I Commodity Market Developments and Prospects
- International Monetary Fund
- Published Date:
- January 1988
Commodity prices experienced a strong recovery during 1987, after the steep decline of 1984–86. By December 1987 the Fund’s index of non-oil commodity prices was about 15 percent above the level of a year earlier in terms of SDRs, and some 30 percent higher in terms of the depreciating U.S. dollar. All commodity groups shared in the recovery, but the greatest strength came in agricultural raw materials and metals. The surge in prices of industrial inputs can be attributed to the pick-up in economic activity in industrial countries under conditions of relatively depleted levels of stocks of these commodities, following several years of production cutbacks owing to low prices. The recovery in food prices was less marked than that of industrial inputs, in part because of historically high levels of inventories at the beginning of the year. The recovery in prices of tropical beverages, which are particularly important in the exports of many developing countries, was both relatively weak and significantly delayed, occurring only in the second half of the year.
Reflecting these various price developments, the export earnings of developing countries have begun to increase, though they have not benefited as much from the upsurge in commodity prices as have those of industrial countries. In real terms (i.e., relative to export prices of manufactures) prices of commodities exported by developing countries in December 1987 remained 20 percent below the average level of prices during 1980–84.
In the final quarter of 1987, following the global stock market crisis in mid-October, commodity prices, particularly those of industrial inputs, exhibited increased volatility and a weaker trend largely because of increased uncertainty about the sustainability of economic growth. In the early months of 1988, commodity prices held fairly steady, perhaps reflecting a better balance between demand and supply, including an expected moderation in the marked stock depletion that had continued for much of 1987. Assuming that moderate growth continues in industrial countries, and that no major supply disruptions occur, the level of real commodity prices is projected to stabilize at about the current level and to remain roughly unchanged through the medium term. If this projection is borne out by actual developments, the recent recovery of commodity prices is unlikely to be reflected in any significant increase in underlying inflation rates.
A number of adjustments in the international trading environment in which commodity prices are determined occurred in 1987, and even more significant changes are expected in the years ahead. Some of the adjustments in the past year affected only bilateral trading arrangements, while others, such as certain initiatives undertaken in the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) negotiations and those relating to some international commodity agreements were of a multilateral nature.
The remainder of this section provides an overview of these developments, while Sections II through V deal with individual commodities. Section II covers food commodities, Section III beverages, Section IV agricultural raw materials, and Section V minerals and metals. The study is based on information through February 1988.
Commodity Prices in 1987
At the outset of 1987 the world index of prices of non-fuel primary commodities stood at its lowest level in nominal terms since the mid-1970s (Table 1). In terms of SDRs, the index was about 30 percent below the last cyclical peak in 1984 and about 20 percent below the last cyclical trough in 1982.1 Commodity prices in real terms, that is, relative to prices of manufactures, were some 35 percent below the level of 1984 and about 25 percent below their 1982 trough.
|Nominal Commodity Prices||Real Commodity Prices1|
|Years||In SDRs||In U.S. dollars||In pounds sterling||In deutsche mark||In French francs||In Japanese yen|
By the end of 1987, however, commodity prices had increased substantially (Chart 1). The increase in terms of SDRs from the fourth quarter of 1986 to the fourth quarter of 1987 was 15 percent. The increase in terms of dollars was more substantial (nearly 30 percent) owing to depreciation of the U.S. dollar. Despite this increase, the SDR price index in the final quarter of 1987 remained some 8 percent below the trough reached in 1982, even though the dollar index was 11 percent higher. Real commodity prices also increased from the fourth quarter of 1986 to the fourth quarter of 1987—by 13 percent—providing some relief to the countries most dependent on exports of non-fuel primary commodities. Nevertheless, at the end of 1987 real commodity prices were still over 15 percent lower than at the trough of the 1981–82 recession.
Chart 1.Non-Fuel Commodity Prices, 1980–87
The recovery of prices in 1987 was linked primarily to two factors: a strengthening of world economic activity through the year and lower-than-expected supplies of commodities (Table 2). High demand, especially in the United States, Japan, and the newly industrializing economies of Asia, led to a reduction of stocks of metals and, to a lesser degree, stocks of agricultural raw materials. Stocks of metals were not rebuilt quickly because much of the excess capacity that had overhung the market for metals earlier in the decade had been closed, and producers were reluctant to reactivate this capacity in view of the excess supply that has characterized these markets for several years. In addition, labor disputes in some mining industries increased uncertainty regarding supplies. The markets for agricultural raw materials were influenced by both general and specific factors. An important general factor was the stimulation of demand for several raw materials (such as cotton, jute, and natural rubber) as a result of the recovery in world oil prices and the consequent rise in prices of petroleum-based synthetic products. Among the special factors were a weather-damaged cotton crop in 1986/87 in the United States, new demand for products made from natural rubber, implementation of conservation practices restricting exports of hardwood logs, and a surge in housing starts in Japan increasing demand for a number of building materials, notably timber.
|In U.S. dollars||5.8||-10.1||-10.4||6.2||2.2||-13.1||-3.8||8.6|
|Unit value of petroleum exports|
|In U.S. dollars||63.5||9.9||-4.3||-11.9||-2.1||-5.0||-49.8||28.6|
|Unit value of manufactured exports|
|In U.S. dollars||10.4||-3.9||-2.1||-2.8||-3.0||1.1||18.0||12.0|
|Domestic prices in seven industrial countries|
|Consumer price index|
|In U.S. dollars||12.2||2.6||-0.1||1.7||0.3||2.5||16.7||10.7|
|In U.S. dollars||9.6||1.4||-0.3||1.8||-0.2||2.2||18.0||10.6|
|Economic activity in seven industrial countries|
|Domestic fixed investment||-2.2||-0.2||-5.2||3.9||9.6||4.5||2.8||3.3|
|World consumption of commodities3|
|Index of consumption||-1.7||1.8||2.1||1.5||3.4||0.7||5.1||1.2|
|World supply of commodities3|
|Index of production||0.1||3.1||-0.8||-0.6||7.9||1.5||-0.9||2.3|
|Index of supply4||-0.4||3.3||1.3||1.3||5.1||2.6||1.4||0.2|
|Index of closing stocks||6.2||15.4||10.9||-10.2||10.2||13.7||-6.0||-6.9|
The recovery in prices in 1987 was mirrored in an inverse movement of stocks of most commodities (Chart 2).2 Stocks of all commodities, measured in terms of months of consumption at the beginning of 1988, were considerably lower than the levels at the beginning of 1987. Stocks of agricultural raw materials and metals fell particularly sharply during 1987. Stocks of food commodities, however, although reduced, were still at relatively high levels at the beginning of 1988, and stocks of beverages actually increased during 1987, following the drawdown associated with supply scarcities in 1985–86.
Chart 2.Commodity Prices in Real Terms and Beginning Stocks Measured in Months of Consumption, 1980–881
1 Weights for commodity price indices are based on 1979–81 average export earnings; includes primary commodities for which stock data are available.
Partly reflecting the changes in stocks, the largest price increases during 1987 were recorded for metals and agricultural raw materials. Exceptionally large increases were recorded from the first quarter of 1987 to the first quarter of 1988 for copper (62 percent in terms of SDRs), nickel (170 percent), hardwood logs (27 percent), aluminum (61 percent), and fine wool (80 percent). There was a 41 percent increase in the index of prices for the minerals and metals group of commodities and a 21 percent increase in the index for the agricultural raw materials group (Table 3). By contrast, the index for the group of food commodities increased by only 12 percent, while the index for beverages fell by 5 percent.
|In SDRs||In U.S. dollars|
|Years||Food||Beverages||Agricultural raw materials||Minerals and metals||Food||Beverages||Agricultural raw materials||Minerals and metals|
Reflecting the mix of commodity exports, the index of commodity prices weighted by industrial countries’ export shares recorded a much greater increase from the first quarter of 1987 to the first quarter of 1988 (21 percent) than did the corresponding index of commodity prices for developing countries (14 percent) (Table 4). Similarly, the year-to-year increase for industrial countries’ index in 1987 was 3 percent, while the 1987 index level of the developing countries was 6 percent below the 1986 level. Much of the difference in the behavior of the two price series is attributable to developments relating to the prices of beverages, in particular coffee, which has a large weight in the index for developing countries but a negligible weight in the index for industrial countries.
|Nominal Commodity Prices1||Real Commodity Prices1,2|
|In SDRs||In U.S. dollars|
|Years||Industrial countries||Developing countries||Industrial countries||Developing countries||Industrial countries||Developing countries|
Commodity Price Changes and Aggregate Inflation
There has been some concern that the recovery of commodity prices during 1987 could be a harbinger of a general rise in inflation. In view of this risk, and in response to proposals by the United States and the United Kingdom at the 1987 Annual Meetings of the Fund and the World Bank, the Fund staff has analyzed the link between commodity prices and general trends in consumer prices in industrial countries. Although preliminary, the results confirm that commodity prices can sometimes serve as a leading indicator of general inflation trends.
Chart 3 shows the relationship between developments in the price index of a broad basket of commodities—including oil and gold as well as the commodities included in the Fund’s traditional index of non-oil commodity prices—and movements in consumer prices in the major industrial countries. Following a marked decline in the commodity price index in the first half of 1986, which reflected a sharp drop in oil prices and excess supply conditions in most other commodity markets, consumer price increases decelerated to only 1 percent toward the end of 1986 as compared with price increases of 3–4 percent during the previous two years. The recovery in commodity prices began in the middle of 1986; about six months later consumer prices in industrial countries also picked up, accelerating to some 3 percent by the end of 1987. By comparison, the average rate of increase in the GNP deflator, which is often regarded as indicative of underlying inflation trends, has remained comparatively stable at some 3 percent a year in the major countries as a group since 1985. On this basis, the firming of consumer price increases during 1987 appears to suggest that the underlying inflation trend has simply reasserted itself following a period of exceptionally low inflation attributable to weak commodity prices.
Chart 3.Commodity Price Changes and Aggregate Inflation Trends in the Major Industrial Countries, 1980–871
(Percent a year)2
1 Composite inflation is an average of percentage changes for individual countries weighted by the average U.S. dollar value of their respective GNPs over the preceding three years. Commodity price index is a world export-weighted basket of commodities that includes oil and gold as well as the commodities included in the Fund’s published index of non-oil commodity prices, converted into the average exchange rate of the major industrial countries where the weights are the same as those used for the composite inflation index.
2 Centered three-month moving average of percentage changes over the same month of preceding year.
Whether the recent upward trend in consumer price inflation continues will depend partly on the behavior of commodity prices. It will, however, also depend importantly on conditions in labor markets as well as on the behavior of exchange rates and monetary policy.
Export Earnings from Commodities in 1987
Despite the rise in commodity prices, earnings from exports of commodities remained depressed in 1987, and developing countries fared less well than industrial countries. In terms of SDRs, estimated aggregate earnings from exports of 19 leading commodities declined by 3 percent compared with 1986 (Table 5). When measured in terms of U.S. dollars, however, there was an increase of 7 percent. In 1987, estimated earnings from coffee exports fell sharply—by 36 percent in terms of SDRs—as did earnings from maize exports—by 35 percent. Large increases, however, are estimated for export earnings from cotton (49 percent), aluminum (27 percent), and copper (21 percent). Industrial countries benefited from the increase in commodity prices to a much greater extent than developing countries because the product mix of their exports gives greater weight to commodities for which the price increases were larger. To the extent that the rise in commodity prices during 1987 is reflected in export earnings with a lag, some additional strength in export earnings from commodities is expected to materialize in 1988, with the developing countries benefiting relatively more, reflecting the delayed increase in coffee prices.
|(In billions of SDRs)||(In billions of U.S. dollars)|
|Total 19 commodities||114||103||87||84||117||105||102||109|
|U.S.S.R. and Eastern European countries||5||4||4||4||5||4||5||6|
|Vegetable oils and protein meals|
|Agricultural raw materials|
During much of the 1980s, commodity export volumes have tended to expand significantly faster in developing countries than in the industrial countries (Table 6). The depressed prices of commodities have nevertheless been of greater proportionate importance to developing countries because primary commodities account for a greater share of total exports in these countries. Similarly, important differences exist among the developing countries themselves. For the 73 developing countries that export mainly non-fuel primary commodities,3 aggregate export earnings in terms of SDRs in 1987 increased by only 1 percent (Table 7). For nine developing countries that export mainly manufactured goods, however, aggregate export earnings increased by 12 percent in 1987. Aggregate earnings of the non-fuel primary commodity exporters in 1987 were only 5 percent above the level of 1980, with an increase in volume of exports of over 30 percent outweighing a sharp fall of over 20 percent in unit values. By contrast, aggregate earnings of the exporters of manufactures in 1987 were nearly 85 percent above the level of 1980; the increase was mainly accounted for by a corresponding rise in export volumes, although unit values for manufactured exports have been less sluggish than those for primary product exports. For the 20 countries that export mainly fuel commodities, an increase of 10 percent in aggregate earnings in SDRs is estimated for 1987, largely as a result of a modest price increase for petroleum. This increase, however, followed a sharp decline of over 40 percent in aggregate earnings for these countries in 1986.
|In terms of SDRs|
|In terms of U.S. dollars|
|In terms of SDRs|
|In terms of U.S. dollars|
|In real terms|
|In terms of SDRs|
|In terms of U.S. dollars|
|In real terms|
|In terms of SDRs||30.9||8.5||-5.9||-1.6||11.3||-3.2||-19.6||8.5|
|Primary product exporters||21.7||4.1||-3.6||6.7||14.6||-3.4||-12.3||1.0|
|Exporters of manufactures||21.6||20.5||6.0||8.1||19.1||2.6||-2.5||12.0|
|Service and remittance countries||23.1||12.1||1.0||2.5||11.6||2.4||-5.1||3.2|
|In terms of U.S. dollars||31.8||-1.7||-11.9||-4.7||6.8||-4.1||-7.1||19.6|
|Primary product exporters||22.6||-5.7||-9.7||3.3||9.9||-4.3||1.3||11.4|
|Exporters of manufactures||22.5||9.2||-0.7||4.6||14.2||1.6||12.6||23.5|
|Service and remittance countries||24.0||1.6||-5.4||-0.7||7.0||1.4||9.7||13.8|
|Primary product exporters||6.7||1.4||0.1||5.7||8.1||5.5||2.9||4.4|
|Exporters of manufactures||10.4||8.8||2.0||10.1||14.0||4.2||12.1||14.0|
|Service and remittance countries||3.5||2.5||0.9||7.2||9.3||7.6||9.0||0.4|
|In terms of SDRs||36.5||15.3||2.0||-4.5||4.0||-4.0||-23.8||1.1|
|Primary product exporters||14.1||2.7||-3.7||0.9||6.1||-8.5||-14.8||-3.2|
|Exporters of manufactures||10.2||10.7||3.9||-1.9||4.4||-1.5||-13.1||-1.7|
|Service and remittance countries||19.0||9.4||0.1||-4.4||2.1||-4.9||-12.9||2.8|
|In terms of U.S. dollars||37.5||4.5||-4.5||-7.5||-0.3||-4.9||-11.9||11.5|
|Primary product exporters||14.9||-7.0||-9.8||-2.3||1.7||-9.3||-1.5||6.7|
|Exporters of manufactures||11.0||0.3||-2.7||-5.0||0.1||-2.4||0.4||8.3|
|Service and remittance countries||19.8||-0.9||-6.3||-7.4||-2.1||-5.8||0.7||13.3|
Commodity Trade Negotiations and International Cooperation in 1987
During 1987 there were some important modifications in the international environment in which commodity trade occurs. Many of the modifications were the result of changes in bilateral arrangements between countries. Those changes that involved multilateral action have for the most part not yet affected commodity trade, but are expected to have an impact in the years ahead. They include the multilateral trade negotiations within the context of the Uruguay Round of the GATT and negotiations regarding some international commodity agreements. A final factor affecting commodity trade in 1987 was the increase in compensatory financing of export earnings shortfalls of individual countries by multilateral agencies.
The Uruguay Round of GATT negotiations began in early 1987. The present round, the eighth in a series of GATT negotiations held since 1947, involves two elements that are of particular relevance to international trade in commodities. First, in response to the global excess stocks of some agricultural commodities, particularly food crops, which have arisen in part because of the distortionary effects of agricultural policies in the major industrial countries, GATT negotiations to liberalize national policies and agricultural trade are being held for the first time. Second, also for the first time, many developing countries are participating actively in the GATT negotiations, including the negotiations covering trade in tropical and natural resource-based products, manufactures, and services as well as agricultural trade. Through observance of the most-favored-nation principle, a cornerstone of the GATT, these negotiations offer the prospect of wider access to national commodity markets by all commodity exporting countries. As of the early months of 1988, the first phase of the negotiations, which was devoted to adopting procedural modalities and to considering country proposals for the multi-faceted negotiations, was drawing to a close. The negotiations themselves are expected to extend over the next 2-3 years. There is, however, wide sentiment among the negotiators that, in view of the persistent threat of protectionism, the negotiations should progress and, if possible, should attempt to yield an “early harvest” of agreements on some measures to liberalize trade, including possibly agricultural trade, before the end of 1988.
As in recent years, international commodity agreements with market intervention mechanisms played a relatively minor role in international commodity trade in 1987. Nevertheless, after a series of lengthy negotiations starting in mid-1985, countries invited to a United Nations Conference on Natural Rubber finally reached accord on the text of a new agreement in March 1987. The new agreement, which is expected to become operative in late 1988, is described in Section IV of this paper. Important decisions were also taken during 1987 by the International Coffee Council and the International Cocoa Council that were designed to make operations under the 1983 International Coffee Agreement and the 1986 Cocoa Agreement more effective. Export quotas were reintroduced for coffee exporting countries in October, and provisions were agreed to enable buffer stock purchases of cocoa in April–May 1987 and again in January–February 1988. These developments are discussed in Section III.
Although only small changes were made in 1987 in the various multilateral schemes that exist to compensate countries for export earnings shortfalls, a significant increase in such financing in 1987 had the effect of stabilizing many developing countries’ export earnings, thereby maintaining their capacity to import and buoying world trade. Drawings under the Fund’s compensatory financing facility (CFF) rose from SDR 0.6 billion in 1986 to SDR 1.2 billion in 1987, reflecting the drop in earnings associated with the downturn in commodity prices that occurred in 1986. In addition to use of the CFF, many primary producing countries have benefited from access to the European Community’s (EC) STABEX and COMPEX facilities. STABEX transfers (which are made only to the African, Caribbean, and Pacific (ACP) countries associated with the EC under the Lomé Conventions), increased sharply from SDR 112 million in 1986 to SDR 202 million in 1987. In early 1987, the EC adopted the COMPEX system, which is designed to compensate the least developed non-ACP countries for shortfalls in earnings from agricultural commodities. COMPEX transfers in 1987, on account of export earnings shortfalls in 1986, amounted to SDR 5.6 million.
Outlook for Commodity Prices in 1988 and for the Medium Term
Commodity price forecasting is always difficult, but the risks become particularly acute in the wake of major turning points in prices, such as the one that occurred in 1987. Forecasting in the current context requires basic judgments to be made about the nature and causes of the previous sharp decline in prices and of the recent recovery before a view can be taken on the outlook. In particular, the occurrence of a recession-like decline in commodity prices in 1984–86 during an upswing of the business cycle raised concerns that the decline might be more closely related to long-term structural factors (such as “downsizing” and other materials-saving practices in automobile production) that reduce the demand for primary commodities, rather than to short-term reversible factors (such as changes in the level of economic activity in industrial countries or commodity supply shocks). Recent analysis suggests that the 1984–86 decline was largely cyclical and not the beginning of a structural decline in prices.4 The fairly strong recovery in prices that began in 1987, including its moderation in recent months, is consistent with this interpretation.
The projections are predicated on the usual assumptions of fixed real effective exchange rates (at the levels prevailing during March 1988), constant interest rates (at the levels of March 1988), and no changes in government policies; it is also assumed that world oil prices would average $16.50 per barrel in 1988 and remain unchanged in real terms over the medium term; and that economic growth in the industrial countries will slow somewhat in 1988 from its 1987 level, but will return to a range of 2¾ percent to 3.0 percent per year (i.e., about the rate of increase expected in productive potential) in 1989–92. On this basis, an increase of about 5 percent in the world index of commodity prices in SDR terms is projected in the baseline projections, compared with a decline of over 1 percent in 1987.5 In 1989, and over the medium term, prices are forecast to increase by 2.5-4.0 percent a year, reflecting the recovery in economic activity and some medium-term supply response, through reductions in productive capacity in response to the low levels of prices in 1985–86. These projections in nominal terms correspond to roughly a 1 percent rise in commodity prices in real terms in 1988 and to constant real prices during 1989–92. The changes forecast for the developing country index of commodity prices are quite similar.
Projected movements in the baseline projections for the four major component groups of the non-oil primary commodities show somewhat greater variability. Prices of industrial inputs, including agricultural raw materials and metals, are determined in markets where demand factors tend to play an important role in short-term movements. These prices are projected to rise at a slower pace during 1988 than during 1987, and over the medium term to grow at 3–4 percent a year in dollar terms during 1989–92, which is equivalent to unchanged prices in real terms. Food prices, after a brief recovery in 1988 related in part to weather in South Asia, are expected to remain weak in real terms through the medium term, largely reflecting the spillover effects of excess supplies originating in the protected domestic sectors of industrial countries. Prices of tropical beverages are expected to continue the recovery begun in mid-1987 through 1988, partly reflecting a new export quota agreement that will limit traded world supplies of coffee.
Movements in the overall commodity price and indices for groups of commodities disguise the much greater variability in prices for individual commodities. In the near and medium term a considerable number of sharp price increases are likely, although such increases will probably be sustained only for short periods and are likely to be followed by sharp declines. The lower the level of stocks, the more vulnerable the individual commodity market will be to disruptions caused by weather and inadequate supply, and, in fewer cases, to unexpectedly strong demand. Price prospects for individual commodities are examined in the following sections.
The baseline projections are, of course, based on assumptions that may not be fully consistent with one another. In particular, the assumptions imply that the existing large external imbalances among the major countries will be smoothly financed through the necessary shifts in portfolio preferences without any corresponding changes in exchange rates, interest rates, or changes in policies among countries. Since such an outcome may not materialize, and given that several of the foreseeable adjustment mechanisms involve some slowdown in economic activity in industrial countries, the balance of risk in the commodity price forecast must be seen to be primarily on the downside. The downside risks would probably be greater, however, if adjustments are left entirely to private markets because such adjustments might well also involve higher interest rates, particularly in the United States. Such a shift would reduce residual demand for commodity stocks and would be likely to lead to a more vulnerable stock situation, such as the one that existed for some commodities in early 1987. Moreover, any scenario involving a more rapid adjustment of external imbalances would require changes in the composition of demand among the major countries that could well involve a net reduction in world demand for raw material imports, resulting in a weakening of commodity prices. Finally, if oil prices weakened significantly from those assumed, substitution on the demand side toward petroleum-based synthetic products and away from natural primary commodities could be expected, resulting in a further weakening of commodity prices.