I Commodity Market Developments and Prospects
- International Monetary Fund
- Published Date:
- January 1986
Commodity Price Movements
For the purposes of providing an overview of the movements in commodity prices, the past quarter century is divided into three periods: prior to 1972, 1972-80, and 1981-85. The same periods are used for the discussion of prices of other goods entering international trade (Chart 1).
Chart 1.Commodity Prices and Unit Values of Petroleum and Manufactures, 1960-85.
In the 1960s and through the beginning of the 1970s commodity prices were relatively stable. There was no significant trend either upward or downward in the IMF overall commodity price index measured in U.S. dollars, and the average annual change in the index was only 3 percent (Table 1).1 Petroleum prices, as measured by the dollar unit values of oil exports of the major fuel exporting countries, were also relatively stable in this period, apart from a 24 percent increase from a low base in 1971. The index of dollar unit values of manufactured exports of industrial countries was also stable throughout the 1960s; annual changes averaged less than 2 percent. In 1970, however, this index increased by 6 percent and in 1971 by 5 percent. The real prices of commodities, measured by the IMF index of commodity prices deflated by the index of unit values of manufactured exports, was relatively stable in the period 1960-70, but fell by 7 percent in 1971.
|Nominal Prices in U.S. Dollars||Real Commodities Prices4|
|Export Unit Values|
From 1972 through 1980, a period of comparatively high inflation in most countries, commodity prices moved sharply upwards in an irregular fashion. While commodity prices increased considerably in terms of all major currencies and in terms of SDRs, the increase was particularly marked in terms of U.S. dollars on account of the depreciation of the dollar (Table 2). The rate of increase in the dollar price index was 12 percent per annum and the average annual change in the index was 17 percent. The largest annual increase, in excess of 60 percent, occurred in 1973, a year of very high growth in economic activity in industrial countries, low growth in agricultural production, increasing inflation, and sharply rising petroleum prices. Commodity prices increased every year in this period, except 1975. In 1975 there was a 16 percent decline in the dollar index of commodity prices at the time of recession in world economic activity, and in 1978 the increase was only 1 percent, mainly because of the fall in coffee and cocoa prices following the record high prices for these two commodities in the previous year. The rate of increase in dollar unit values for petroleum exports was 35 percent per annum in this period, with the increases concentrated in a 361 percent rise over the two-year period 1973-74 and a 139 percent increase over the two-year period 1979-80. The unit value of manufactured exports in dollar terms also increased every year from 1972 to 1980; the rate of increase was 12 percent per annum. Because of the higher rate of increase for commodity prices than for manufactured exports, real commodity prices on average were marginally higher in this period than in 1960-71, but they were also more variable (Chart 1).
|Year||U.S. Dollar||Pound Sterling||Deutsche Mark||French Franc||Japanese Yen||SDR||SDR/U.S. Dollar Exchange Rate|
|(Indices: 1980 = 100)||(Rate)|
The persistent upward trend in dollar prices of commodities that characterized much of the 1970s ended in 1980. The index of dollar prices of commodities fell by more than 20 percent over the two-year recession period 1981-82. Although the index increased in 1983 and 1984, in 1984 it was still 13 percent below its 1980 level, and in 1985 it fell back to below its 1982 level. Following the large oil price increases in 1979-80, dollar oil unit values increased by 10 percent in 1981, but fell each year thereafter to reach a level, by the end of 1985, which was 15 percent below its 1980 level. The dollar unit values of manufactured exports fell by 5 percent in 1981 and declined each year thereafter, although at a slower rate. By the end of 1985 the index of unit values of manufactured exports was 13 percent below its 1980 level. The pattern of movement in prices measured in U.S. dollars was similar for most individual commodities and commodity groups, apart from beverages (Chart 2 and Table 3).2
Chart 2.Prices for Groups of Commodities, 1960-85
|Year||Overall||Food||Beverages||Agricultural Raw Materials||Metals|
Real commodity prices fell considerably in 1981 and 1982 as the decline in commodity prices exceeded the decline in unit values of manufactured exports (Chart 1 and Table 1). Much of this decline in real commodity prices was reversed in 1983 and 1984, however, when commodity prices increased, while the prices of manufactured exports continued to decline. Nevertheless, real commodity prices declined by 12.7 percent in 1985 as commodity prices declined substantially while the index of the unit values of manufactured exports increased by 1 percent. Real commodity prices in 1981-85 averaged 7 percent below the level of 1980 and 16 percent below the average for 1960-80.
The persistent weakness in the U.S. dollar prices during the 1980s was accompanied by an appreciation of the U.S. dollar vis-à-vis other currencies.3 Because of this appreciation, commodity prices in the first half of 1984 were at record high levels. Prices in terms of SDRs, however, fell substantially in the second half of 1984 and in 1985; by the final quarter of 1985 the index in terms of SDRs was more than 10 percent below the level of 1980. The difference in the behavior of commodity prices in SDRs and in U.S. dollars is explained by the 35 percent appreciation of the U.S. dollar vis-à-vis the SDR over the period from 1980 to the first quarter of 1985, in contrast with the depreciation of the 1970s. From the first to the fourth quarter of 1985 the U.S. dollar depreciated by 10.4 percent vis-à-vis the SDR.
Chart 3.Commodity Prices in Terms of SDRs and Five Major Currencies, 1980-85
The trends in commodity prices in the 1980s, measured in terms of three of the other major currencies, show little change from those of the 1970s (Table 3). From 1980 until the second quarter of 1985, commodity prices, measured in terms of French francs, deutsche mark, and pounds sterling, all moved persistently upward reflecting the depreciation of these currencies vis-à-vis the U.S. dollar and, to a lesser extent, the Japanese yen (Chart 3). Since 1980 the pattern of movement of commodity prices measured in terms of Japanese yen has been similar to that for prices measured in terms of U.S. dollars.4
Factors Underlying Commodity Price Movements
In addition to the movements in exchange rates outlined above, which determine the differences in price movements when measured in different currencies, the factors shown in various studies to have the greatest impact on current commodity prices are the rates of world inflation, the level of economic activity in the major markets for primary commodities, and the supply of the commodities concerned.
Inflation in Major Markets
Econometric studies have shown a positive relationship between commodity prices and inflation. In one study, changes in domestic wholesale prices of the industrial countries were found to have a significantly positive relationship to commodity prices with an elasticity of about one.5 In a follow-up to this study, an effort was made to distinguish between the influence of inflation in exporting countries and inflation in importing countries.6 The results showed that the prices of agricultural raw materials and metals are affected to a greater extent by inflation in exporting countries, while food and beverage prices are affected more by inflation in importing countries.
There has been a marked deceleration in the rates of inflation in industrial countries in the 1980s (Table 4). The rate of increase in consumer prices in the seven major industrial countries declined from 12.0 percent in 1980 to 3.8 percent in 1985. A similar movement occurred in the gross national product (GNP) deflator for the seven countries, which declined from 9.3 percent in 1980 to 3.6 percent in 1985. These measures of inflation, when converted to U.S. dollar terms (that is, taking account of the depreciation of the U.S. dollar in the 1970s and the appreciation of the U.S. dollar in the 1980s) show a much greater deceleration. For the GNP deflator, measured in terms of dollars, the average annual increase in the period 1981-85 was 1.1 percent, whereas it averaged 10.1 percent in the period 1972-80.
|Nominal Prices in U.S. Dollars||Domestic Prices in Seven Industrial Countries|
|Export unit values||Consumer price index||GNP deflator||Real Commodity Prices1|
|Year||Commodities||Petroleum||Manufactures||Unadjusted||In U.S. dollars||Unadjusted||In U.S. dollars|
The decline in the rates of increase in domestic prices in major industrial countries has been accompanied, beginning in 1981, by decreases in the prices of manufactured exports and, beginning in 1982, by decreases in the prices of petroleum. The reduction in the prices of manufactured exports has meant that real commodity prices have not decreased to the same extent as commodity prices measured in nominal U.S. dollar terms. This was the case particularly in 1983 and 1984, when commodity price increases were accompanied by continued declines in the prices of manufactured exports.
Economic Activity in Major Markets
In a recent study, industrial production in the seven major industrial countries (used as a proxy for economic activity in consuming countries) was found to be the most important variable explaining short-run changes in real commodity prices, yielding an estimated elasticity of about two.7
In the 1980s various measures of the level of economic activity in major industrial economies have registered a deceleration compared with the 1970s. Growth in real GNP in the seven major industrial countries over the period 1980-85 averaged only 2.1 percent per annum compared with an average of 3.4 percent in the 1970s (Table 5). Growth in industrial production in the same countries in the 1980s has averaged 2.0 percent per annum compared with 3.4 percent in the 1970s. The growth in gross domestic investment, which is an important determinant of demand for certain metals and agricultural raw materials, averaged 1.9 percent per annum in these countries in the period 1980-85, compared with 3.5 percent per annum in the 1970s. Furthermore, the lower rates of growth in the 1980s have been most pronounced in European countries, which account for more than half of total world imports of primary commodities.
|Commodity Prices||Economic Activity in Seven Industrial Countries||Supply of Commodities1|
|Year||Nominal||Real||Real GNP||Industrial production||Domestic fixed investment||Index of production||Index of stocks2||Index of supply3|
|(In U.S. dollars)|
There was expansion of economic activity in the early 1970s, recession in 1974-75, expansion in the late 1970s, recession in 1980-82, and modest recovery in 1983-85. The recession of the early 1980s was more prolonged than the recession of the mid-1970s. In addition, the expansion in the recovery periods was progressively weaker. Growth in real GNP in the seven major industrial countries averaged 5.0 percent in 1971-73, 4.2 percent in 1976-79, and 3.4 percent in 1983-85. This deceleration in the rate of growth of economic activity has contributed to the weakness of commodity prices in the 1980s compared with the preceding decade, particularly with reference to commodities used as industrial raw materials. It helps explain why in the 1980s there has been a decrease in the index of “real” commodity prices of 2.7 percent per annum, whereas in the 1970s there was an decrease of 0.5 percent per annum.
Supply of Commodities
The year-to-year movements in commodity prices, particularly in agricultural commodities, are greatly influenced by supply factors. An index of commodity supply, defined as annual production plus stocks at the beginning of the year (crop year in the case of agricultural commodities), has been constructed using the same weights for individual commodities as those used in the price index. The relatively small increase in the supply of commodities in 1979, coupled with 3.3 percent growth in real GNP in major industrial countries and relatively strong inflationary pressure, was associated with a 21.3 percent increase in the dollar commodity price index and a 6.0 percent increase in real commodity prices (Table 5). In 1980, although in the major industrial countries growth of real GNP fell to 1.1 percent and industrial production remained at the 1979 level, the absence of growth in commodity supply and the inflationary pressure in the wake of the large 1979-80 oil price increase were associated with an 6.2 percent increase in dollar commodity prices. Real commodity prices in 1980, however, fell by 3.9 percent because the increase in the prices of manufactured exports exceeded the increase in the prices of commodities by a considerable margin.
The situation with reference to supply of commodities changed considerably in 1981 and 1982. In 1981 the index of commodity production increased by 3.1 percent. This increase, combined with an increase in beginning of year stocks, resulted in a 3.2 percent increase in the index of commodity supply. The growth in real GNP in 1981, while higher than in 1980, was low, inflationary pressure was much reduced, and the dollar appreciated by 10.4 percent in terms of SDRs. These factors were associated with a decline in 1981 of 10.6 percent in the index of dollar prices of commodities. Because the prices of manufactured exports also declined, the decline in real commodity prices was limited to 6.0 percent. In 1982, at the trough of the 1981-82 recession in the major industrial countries, real GNP fell by 0.6 percent and industrial production fell by 4 percent. The dollar appreciated by 6.8 percent in terms of SDRs, to the extent that the GNP deflator in terms of dollars fell. Despite a 0.8 percent decrease in production, a large carryover of stocks from 1981 led to a 1.5 percent increase in the index of commodity supply. Under these conditions, in 1982 commodity prices fell by 10.6 percent in nominal U.S. dollar terms and by 8.3 percent in real terms.
A somewhat different pattern prevailed in 1983 and through the first half of 1984. A low increase in supply in 1982 coupled with a decrease in commodity production in 1983 resulted in an increase in supply of only 1.5 percent at a time of considerable recovery in real GNP. In the major industrial countries, the movement in real GNP changed from a decrease of 0.6 percent in 1982 to an increase of 2.7 percent in 1983 and of 4.9 percent in 1984. Industrial production changed from a decrease of 4 percent in 1982 to an increase of 3.8 percent in 1983 and 8.5 percent in 1984. Consequently, dollar commodity prices increased by 6.5 percent in 1983.
A large increase in commodity production in 1984 of 7.2 percent, the highest recorded in the period 1960-85, soon put downward pressure on commodity prices at a time when the U.S. dollar was still appreciating. The increase in dollar commodity prices in 1984 was only 1.6 percent and occurred in the first half of the year. The high level of commodity production in 1984 provided considerable carryover of stocks with the result that, although 1985 production increased by only 1.6 percent, commodity supply was 2.9 percent higher than the ample level of 1984. With growth in real GNP declining to 2.7 percent in 1985, and in spite of the depreciation of the U.S. dollar beginning in the second quarter of 1985, dollar commodity prices in 1985 averaged 12.4 percent below the level of 1984.
Outlook for Commodity Prices in 1986
The sharp rise in coffee prices on account of adverse weather in Brazil (see Section III) is the main reason why an increase in the overall index of commodity prices is projected for 1986. Apart from coffee, sizable price increases, albeit from low levels, are projected for only a few commodities—sugar, tropical timber, hides, and aluminum. The prices of other commodities are projected either to continue to decline in 1986 or to increase by only modest amounts.
The major factor limiting commodity price increases in 1986 will continue to be the large overhang in supplies, particularly for food commodities. For food and other agricultural commodities, this supply situation is likely to persist throughout the year, unless there are large unforeseen reductions in the 1986/87 harvests in one or more of the major producing areas owing to adverse weather or other short-term factors. No major change is envisaged in the supply situation for most of the nonagricultural commodities in 1986. The influence of these supply factors on commodity prices has been reinforced by a reduction in inflationary expectations as a result of the achievement of lower rates of inflation in many countries in 1985 and in early 1986 and by the sharp decline in the price of petroleum in the early months of 1986. During 1986 the influence of these factors on commodity prices is likely to outweigh the effect on prices of continued growth in world industrial production, even with the impetus given to production by lower energy costs. Taking into account a projected increase in the unit values of manufactured exports, the real prices of most individual commodities are projected to decline substantially in 1986.
Total earnings, in terms of U.S. dollars, from the exports of 17 leading non-fuel primary commodities, which grew by 3.3 percent in 1983 and 4.2 percent in 1984, are estimated to have fallen by 12.2 percent in 1985 (Table 6). In 1984 and 1985 the changes in export earnings were more attributable to changes in export unit values than to changes in volumes exported, whereas in 1983 changes in volumes were more important than changes in unit values. An index of export unit values for the 17 commodities, constructed using 1980 value weights, shows an increase of 1.7 percent in 1983 and an increase of 3.3 percent in 1984 and a decrease of 11.4 percent in 1985 (Table 7). An index of volume of exports for the same commodities using the same weights shows an increase of 1.7 percent in 1983 and of 1.0 percent in 1984 and a decrease of 1.0 percent in 1985. Despite increases in 1983 and 1984, total export earnings from these commodities in 1984 were 11.2 percent below the level of earnings in 1980; the total in 1985 was 22.1 percent below the 1980 level (Table 6).
|Total 17 commodities||121,270||115,220||99,990||103,330||107,680||94,530|
|Vegetable oils and protein meals|
|Agricultural raw materials|
|Earnings Share in Total for 17 Commodities in 1980 (in percent)||Calendar Years|
|Earnings (in U.S. dollars)||100.0||100.0||95.0||82.4||85.2||88.8||77.9|
|Unit values (in U.S. dollars)||100.0||94.3||81.3||82.7||85.4||75.7|
Over the period 1980-85, industrial countries accounted for 47 percent of total export earnings from the 17 major primary commodities and dominated the exports of wheat, maize, soybeans, soybean oil, and aluminum; developing countries accounted for 44 percent of total earnings and dominated the exports of rice, sugar, palm oil, coffee, tea, cocoa, cotton, natural rubber, copper, and tin (Table 8). Other countries that are not members of the Fund accounted for 9 percent of total earnings over this period.
|Total||Industrial countries1||Developing countries||Other countries2||Industrial countries||Developing countries||Other countries|
|(In millions of U.S. dollars)||(In percent)|
|Total 17 commodities||107,000||50,720||47,250||9,030||47||44||9|
|Vegetable oils and protein meals|
|Agricultural raw materials|
The decline in export earnings from major commodities from 1980 to 1985 was more pronounced for industrial countries (29 percent) than for other countries (16 percent). In addition, whereas the earnings from exports of the 17 commodities for industrial countries increased by only 0.9 percent in 1983 and by 1.5 percent in 1984, for developing countries these earnings increased by 6.5 percent in 1983 and by 9.1 percent in 1984. The difference in the pattern of movement in earnings in 1983 and 1984 for the two groups of countries is largely accounted for by the earnings obtained from the beverages, rubber, and palm oil—commodities which are not exported by the industrial countries. Market prices for these commodities increased considerably in 1983 and 1984. In 1985 earnings of industrial countries are estimated to have fallen more than earnings of developing countries—17.9 percent compared with 9.2 percent.
The increases in export earnings from commodities in 1983 and 1984 were important factors in the increases in total export earnings of non-fuel developing countries in those years. After declining by 5.2 percent in 1982, total export earnings of the non-fuel developing countries increased by 3.5 percent in 1983 and 12.2 percent in 1984.8 The increases in 1983 and 1984 occurred in spite of a unit value decline of 4.4 percent in 1983 and only a marginal increase of 0.5 percent in 1984, as export volumes rose by 8.3 percent in 1983 and by 11.7 percent in 1984. The recovery in economic activity of industrial countries and widespread adjustment efforts by non-fuel developing countries in 1983 and 1984 contributed significantly to the growth in the volume of exports of non-fuel developing countries in these two years.9 Export earnings of non-fuel developing countries are estimated at the same level in 1985 as in 1984 with increases in earnings from manufactures offsetting the decreases in earnings from commodities and overall unit value decreases are offset by volume increases.
Reflecting the increases in total export earnings of non-oil developing countries beginning in 1983, fewer individual countries have experienced shortfalls from the medium-term trends in their export earnings. As a result, annual purchases under the Fund’s compensatory financing facility (CFF), after averaging SDR 2.7 billion during 1982-83 in the aftermath of the 1981-82 recession, fell to SDR 0.8 billion in 1984 and SDR 0.9 billion in 1985. Outstanding CFF purchases, which reached a peak of SDR 7.8 billion in mid-1984, are expected to fall sharply when the large purchases made in 1982-83 become due for repurchase beginning in 1986.