IV Agricultural Raw Materials

International Monetary Fund
Published Date:
September 1990
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After a rapid recovery in 1987, the overall price index for agricultural raw materials fluctuated around a fairly flat trend in 1988 and 1989 (Table 7 and Chart 6), indicating a movement toward broad balance in the markets for these commodities. World consumption of agricultural raw materials, which grew at an average annual rate of 5 percent in the years 1985–86, rose by an average 2 percent a year thereafter, while the index of production decelerated from 3 percent in 1988 to 1 percent in 1989. The overall price index for agricultural raw materials is expected to register virtually no change in 1990. This forecast is premised on continued moderate growth in world consumption of these commodities, the absence of significant supply disruptions, and the continued long-term impact of productivity increases and the development of synthetic substitutes.

Table 7.Movements in Prices of Agricultural Raw Materials and Related Economic Indicators, 1983–89(Annual percentage change)
Prices of agricultural raw materials1
In SDRs5.311.6–14.0–
In U.S. dollars1.97.2–15.01.633.69.4–2.1
Petroleum prices3
In SDRs–6.63.8–3.5–55.716.8–23.527.3
In U.S. dollars–9.6–0.4–4.5–48.828.7–20.421.4
Unit value of manufactured exports
In SDRs0.
In U.S. dollars–2.9––0.3
Domestic prices in major industrial countries4
Consumer price index4.
GNP deflator4.
Economic activity in major industrial countries4
Real GNP2.
Industrial production3.
Domestic fixed investment3.
Index of world consumption of agricultural raw materials52.
World supply of agricultural raw materials5
Index of production1.48.80.0–
Index of supply62.
Index of closing stocks–2.639.17.8–20.1–4.6–1.9–8.5
Sources: Commodities Division and Current Studies Division, IMF Research Department.

Chart 6.Agricultural Raw Materials: Indices of Prices in SDRs, January 1980–March 1990

(1980 = 100)

Source: Commodities Division, IMF Research Department.

Although prices eased in the latter half of 1989, the overall index rose by 3 percent in calendar year 1989. This was largely attributable to the strength of cotton prices, although the prices of hides, sisal, and tobacco were also substantially higher than in 1988 (Appendix Table 9). Average prices for logs in 1989 were almost level with 1988 prices, while natural rubber and wool prices were substantially lower.


In contrast to the two previous crop years (August to July), world cotton production during 1988/89 marginally exceeded world consumption, leading stocks to stabilize at about 40 percent of consumption. Toward the end of 1988/89, cotton prices began to rise, registering an average increase of 26 percent in the price for medium-staple cotton during 1989. The recovery of cotton prices reflected market expectations that in 1989/90 world consumption would again exceed production.

World cotton production in 1988/89, at 18.4 million tons, was 4 percent higher than in 1987/88 and slightly below the peak level reached in 1984/85. Production increases in India, the United States, and the U.S.S.R. accounted for most of this expansion. Area planted to cotton rose significantly, particularly in China, India, and the United States. The average yield declined by about 4 percent, however, mainly reflecting insect damage, particularly in the Southern Hemisphere, and inadequate moisture in many countries. Declines in U.S. and Chinese yields were particularly notable and, as a consequence, China became an important net importer of cotton.

World demand for cotton apparel and related goods strengthened in 1989, in line with the growth in income in the industrial and developing countries. Despite tighter administration of Multifibre Arrangement quotas, mill consumption rose significantly in China, India, and Pakistan. This reflected the significant increase in investments in textile production facilities in these countries, as well as in Indonesia, Hong Kong, and Thailand.

The cotton market has been tighter in 1989/90, with a continuing rise in cotton consumption accompanied by a 4 percent decline in cotton production. Total area planted to cotton is estimated to have declined mainly because of a doubling of the acreage reduction requirement in the United States. Moreover, average yield is expected to decline because of heavy rains in Argentina and Australia, freezing temperatures in the U.S.S.R., and inadequate moisture in certain other producing countries. As a result of these developments, closing stocks of cotton are expected to fall to the equivalent of about 36 percent of total consumption in 1989/90, and prices are forecast to rise somewhat in 1990. The volume of global cotton exports is likely to remain at about the 1988/89 level. Exports of fine cotton are, however, forecast to rise sharply, mainly in response to increased demand for cotton apparel (denim and sportswear) in Western Europe.


The price of hardwood logs began to weaken in the second half of 1989, although the average price for the year increased slightly above that for 1988. The volume of global exports in 1989 remained at about the previous year’s level.7 These developments partly reflected weak demand in Japan for logs for plywood manufacturing in the face of large log inventories. Stocks of logs in Japan amounted to about 30 percent of log consumption in 1989, compared with about 20–24 percent in the three preceding years. In contrast, the prices of sawnwood (not included in the agricultural raw materials index),8 which had increased moderately in 1988, rose sharply throughout 1989, posting an average increase of 44 percent during the year. Among the factors contributing to this development were the ban on exports of sawnwood by the Philippines; advance buying prompted by Indonesian proposals, adopted in the final quarter of the year, to increase export duties on sawnwood; and the continuing popularity of housing renovation in lieu of new construction in some major consuming countries. Global sawnwood exports increased an estimated 3 percent in 1989, compared with 5 percent in the previous year.

Construction of new housing in major markets remained weak. Housing starts in Japan, the main source of demand for Southeast Asian logs, leveled off in 1988 and declined by about 3 percent in 1989. In the United States, housing starts, which declined by 8 percent in 1988, declined by a further 6 percent in 1989 in the wake of higher mortgage interest rates. In contrast to 1988, when roughly half of the decline in U.S. housing starts was accounted for by more wood-intensive single-family units, three quarters of the decline in housing starts in 1989 was accounted for by such dwellings. Demand for hardwood in the European Community in 1989 was sluggish; log imports declined by about 3 percent, while sawnwood imports remained stagnant.

In 1990, hardwood log prices are expected to decline moderately because of ample stocks. Unless there is an easing of interest rates, a prospect made less likely by recent increases in Japanese rates and increased demand for capital in Eastern Europe, housing starts are not likely to recover in the major economies during the year. In the sawnwood market, however, supply restrictions and renovation activities are expected to boost prices further.

Natural Rubber

Natural rubber prices rose by 14 percent in 1988 before falling by 15 percent in 1989 to a level that was virtually the same as in 1987. A continuing increase in natural rubber production and a deceleration in economic activity in the main rubber consuming countries were the main contributing factors to the fall in prices in 1989.

On the basis of preliminary data, world natural rubber production increased an estimated 1½ percent in 1989 to 5.1 million tons. Malaysian production fell by 12 percent, partly in response to the fall in natural rubber prices. The decline, of some 200,000 tons, was more than offset by substantial increases in output in Thailand (17 percent), India (12 percent), China (6 percent), and Indonesia (2 percent). Natural rubber production in African countries also increased, although output in Sri Lanka declined by 11 percent.

The demand for natural rubber, which is derived from the demand for tires and other rubber manufactures, is very closely related to the level of industrial production in industrial countries and is also influenced by prices for synthetic rubber. Growth of industrial production in the seven major industrial countries slowed from a high rate of over 6 percent in 1988 to a rate of under 4 percent in 1989. In the United States, the indices for production of tires, non-tire rubber goods, and bus and truck production all declined in the final quarter of 1989, while a decline in car sales in Western Europe started in December 1989. Preliminary data compiled by the International Rubber Study Group indicate that natural rubber consumption nevertheless increased by 3½ percent and exceeded production. Expectations of the slowdown in economic activity, however, may have reduced the demand for stocks and contributed to the estimated 180,000 ton drawdown in stocks as well as to the weakening of prices.

The 1979 International Rubber Agreement (INRA), which was in force from October 1980 to October 1987, was succeeded by the 1987 INRA. The new agreement entered into force provisionally on December 29, 1988, and definitively on April 3, 1989. In April 1989, the International Natural Rubber Council revised the reference price upward by 8 percent to 218.1 Malaysian/Singapore cents per kilogram. The INRA buffer stock manager is reported to have intervened in the market to support prices in January 1990 and again in March. In late March the Council also made the first call-up for contributions to the INRA buffer stock account, and in April the International Monetary Fund decided that Fund members may use the Fund’s buffer stock facility to finance their contributions to this account.

Demand for natural rubber is not expected to be buoyant in the short run, because of an expected deceleration in the rate of growth of real GDP in the major industrial countries. Production in Thailand, and to a lesser extent in Indonesia, is expected to increase as new plantings come into production, but these increases may be partly offset by declining production in Malaysia. Natural rubber prices are expected to remain close to the “may buy” level of the 1987 INRA price range, and continued purchases by the INRA buffer stock manager are a distinct possibility.

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