I Market Developments and Outlook for Non-Fuel Primary Commodities
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International Monetary Fund
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English
Print Publication Date:
15 Sep 1990
Keywords:
WEFS; price; index; commodity; food; food commodity; commodity coverage of the indices; fuel commodity; primary commodity; soybean product export; natural resource; Exports; Oil prices
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Abstract

Non-fuel primary commodity prices fell in the second half of 1989, breaking the upward trend that had prevailed in the preceding two years. The decline in the Fund’s index of non-fuel commodity prices from the first half of 1989 to the second half of the year was 7 percent in terms of SDRs and 8 percent in terms of U.S. dollars.1 By contrast, petroleum prices increased during 1989, reversing the downward trend of the previous two years. The Fund’s indicative petroleum price—an average of prices for U.K. Brent light crude, Dubai medium crude, and Alaska north slope heavy crude—rose on a year-to-year basis by 38 percent in SDR terms and 33 percent in terms of dollars during the second half of 1989.

Non-fuel primary commodity prices fell in the second half of 1989, breaking the upward trend that had prevailed in the preceding two years. The decline in the Fund’s index of non-fuel commodity prices from the first half of 1989 to the second half of the year was 7 percent in terms of SDRs and 8 percent in terms of U.S. dollars.1 By contrast, petroleum prices increased during 1989, reversing the downward trend of the previous two years. The Fund’s indicative petroleum price—an average of prices for U.K. Brent light crude, Dubai medium crude, and Alaska north slope heavy crude—rose on a year-to-year basis by 38 percent in SDR terms and 33 percent in terms of dollars during the second half of 1989.

Much of this paper examines the weakening of non-fuel primary commodity prices that occurred in the second half of 1989 and explores the outlook for 1990. It also discusses the implications of commodity price developments for the earnings of exporting countries and the impact of recent developments in international cooperation on non-fuel commodity trade. Section I of the paper provides an overview of these developments, while Sections II through V provide information on specific groups of non-fuel primary commodities.2

Prices

During the 1980s, prices of most commodities were much less buoyant than in the 1970s. The Fund’s price index (in SDR terms) for 34 non-fuel primary commodities was at almost the same level in 1989 as it was in 1980; the Fund’s indicator petroleum price in 1989 was one half its level in 1980 (Chart 1).

Chart 1.
Chart 1.

Non-Fuel Primary Commodities, Petroleum, and Manufactures: Indices of Prices, First Quarter 1970–First Quarter 1990

(1980) = 100)

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

The change in pattern between the two decades was associated with a marked deceleration in inflation rates in industrial countries. The annual rate of increase in consumer prices in the seven major industrial countries declined from nearly 8 percent a year in the period 1970–79 to 5½ percent a year in the period 1980–89, with the rate of increase averaging little more than 3 percent in the second half of the 1980s.3 A similar movement was recorded in the rate of increase in the weighted GNP deflator for the seven countries, which declined from an average rate of nearly 8 percent a year during the 1970s to 4 percent a year in the 1980s.

Various indicators of economic growth in the major industrial countries also decelerated, although less markedly than the decline in measures of inflation. Over the period 1970–79 growth in real GNP in the seven major industrial countries averaged 3½ percent a year and declined to an annual average of under 3 percent in the 1980s. Growth in industrial production, which is an important determinant of the demand for most metals and agricultural raw materials, averaged about 3½ percent a year in the 1970s, falling to about 2½ percent a year in the 1980s. The decelerated rate of real economic growth was an important determinant of the weakness in real commodity prices. In 1989 the price index for non-fuel primary commodities in real terms, that is, deflated by an index of export unit values for the manufactured goods of industrial countries, was 22 percent below its 1980 level (Appendix Table 1). There was an even greater decline in the price index in real terms for non-fuel primary commodities exported by developing countries (Appendix Table 2). In real terms the petroleum price was 61 percent below the 1980 level, largely as a result of the sharp drop in petroleum prices in late 1985-early 1986 (Appendix Tables 3 and 4).

Supply factors were also important in explaining commodity price movements in the 1980s. Record agricultural crops and high capacity and production levels for metals reinforced the impact of the 1981–82 recession on prices for non-fuel commodities. Supply expansion was again important in 1984, when increases in the production of food crops, beverages, and agricultural raw materials were each on the order of 8 percent. Further large harvests followed in 1985 and 1986, leading to large carryover stocks for most agricultural commodities and contributing to the weakness in commodity prices in 1985–86, despite sustained economic growth in the industrial countries (Table 1).

Table 1.

Movements in Commodity Prices and Related Economic Indicators, 1983–89

(Annual percentage change)

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

Refers to the Fund’s world index of non-fuel primary commodities. These percentages differ from those reported in International Monetary Fund, World Economic Outlook, May 1990: A Survey by the Staff of the International Monetary Fund, World Economic and Financial Surveys (Washington, 1990), Table A29, which refer to the index of commodities exported by developing countries (given in Appendix Table 2).

Index of dollar commodity prices deflated by the index of dollar unit values of manufactured goods exports (Appendix Table 3).

Average of spot prices for U.K. Brent, Dubai, and Alaska North Slope crude petroleum, equally weighted.

Averages of percentage changes for Canada, France, Federal Republic of Germany, Italy, Japan, United Kingdom, and the United States, weighted by the average U.S. dollar value of their respective GNPs over the preceding three years.

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, for example, crop year 1980/81 under 1980. The commodity coverage of the indices of consumption and stocks is less comprehensive than the coverage of the indices of production and supply.

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

In contrast with the general pattern of commodity prices in the 1980s, prices for many non-fuel commodities increased sharply in the second half of 1987, albeit from low levels, and the upward tendency was sustained through 1988 and into early 1989 (Chart 2). Underlying this movement was a strengthening of world economic activity, which had been underestimated by most forecasters, especially during 1988. Prices of metals, in particular, were strong, as demand for most metals was repeatedly underestimated and suppliers responded cautiously to the higher prices. The upward tendency was reinforced by the effects of the 1988 drought in North America on supplies of wheat, maize, and soybeans. Consequently, by the beginning of 1989, stocks of non-fuel primary commodities (in terms of months of consumption), which had increased during the first half of the 1980s to a peak level by early 1986, had fallen to a level that was little above that at the start of 1980 (Chart 3). The buildup and subsequent decline was most marked for stocks of minerals and metals. Movements in stocks of food commodities and agricultural raw materials generally followed a similar pattern, but with less pronounced fluctuations. The pattern for beverages, however, was very different, as the relatively low stocks in the mid-1980s were followed by stock buildups in 1987–89. These movements in stocks of beverages reflected the impact that weather and long-term cyclical movements in capacity had on production.

Chart 2.
Chart 2.

Groups of Non-Fuel Primary Commodities: Indices of Prices in SDRs, January 1980–March 1990

(1980 = 100)

Source: Commodities Division, IMF Research Department.
Chart 3.
Chart 3.

Groups of Non-Fuel Primary Commodities: Indices of Prices in Real Terms and of Beginning Stocks Measured in Months of Consumption, 1980–90

(1980 = 100)

Source: Commodities Division, IMF Research Department.

Although the Fund index of non-fuel primary commodity prices was on average 4½ percent higher in 1989 than in 1988, the average half-yearly index in terms of SDRs fell by 7 percent from the first to the second half of the year.4 The decline in the second half was largely attributable to sharp reductions in the prices of most metals, especially copper, aluminum, and nickel, as well as in the prices of coffee, cocoa, vegetable oils, and protein meals.

The overall index of prices of minerals and metals fell by 20 percent from December 1988 to December 1989. Underlying the decline was a slackening of industrial demand from durable goods manufacturers, particularly in Japan and the United States, and more specifically, an accumulation of stocks of unsold automobiles. Although industrial production in the major industrial countries increased by nearly 4 percent in 1989, it slowed in comparison with 1988, which recorded an exceptionally high growth rate of over 6 percent. The slowdown in demand combined with the expansion of metal production, which resulted from the coming on stream of new metal production capacity as well as the resolution of major supply disruptions, led to a buildup of metal stocks on commodity exchanges in 1989 from the unusually low levels of 1988.

Prices of beverages peaked in the first quarter of 1989, then fell sharply in each of the remaining quarters of the year. Steep declines in coffee prices were associated with the July suspension of the 1983 International Coffee Agreement’s quota provisions and subsequent strong competition among major exporters to off-load accumulated stocks. Cocoa prices also declined sharply throughout most of 1989, owing mainly to continued growth in the world cocoa surplus and an inability of members of the International Cocoa Organization to agree on measures to support cocoa prices.

After rising by 23 percent in 1988, mainly because of the drought in North America, the price index for food commodities rose by an additional 8 percent in 1989, reflecting higher prices for cereals, meat, and sugar, which more than offset lower prices for vegetable oils and protein meals. In 1989 as a whole, average cereal prices were sharply higher because of supply losses from the previous year’s drought in the United States. Nevertheless, prices weakened in the second half of the year, when growing conditions improved, and there seemed to be prospects for a recovery of production in 1989/90 in major producing countries, especially for wheat production in Canada, the European Community (EC), and the United States. In contrast to the rise in cereal prices, the index of prices of vegetable oils and protein meals declined by 5 percent in 1989. The price declines, which were more pronounced during the second half of the year, mainly reflected factors affecting supply, including: a recovery of soybean production in the United States from the drought-reduced level of the previous year, stepped-up soybean and soybean product exports from Brazil’s bumper crop during the third quarter of the year, and record palm oil production and exports from Indonesia and Malaysia. Also contributing to downward pressure on prices was the absence of large purchases by India, normally a major importer of vegetable oils, which had experienced a marked recovery in its domestic oilseed production.

The decline in non-fuel commodity prices during 1989 was associated with a slight recovery in stocks; stocks nevertheless remained at low levels compared with the mid-1980s. Stocks of minerals and metals, after declining by a cumulative 38 percent between the end of 1982 and the beginning of 1989, rose by 20 percent during 1989. The earlier decline was attributable to strong growth in consumption and, because of a long period of low prices, reductions in production capacity. Stocks of beverages, after increasing by a cumulative 48 percent between the end of 1986 and the beginning of 1989, rose an additional 6 percent in 1989 to the highest level in over a decade. As a result of several years of good harvest, world stocks of food commodities—including cereals, soybeans, palm oil, coconut oil, groundnut oil, and sugar—increased by a cumulative 41 percent between the end of 1983 and the beginning of 1986. These aggregate stocks of food commodities declined sharply in both 1987 and 1988 and remained low in 1989 as a consequence mainly of strong demand growth and the combined effects of the 1988 drought and the acreage-reduction programs under the 1985 farm bill on U.S. production of cereals and soybeans.

Export Earnings

In 1989, global receipts from exports of non-fuel primary commodities registered a substantial increase for the second consecutive year (Table 2). Estimated aggregate earnings from exports of the 19 leading non-fuel commodities increased by 12 percent in 1988 and by an additional 11 percent in 1989. In 1989 large decreases in earnings from vegetable oils, protein meals, and beverages were more than offset by large increases in estimated earnings from cereals, sugar, agricultural raw materials, and metals. More specifically, the largest increases are estimated for maize (21 percent), rice (32 percent), hardwood (31 percent), cotton (31 percent), copper (38 percent), iron ore (28 percent), and tin (33 percent). The largest declines in earnings are estimated for soybeans (13 percent) and coffee (13 percent).

Table 2.

Export Earnings from Nineteen Major Non-Fuel Primary Commodities, 1983–89

(In billions of SDRs)

article image
Sources: United Nations Conference on Trade and Development, UNCTAD Commodity Yearbook (New York, 1989); United Nations Food and Agriculture Organization, 1987 FAO Trade Yearbook (Rome); and Commodities Division, IMF Research Department.

Covers 24 countries as defined in International Monetary Fund, International Financial Statistics.

Includes all countries other than industrial countries.

Over two thirds of the estimated increase in global export receipts from the 19 leading non-fuel commodities accrued to developing, rather than to industrial, countries. Developing country earnings from these exports rose by an estimated 14 percent, compared with a 7 percent increase for industrial countries. Exports of cotton, copper, hardwood, and sugar together accounted for 80 percent of the growth in developing country earnings. The rise in total earnings in 1989 is attributable to an estimated 5 percent expansion in the aggregate export volume of the 19 commodities, for industrial and developing countries combined, and an estimated 6 percent increase in unit values (Table 3).

Table 3.

Indices of Aggregate Earnings, Volumes, and Unit Values for Nineteen Major Non-Fuel Primary Commodities, 1983–89

(1980 = 100; Values in terms of SDRs)

article image
Source: Commodities Division, IMF Research Department. Basic data from sources given in Table 2. Indices for individual commodities aggregated in accordance with earnings share in total for 19 commodities in 1980 for world, industrial countries, and developing countries.

Covers 24 countries as defined in International Monetary Fund, International Financial Statistics.

Includes all countries other than industrial countries.

Increases of 10 percent in 1988 and 12 percent in 1989 were recorded for the total earnings from all merchandise exports of the 53 Fund members whose non-fuel primary commodities accounted for at least half of their earnings (Table 4). The increased earnings for these countries were mainly attributable to rising prices in 1988 and to higher average prices and a strong expansion in volumes in 1989. The increased earnings for the subgroup of 13 countries exporting predominantly minerals and metals (not including fuel) were entirely attributable to price increases in 1988, as the aggregate volume of exports fell by 3 percent. In 1989, however, export volume expanded by 5 percent, while unit values increased by 9 percent. Export earnings of the subgroup of 40 countries with predominantly agricultural exports rose by 9 percent in 1988 and 11 percent in 1989; volume increases were about 5 percent in each year, while unit values increased by 3 percent in 1988 and 6 percent in 1989. Export earnings of developing countries exporting mainly manufactured goods (17 countries) increased at a more rapid rate—by 16 percent in both 1988 and 1989. These increases are mainly attributable to higher export volumes in 1988 and higher unit values in 1989, although volume also showed strong growth in the latter year.

Table 4.

Developing Countries: Annual Changes in Export Earnings by Volume and Unit Value, 1983–89

(Annual percentage change)

article image
Source: Current Studies Division, IMF Research Department.

The number of countries included in each group is as follows: fuel exporters, 18; non-fuel primary product exporters, 53 (of which, agricultural exporters, 40; mineral exporters, 13); exporters of manufactures, 15; service and remittance countries, 33; diversified export base, 13. For a listing of the countries in each group, see International Monetary Fund, World Economic Outlook, May 1990: A Survey by the Staff of the International Monetary Fund, World Economic and Financial Surveys (Washington, 1990), Statistical Appendix, pp. 118–19.

International Cooperation

In the current Uruguay Round of multilateral trade negotiations being conducted under the General Agreement on Tariffs and Trade (GATT), issues related to commodity markets are covered by the groups discussing agriculture (temperate zone products and sugar), tropical products (e.g., beverages), and natural resource-based products. Agriculture has been subject to a great deal of attention and is considered one of the most difficult and important areas in the Round. There has been some progress in the discussions on tropical products with an initial round of tariff cuts implemented in 1989 and proposals for further larger cuts put forward. Progress has been slower with regard to natural resource-based products.

Agricultural proposals submitted at the end of 1989 attempted to achieve “substantial progressive reductions in agricultural support and protection” as agreed at the April 1989 mid-term review. However, the proposals reflect many of the deep-seated differences among participants that have been evident since the beginning of the Uruguay Round. The U.S. and Cairns Group5 proposals—presented in October and December 1989, respectively—have continued to press for a major liberalization in the sector. The U.S. proposal seeks to eliminate export subsidies in five years and convert within 10 years all nontariff barriers—such as quotas, variable levies, and voluntary export restraints—into tariffs that would be reduced to low levels bound by international agreement. The most trade-distorting internal support measures, such as administered pricing policies and income support policies linked to production or marketing, would be phased out. Other support policies would be classified into those permitted within agreed limits and those to which no restrictions would apply. The Cairns Group proposal is similar but embodies greater flexibility in the timing of tariff reductions, in the classification of internal support policies, and in the application of special and differential treatment for developing countries.

The European Community, in its proposal submitted in late December 1989, has reiterated its belief that special trade rules should continue to apply to agriculture. It proposes that all forms of trade-distorting support and protection measures be calculated in terms of “support measurement units” (SMUs). Under its terms the SMUs would be reduced from their historically high 1986 levels to an agreed level for a five-year period, after which time a new level would be negotiated. Certain production subsidies and most non-tariff barriers would be converted into tariffs. A country would be permitted to reduce subsidies and raise previously bound tariffs on some products, as long as the “rebalancing” occurred within the country’s agreed limit on SMUs. Under the proposal these tariffs could also be adjusted for exceptional movements in world prices and exchange rates. For food security and other nontrade reasons, certain countries, including Japan, generally want agriculture to remain protected by quantitative restrictions.

Trade liberalization initiatives have also been undertaken at the regional and bilateral levels. After several years of negotiation an agreement was reached on the creation of a single internal market in the European Community by the end of 1992. While agricultural programs in member states already have been merged through the Common Agricultural Policy, the agricultural sector is still affected by a significant number of nontariff barriers that restrict the movement of goods based on differences in product and health standards. Reduction or elimination of internal barriers to trade and the harmonization of food standards and health regulations and standards could have implications for both intra-community and international commodity trade. The U.S. and Canadian governments agreed, after a meeting of the U.S.-Canada Trade Commission in late 1989, to accelerate to early 1990 the scheduled elimination of import tariffs on 400 products traded between them, including a number of primary commodities. In February 1990, Mexico and the United States signed a new two-year agreement to eliminate quotas on over half of the textile items manufactured in Mexico and to increase quotas on most of the remaining items by one fourth.

In regard to individual commodity markets, the 1987 International Natural Rubber Agreement entered into force in December 1988 and purchases for the buffer stock began in early 1990. In contrast, the quota provisions of the International Coffee Agreement were suspended in July 1989, when members failed to extend the economic clauses of the Agreement. The main sources of disagreement were allocation of export quotas between different types of coffee and sales to non-members at substantial discounts. The International Coffee Agreement was, however, extended without economic clauses until the end of the 1990/91 coffee year.

Members of the International Cocoa Organization (ICCO) failed to agree on measures to support prices in the face of the increasingly abundant supply of cocoa in the world market. In London in March 1990, the ICCO Council did, however, approve a two-year extension of the International Cocoa Agreement without economic provisions. Under this agreement buffer stock operations remain suspended, but the existing 250,000-ton buffer stock would not be liquidated, other than to cover expenses.

In 1989, the International Monetary Fund continued to provide compensatory financing of export shortfalls under its new compensatory and contingency financing facility (CCFF), which replaced the previous compensatory financing facility (CFF) in August 1988. The CCFF retains the essential features of its predecessor and also provides contingency financing in conjunction with Fund-supported adjustment programs, when adverse exogenous shocks cause key variables in adjustment programs to deviate from their projected paths. Key variables subject to contingency financing may include export prices, import prices, tourist receipts, workers’ remittances, and interest rates. In 1989, drawings by four developing countries under the compensatory financing provisions of the CCFF totaled SDR 808 million. The first two Fund standby arrangements to incorporate a contingency element under the CCFF were also approved in 1989; no drawings have been made to date.

The European Community continued to make disbursements under its STABEX scheme. STABEX transfers under the Lomé 3 Convention to the African, Caribbean, and Pacific (ACP) countries amounted to about SDR 360 million in 1989, compared with about SDR 330 million in 1988. STABEX arrangements changed considerably following the conclusion of the Lomé 4 Convention in December 1989. While it remains a commodity-specific compensatory financing scheme for disbursements for calendar year 1990 onward, STABEX transfers will be outright grants rather than a mixture of grants and loans, as at present. The funds will be disbursed, however, only after the Commission and country authorities formally agree on how the financial assistance will be utilized. There are also a number of technical changes bearing on the entitlement to draw. One important change concerns the time period used to calculate the references for the shortfall; the period has now been extended from four years to six years preceding the year of application, with the highest and the lowest values out of the six years excluded. The list of products has been extended to cover all primary cocoa products and all essential oils, plus a variety of marine products. Finally, the statistical basis for the calculations has been changed from data on ACP exports to the European Community to data on the Community’s imports from the ACP countries.

Outlook

Price projections are based on the usual assumptions of constant real effective exchange rates (at the levels prevailing in March 1990) and no major changes in existing government policies. An average petroleum price of $17.60 a barrel is assumed for 1990, which would remain unchanged in real terms during 1991 and over the medium term (1992–95). Output in the major industrial countries is projected to grow by about 2¾ percent in 1990, compared to 4½ percent and 3½ percent in 1988 and 1989, respectively; output growth in the period 1991–95 is projected at approximately 3 percent a year on average. In SDR terms the prices of exports of manufactured goods are projected to continue to increase at modest rates only, from 2½ percent to 3 percent a year over the period 1991–95. On this basis, and taking into consideration available information on the supply and demand for specific commodities, the world index of prices of non-fuel primary commodities in 1990 is projected to be 11 percent lower in terms of SDRs and 9 percent lower in terms of dollars. The index is projected to bottom out in 1991 with some recovery in beverage prices expected to be offset by a further decline in prices of minerals and metals.

Over the medium term, a small increase of about 1 percent in terms of SDRs is projected for the world price index of non-fuel primary commodities in 1992, followed by increases of about 4 percent a year in the period 1993–95. These increases, which are related to the expectation of reasonably strong economic growth in the major industrial countries, would reverse the declining trend in prices of minerals and metals as well as agricultural raw materials. Prices of beverages are also expected to recover over the medium term as the sustained period of low prices is expected to restrain production. The increases in the index, if realized, would result in small increases in real commodity prices of about 1 percent in 1993–95, in contrast to the decreases projected for the 1990–92 period. Prices of all individual commodities will, of course, remain subject to possible periods of considerable variability because of weather-related or other unexpected production shortfalls or fluctuations in demand.

The lower market prices for non-fuel primary commodities recorded in the second half of 1989 and projected for 1990–91 are expected to reduce export earnings for countries heavily dependent on these exports. As a result the balance of payments difficulties of a number of developing countries are likely to be aggravated in the near term.

The lower market prices for non-fuel commodities projected for 1990–91 could also point to lower consumer price inflation in industrial countries. Movements in commodity prices, taking petroleum and non-fuel primary commodity prices into account, may be a helpful leading indicator of changes in inflation in industrial countries.6 Not only are primary commodities used in the production of goods and services but their prices also tend to respond to expected variations in supply and demand more rapidly in commodity markets than in markets for manufactured goods. The index of consumer prices in the major industrial countries rose by over 4 percent in 1989 compared with little more than 3 percent in 1988. The increase in 1989 would appear to be in line with the movement in commodity prices. In the first six months of 1989 the higher prices for non-fuel commodities were accompanied by higher petroleum prices. In the second half of the year the weakening of non-fuel commodity prices was largely matched by the strengthening of petroleum prices. A turning point in commodity prices may occur in 1990, however, because petroleum prices are not expected to offset fully the decrease forecast in non-fuel commodity prices.

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Cover Primary Commodities
Primary Commodities
Market Developments and Outlook
ISBN:
9781557751461
ISSN:
0258-7440
Publication Date:
15 Sep 1990
Publisher:
International Monetary Fund
DOI:
https://doi.org/10.5089/9781557751461.083
Pages:
43
  • Chart 1.
    View in gallery
    Chart 1.

    Non-Fuel Primary Commodities, Petroleum, and Manufactures: Indices of Prices, First Quarter 1970–First Quarter 1990

    (1980) = 100)

  • Chart 2.
    View in gallery
    Chart 2.

    Groups of Non-Fuel Primary Commodities: Indices of Prices in SDRs, January 1980–March 1990

    (1980 = 100)

  • Chart 3.
    View in gallery
    Chart 3.

    Groups of Non-Fuel Primary Commodities: Indices of Prices in Real Terms and of Beginning Stocks Measured in Months of Consumption, 1980–90

    (1980 = 100)

Chart 1.

Non-Fuel Primary Commodities, Petroleum, and Manufactures: Indices of Prices, First Quarter 1970–First Quarter 1990

(1980) = 100)
Chart 2.

Groups of Non-Fuel Primary Commodities: Indices of Prices in SDRs, January 1980–March 1990

(1980 = 100)
Chart 3.

Groups of Non-Fuel Primary Commodities: Indices of Prices in Real Terms and of Beginning Stocks Measured in Months of Consumption, 1980–90

(1980 = 100)