Africa. Global stocks were reduced by 2 million tons, and this reduction lent some support to market prices in the first half of 1987 when prices averaged $209 a ton.

In the second half of 1987, prices rose sharply on account of a long delay in the onset of the monsoon in South and Southeast Asia, which reduced the prospects for the 1987/88 crop in India and Thailand. Indian production is now expected to fall by 20 percent, compared with 1986/87 and Thai production by 17 percent. In addition, output in Bangladesh was affected by floods accompanying the delayed arrival of the monsoon in September, and is expected to decline by 4 percent. As a consequence, despite an expected 2 percent increase in China’s production, global output of milled rice is projected to fall by 5 percent to 302 million tons in 1987/88. Although the shortfall in Indian production is expected to be met by reducing consumption and using stocks of rice and wheat rather than by importing, the anticipated lower availability of Thai rice for export (especially in 1988) tightened the market considerably in the final quarter of 1987 and prices averaged $274 a ton or almost 50 percent higher than in the corresponding quarter of 1986. Any further upward movement in prices in 1988 may, however, be constrained by the substitution of wheat for rice imports in African and Middle Eastern countries.

For 1987 as a whole, the global volume of trade in rice is estimated to have declined by 2 percent (Table 16). This reflects not only a small reduction in Thai exports, but also reduced availability in Australia, where low prices led to a reduction in planted area, and in Indonesia where the yield was affected by pest infestation. U.S. rice exports are also expected to decline slightly after rising by 26 percent in 1986. On the import side, the reduced volume of trade in 1987 mainly reflects the virtual absence of Brazil from the market after record imports in 1986. Despite the decline in volume, the value of world trade in rice is expected to increase by 7 percent to $3.2 billion in 1987, which would be the first increase recorded since 1984. The value in 1987 in terms of SDRs, however, is expected to be marginally lower than in 1986. In 1988, the volume of Thai exports is projected to be more than 50 percent below 1987 volume, and the United States is likely to become the world’s largest exporter.

Table 16.

Rice: Export Earnings, 1984–87

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Sources: UN Food and Agriculture Organization, 1986 FAO Trade Yearbook (Rome) for exports; Commodities Division, IMF Research Department for prices.

Data on exports are estimates of Commodities Division, IMF Research Department.

Thai milled white rice, 5 percent broken, f.o.b. Bangkok.

Vegetable Oils and Protein Meals

The index of prices for vegetable oils and protein meals in 1987 was 9 percent higher than in 1986 in terms of U.S. dollars, but was nearly 2 percent lower in terms of SDRs (Table 17). In both years prices were far below the level of 1984—about one third lower in terms of dollars and about 44 percent lower in terms of SDRs—and prices were lower than in any other year since 1972. The downward pressure on the prices of vegetable oils and protein meals is mainly attributable to the strong recovery and continued expansion of production since 1983/84, when several largely coincidental factors markedly reduced output and stocks.30 Production and stocks reached unprecedented levels in 1985/86 and remained at those levels in 1986/87. Prospects are for a further increase in output in 1987/88 (Tables 18 and 19) but increased consumption is expected to leave accumulated stocks slightly below the previous year’s level.

Table 17.

Prices of Vegetable Oils and Protein Meals, 1979–88

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Source: Commodities Division, IMF Research Department.

The weights in the index are as follows: soybeans, 41 percent; soybean meal, 24 percent; soybean oil, 11 percent; palm oil, 10 percent; coconut oil, 6 percent; fish meal, 5 percent; groundnut oil, 2 percent; groundnut meal, 1 percent; sunflowerseed oil and rapeseed oil are not included in the index.

Dutch, f.o.b. ex-mill Rotterdam.

Sumatra/Malaysian oil, c.i.f. Northwest European ports.

Any origin, ex-tank Rotterdam.

Dutch, f.o.b. ex-mill.

Philippine/Indonesian oil, in bulk, c.i.f. Rotterdam.

Any origin, c.i.f. Rotterdam.

U.S. origin, c.i.f. Rotterdam.

Argentine meal, in bulk, c.i.f. Rotterdam.

Any origin, c.i.f. Hamburg.

Table 18.

Major Oilseeds (Oil Equivalent): World Commodity Balance, 1981/82-87/88

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Source: U.S. Department of Agriculture, Foreign Agriculture Survey: Oilseeds and Products (Washington), various issues.

Preliminary.

U.S. Department of Agriculture forecast.

Derived from oilseed data using standard conversion factors.

Change in oilseed stocks equals production less noncrush use less crushings.

Change in oil stocks equals oil production less oil consumption.

Table 19.

Major Oilseeds (Meal Equivalent): World Commodity Balance, 1981/82–87/88

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Source: U.S. Department of Agriculture, Foreign Agriculture Survey: Oilseeds and Products (Washington), various issues.

Preliminary.

U.S. Department of Agriculture forecast.

Derived from oilseed data using standard conversion factors.

Change in oilseed stocks equals production less noncrush use less crushings.

Change in meal stocks equals meal production less meal consumption.