Chapter

II Food Commodities

Author(s):
International Monetary Fund
Published Date:
January 1988
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The prices of most food commodities bottomed out in the second half of 1986 and the first half of 1987 and then increased by modest amounts. This turnaround followed a three-year period beginning mid-1984 during which the group price index fell by about 40 percent (Chart 4). The upturn, however, was small in comparison with the increases in the prices of many other commodities during the second half of 1987. The change in the direction of the movement in prices of food commodities was largely a result of changes in supply. Production of food commodities is expected to show a modest decrease in crop year 1987/88, in contrast to an exceptionally large increase in 1984/85 and the substantial increases of the two following years (Table 8). The supply situation has also been altered somewhat on account of a very large increase in 1986/87 in consumption of food commodities, in particular of cereals, principally because of greater use of these commodities in animal feed. The group index of closing stocks of food commodities is expected to fall by over 10 percent in the crop year 1987/88, although stocks of most food commodities are expected to remain at high levels. With reference to individual food commodities, the prices of both cereals and vegetable oils and protein meals in 1986–87 were far below the levels of 1983–84, while the sugar price has been at a low level since 1981. The reasons for these price patterns are discussed in this section.

Chart 4.Prices of Food Commodities, 1980–87

(In SDRs; indices: 1980=100)
Table 8.Movements in the Prices of Food Commodities and Related Economic Indicators, 1980–87(Annual percentage changes)
19801981198219831984198519861987
Prices of food commodities1
In SDRs7.96.7-9.412.53.3-14.3-24.0-7.3
In U.S. dollars8.6-3.2-15.28.7-0.7-15.5-12.22.5
Real2-1.70.9-13.412.02.1-15.9-25.7-8.9
Domestic prices in seven industrial countries
Consumer price index
In SDRs11.413.26.75.04.63.51.00.4
In U.S. dollars12.22.6-0.11.70.32.516.710.7
GNP deflator
In SDRs8.811.96.55.14.03.12.10.3
In U.S. dollars9.61.4-0.31.8-0.22.218.010.6
Real GNP in seven industrial countries1.21.7-0.42.85.23.22.83.1
World consumption of food commodities3
Index of consumption-2.43.74.00.92.20.77.11.3
World supply of food commodities3
Index Of production-0.14.34.9-3.78.02.02.9-1.4
Index of supply4-0.84.25.4-1.14.74.15.6-1.0
Index of closing stocks2.610.317.0-16.621.424.91.1-11.3
Sources: Commodities Division and Current Studies Division, IMF Research Department.

Cereals

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

Table 9.Prices of Cereals, 1979–88
YearsIndex

of Prices

of Cereals1
Wheat2Maize3Rice4
(1980 = 100)(In SDRs a ton)
197990.712591259
1980100.013397333
1981114.4148111409
1982101.814598266
1983113.4147127259
1984115.1149133246
1985100.4134111214
198672.39875179
198761.98759177
1986I86.911793203
II79.010390174
III62.48562174
IV60.98857167
1987I60.48955162
II62.38861164
III60.68558178
IV64.18861204
1988I68.59465220
(1980 = 100)(In U.S. dollars a ton)
197990.1160116334
1980100.0173126434
1981103.8175131483
198286.5160108293
198393.1157136277
198490.8152136252
198578.1136112217
198664.911588210
198761.511475230
1986I75.1132104229
II70.5119104202
III57.710375209
IV56.410668201
1987I58.511269205
II62.011478213
III59.510873228
IV66.111881274
1988I72.012888301
Source: Commodities Division, IMF Research Department.
Table 10.Cereals; World Supply and Utilization, 1960/61–87/88
Crop

Years
Area

Harvested
YieldProductionUtilization1Closing Stocks2Stocks/

Utilization

Ratio3
(In millions of hectares)(In tons a hectare)(In millions of tons)(In percent)
1960/616471.3184683219924
1961/626421.2680683317221
1962/636471.3486786517420
1963/646531.3387087017520
1964/656631.3992492017919
1965/666601.4092195514215
1966/676601.521,00698016917
1967/686731.541,0381,01718919
1968/696781.591,0791,04722221
1969/706801.601,0871,10220719
1970/716711.641,1031,14416514
1971/726801.761,1971,17918316
1972/736701.731,1611,20114312
1973/746981.821,2731,26614912
1974/757001.741,2181,22314112
1975/767171.741,2471,23615012
1976/777191.901,3631,30920416
1977/787171.871,3371,33820215
1978/797172.051,4661,43623216
1979/807132.001,4281,45121014
1980/817242.001,4471,46119613
1981/827342.041,4981,46422916
1982/837172.161,5481,50527218
1983/847082.101,4851,55320413
1984/857092.321,6451,59225616
1985/867142.331,6651,57534622
1986/877102.361,6791,64138523
1987/8846882.321,6001,64833720
Source: U.S. Department of Agriculture, World Grain Situation and Outlook, December 1987 and earlier issues.

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

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

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

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

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

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

Wheat

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

Table 11.Wheat: World Commodity Balance, 1981/82–87/88(In millions of tons, unless otherwise indicated)
July/June Crop Years
1981/821982/831983/841984/851985/861986/871987/881
Production450477489512499529501
China60688188869087
European Community58656483727272
India36384345444746
United States76756671665757
U.S.S.R.81847769789281
Other countries139147158156153171158
Utilization444462482496487519521
China73819195929999
United States23253031293333
U.S.S.R.10210193919210296
Other countries246255268279274285293
Closing stocks87102109125137147127
United States32413839525035
Other countries55617186859792
Stocks/utilization ratio (in percent)20222325292824
Source: U.S. Department of Agriculture, Foreign Agriculture Circular: World Grain Situation and Outlook (Washington), various issues.

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

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

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

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

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

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

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

Table 12.Wheat: Export Earnings, 1984–87
1984198519861987119841985198619871
(Values in SDRs)(Values in U.S. dollars)
Earnings (in billions)17.815.111.110.618.215.313.013.7
Industrial countries15.712.910.19.716.113.111.912.5
Developing countries1.51.50.60.51.51.60.70.7
U.S.S.R. and Eastern European countries0.60.70.40.40.60.70.50.5
Volumes (in millions of tons)116.4105.395.7102.9116.4105.395.7102.9
Industrial countries101.988.586.492.6101.988.586.492.6
Australia10.615.816.213.610.615.816.213.6
Canada21.617.416.416.721.617.416.416.7
France15.819.015.413.515.819.015.413.5
United States43.626.126.437.243.626.126.437.2
Other10.310.212.011.610.310.212.011.6
Developing countries10.812.05.45.710.812.05.45.7
Argentina7.49.74.14.37.49.74.14.3
Other3.42.31.31.43.42.31.31.4
U.S.S.R. and Eastern European countries3.74.83.94.63.74.83.94.6
Unit values (a ton)153143116104157145136134
Industrial countries154145117104158147137135
Developing countries13912810492143130122119
U.S.S.R. and Eastern European countries15314010394157142121122
Market prices (a ton)21491349887152136115113
Sources: UN Food and Agriculture Organization, 1986 FAO Trade Yearbook (Rome) for exports; Commodities Division, IMF Research Department for prices.

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

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

Maize

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

Table 13.Maize: World Commodity Balance, 1981/82–87/88(In millions of tons, unless otherwise indicated)
October/September Crop Years
1981/821982/831983/841984/851985/861986/871987/881
Production439440347459480474446
China59606873646978
United States206209106195225210182
Other countries174171173191191195186
Utilization413419414437418450463
China60636868586777
United States127138122131133150153
Other countries226218224238227233233
Closing stocks851063961123147130
United States64902642103124110
Others21161319202320
Stocks/utilization ratio (in percent)2125914293328
Source: U.S. Department of Agriculture, Foreign Agriculture Circular: World Grain Situation and Outlook (Washington).

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

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

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

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

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

Table 14.Maize: Export Earnings, 1984–87
198419851986198719841985198619871
(Values in SDRs)(Values in U.S. dollars)
Earnings (in billions)10.08.65.83.810.38.86.84.9
Industrial countries8.36.43.72.88.56.54.43.7
Developing countries1.62.12.00.91.62.12.31.1
U.S.S.R. and Eastern European countries0.10.10.10.10.20.20.10.1
Volumes (in millions of tons)68.869.757.557.868.869.757.557.8
Industrial countries56.750.434.542.156.750.434.542.1
United States49.144.027.133.349.144.027.133.3
Other countries7.66.47.46.87.66.47.46.8
Developing countries11.418.321.015.011.418.322.215.0
U.S.S.R. and Eastern European countries0.71.00.80.70.71.00.80.7
Unit values (a ton)1451231016614912511885
Industrial countries1461271076715012912687
Developing countries138113906014111510577
U.S.S.R. and Eastern European countries19617513693201178159120
Market prices (a ton)213311175581361128876
Sources: UN Food and Agriculture Organization, 1986 FAO Trade Yearbook (Rome) for exports; Commodities Division, IMF Research Department for prices.

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

Rice

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

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

Table 15.Rice: World Commodity Balance, 1981/82–1987/88(In millions of tons)
Crop Years1
1981/821982/831983/841984/851985/861986/871987/882
Production (unmilled basis)413420454469470465442
China144161169178169172175
India80719088969072
Indonesia33343538393939
Bangladesh21212222232322
Thailand18172020201815
United States8756666
Other countries109109113117117117113
Production (milled basis)281286309319320317302
Utilization (milled basis)282290309314316319309
China101112117124117120121
India54495857626052
Indonesia22242525262727
Bangladesh14151515151615
Other countries91909493969694
Closing stocks (milled basis)21171722262417
India5367995
Indonesia2223322
United States2212221
Others121081012119
Stocks/utilization ratio (in percent)7667876
Source: U.S. Department of Agriculture, World Grain Situation and Outlook (Washington, D.C.), various issues.

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

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

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

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

Table 16.Rice: Export Earnings, 1984–87
1984198519861987119841985198619871
(Values in SDRs)(Values in U.S. dollars)
Earnings (in billions)3.73.12.52.53.83.13.03.2
Industrial countries1.41.31.11.11.41.31.31.4
Developing countries2.31.81.41.42.41.81.71.8
Volumes (in millions of tons)12.711.112.212.012.711.112.212.0
Industrial countries3.53.53.83.63.53.53.83.6
United States2.11.92.42.32.11.92.42.3
Other countries1.31.51.41.31.31.51.41.3
Developing countries9.27.68.48.49.27.68.48.4
Thailand4.64.14.54.24.64.14.54.2
Other countries4.63.53.94.24.63.53.94.2
Unit values (a ton)290280210210300280240270
Industrial countries410380290290420380340380
Developing countries250230170170260230200220
Market prices (a ton)2246214179178252217210230
Sources: UN Food and Agriculture Organization, 1986 FAO Trade Yearbook (Rome) for exports; Commodities Division, IMF Research Department for prices.

Vegetable Oils and Protein Meals

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

Table 17.Prices of Vegetable Oils and Protein Meals, 1979–88
YearIndex of Prices of Vegetable Oils and Protein Meals1Soybean Oil2Palm Oil3Sunflowerseed Oil4Rapeseed Oil5Coconut Oil6Groundnut Oil7Soybean Meal8Groundnut Meal9Fish Meal10
(1980 = 100)(In SDRs a ton)
1979103.6512506590492762688188184306
1980100.0460448486439517660199209388
1981105.5430483542410483884214228396
198293.8405402479378422530197189320
1983113.2493471522467686668222215423
1984127.27077097486701,126990192183364
198597.5567498593532588894155144276
198671.6292220312262253487157142273
198770.5258264279236341387157125296
1986I78.8362258375318294541167150268
II72.3300208330276216493158140278
III66.4245173264210189455155139273
IV68.8266240283248313457150137274
1987I66.1245263264234310398143126257
II70.4267263304240321398155131280
III71.1253246274223366375158106318
IV74.4268286272247370376172137329
1988I78.0301309304284393376163130349
(1980 = 100)(In U.S. dollars a ton)
1979102.8662654762636985889243238395
1980100.0598583633571673859259272504
198195.85075716394835701,043253269468
198279.6447445529417467585218208354
198392.8527501558499730711238229453
1984100.47257297676871,1551,017197188373
198575.7576501602540590905157146280
198664.4342257366307296569185166321
198770.2334343360305442500203162383
1986I68.0407289422358330607188169302
II64.5348241382320251572184163322
III61.4294208318252227548187167328
IV63.8320289341299378551180165330
1987I64.0309331333295391501180159324
II70.0345341393310415515200170363
III69.8323314350284467478202135405
IV76.8360384365331496504231184442
1988I82.0412423416388537515223178478
Source: Commodities Division, IMF Research Department.
Table 18.Major Oilseeds (Oil Equivalent): World Commodity Balance, 1981/82-87/88
October/September Crop Years
1981/821982/831983/841984/851985/861986/8711987/882
(In millions of tons; oil equivalent)3
Production45.147.345.251.554.454.056.6
Soybeans15.116.715.016.817.317.418.1
Palm oil6.05.96.36.98.18.08.5
Sunflowerseed5.86.66.27.07.77.68.2
Rapeseed4.55.35.26.26.87.28.1
Groundnuts5.85.25.45.75.65.85.4
Cottonseed4.13.93.85.04.43.94.3
Copra3.02.92.42.93.32.92.8
Palm kernels0.80.80.91.01.21.21.2
Noncrush use7.37.37.67.77.98.38.9
Soybeans2.72.62.92.72.53.03.0
Groundnuts2.42.32.52.62.72.83.1
Other2.22.42.22.42.72.52.8
Crushings/oil production38.339.838.542.545.646.347.8
Soybean oil12.713.612.813.313.815.015.5
Palm oil6.05.96.36.98.18.08.5
Sunflowerseed oil5.05.75.56.26.66.57.0
Rapeseed oil4.45.04.95.66.26.77.0
Groundnut oil3.32.92.93.03.03.02.7
Cottonseed oil3.33.13.03.93.53.13.3
Coconut oil2.92.82.32.63.32.92.7
Palm kernel oil0.70.80.81.01.11.11.1
Oil consumption38.639.838.441.944.646.047.9
Soybean oil13.113.513.013.213.514.815.6
Palm oil5.76.26.06.77.87.98.5
Sunflowerseed oil5.15.65.56.06.56.56.9
Rapeseed oil4.54.94.95.66.16.67.0
Groundnut oil3.32.92.93.03.03.12.7
Cottonseed oil3.23.13.13.83.53.23.3
Coconut oil3.02.82.22.73.22.82.8
Palm kernel oil0.70.80.80.91.01.11.1
Closing stocks6.76.96.18.09.99.99.4
As oilseeds43.84.03.14.45.34.74.6
Soybeans2.63.12.43.24.23.63.2
Other1.20.90.71.21.11.11.4
As oil52.92.93.03.64.64.94.8
Soybean oil1.41.51.31.41.71.91.8
Palm oil0.80.50.81.01.31.41.4
Other0.70.90.91.21.61.61.6
Source: U.S. Department of Agriculture, Foreign Agriculture Survey: Oilseeds and Products (Washington), various issues.
Table 19.Major Oilseeds (Meal Equivalent): World Commodity Balance, 1981/82–87/88
October/September Crop Years
1981/821982/831983/841984/851985/861986/8711987/882
(In millions of tons; meal equivalent)3
Production106.0113.0102.7119.2122.2121.4127.4
Soybeans68.274.264.973.476.477.080.0
Cottonseed12.912.211.816.114.212.514.0
Rapeseed7.69.08.710.411.211.813.4
Sunflowerseed6.87.97.28.49.08.79.3
Groundnuts8.07.17.78.18.18.37.7
Copra1.61.61.31.61.91.71.6
Palm kernels0.91.01.11.21.41.41.4
Noncrush use19.519.720.620.620.822.123.1
Crushings/meal production87.691.885.794.597.0101.8105.6
Soybean meal57.360.555.358.260.666.368.5
Cottonseed meal10.29.99.612.611.19.810.7
Rapeseed meal7.38.48.19.410.211.011.6
Sunflowerseed meal5.96.76.47.37.77.48.0
Groundnut meal4.53.94.14.34.24.33.8
Copra meal1.61.51.31.51.91.71.6
Palm kernel meal0.80.90.91.21.31.31.4
Meal consumption88.191.484.894.796.9101.6105.7
Soybean meal57.859.854.858.560.566.068.5
Cottonseed meal10.210.19.612.411.110.010.7
Rapeseed meal7.38.48.09.510.110.911.7
Sunflowerseed meal5.96.76.47.27.67.48.0
Groundnut meal4.53.94.14.34.44.33.9
Copra meal1.61.51.11.61.91.71.6
Palm kernel meal0.81.00.81.21.31.31.3
Closing stocks16.218.115.419.323.821.520.1
As oilseeds413.515.011.415.519.917.416.1
Soybeans11.813.710.413.818.315.913.9
Rapeseeds0.60.50.40.70.80.71.3
Other1.10.80.61.00.80.80.9
As meal52.73.14.03.83.94.14.0
Soybean meal1.92.63.12.82.93.23.2
Other0.80.50.91.01.00.90.8
Source: U.S. Department of Agriculture, Foreign Agriculture Survey: Oilseeds and Products (Washington), various issues.

Vegetable oils and protein meals are derived mainly from oilseeds, most of which are not consumed directly but rather are processed to expel their oil content and to produce meal. The demand for vegetable oils is derived mainly from the food and soap or detergent manufacturing industries, and the demand for meals, which are mainly used to produce animal feed, is derived from the demand for livestock products. In both of these markets, products are highly substitutable. For technical reasons or because of consumer preferences, however, some products may be preferred over others in particular end uses. The preferences for specific vegetable oils have been weakened in recent years as a result of technological improvements in processing that have increased the interchangeability of vegetable oils in a variety of uses and consequently have made price a more important criterion in the choice of oil by purchasers. Similarly, as a wide variety of materials can be used to manufacture animal feeds—including oilseed meals, grains, grain by-products, cassava, and citrus and beet pulp—price also is an important determinant of use among these various feedstuffs.

On the supply side, the market is considerably more heterogeneous and complex. One important characteristic is that some oilseeds are produced as annual crops (mainly soybeans, sunflowerseed, cottonseed, groundnut, and rapeseed) while others are perennial tree crops (mainly coconut, oil palm, and olives). Consequently, the supply response to changes in price prospects and the stability of supply from these two types of crops varies. Most producers of annual oilseed crops can adjust supply rapidly to a changing world price outlook, generally within a year. Tree crop producers have considerably less flexibility to increase supply in the short term because of long gestation periods, lengthy economic life spans, and relatively low variable costs of cultivation and harvest.31

The complexity of the market emanates from the fact that while different market forces govern the demand for oils and the demand for meals, most oils are produced as a joint product with meal in the processing of oilseeds, and the relative importance of each component varies considerably among oilseeds. For example, soybeans are 80 percent meal and 18 percent oil by weight, while copra is only 36 percent meal but 62 percent oil by weight. Soybeans are crushed mainly in response to meal demand. Hence the supply of soybean oil tends to be determined by the demand for meal, rather than the direct demand for soybean oil. Consequently, strong demand for meal has resulted in expanding soybean oil supplies, with little reference to the prevailing market prices for soybean oil. This factor is of particular importance because the soybean complex dominates prices in both the oil and meal markets. Soybean oil is by far the most important vegetable oil produced in terms of volume and strongly influences the prices of other oils, although its leadership has been narrowed in recent years by the expansion of palm oil production. As a consequence of these relationships, while protein meal prices have been relatively stable because of substitution with other feeds, the supply structure for soybean oil helps to make vegetable oil prices highly unstable.

Despite the depressed level of market prices of oilseeds and their products in recent years, world oilseed production has continued to expand and to add to the already abundant level of accumulated stocks. This upward spiral of production is a continuation of a long-term trend that began in the early 1970s and reflects world market conditions as well as domestic government policies. As a result, the relative importance of the various products and the relative share of the countries or regions that produce them in world production and exports have changed markedly. These structural changes on the supply side have been accompanied by important changes on the demand side, again as a result of both market forces and government policies.

In the 1970s world oilseed production expanded rapidly in response to the strong demand growth for both oilseed meals used in animal feeds and for vegetable oils. The steep price increases recorded early in the decade32 encouraged the expansion of oilseed production and processing in many parts of the world. In the ten years ending 1979/80, production of the eight commodities listed in Table 18, in terms of oil equivalent, increased by 73 percent, or by an annual rate of 5.6 percent. Of the overall increase in the 1970s, 88 percent is attributable to four commodities: soybeans (49 percent), palm oil (17 percent), and rapeseed and sunflowerseed (11 percent each).

World oilseed production, in terms of oil equivalent, continued to grow rapidly in the 1980s, increasing from 44.1 million tons in 1979/80 to 54.4 million tons in 1985/86, or at an annual rate of 3.5 percent. After declining in 1983/84, world production recovered sharply with two consecutive years of surplus production. Consequently, stocks increased rapidly in 1984/85 and 1985/86, and this caused prices to fall sharply. After declining from the equivalent of 20 percent of oil consumption in 1980/81 to less than 16 percent in 1983/84, stocks of oilseeds and oils, in terms of oil equivalent, increased to 19 percent in 1984/85 and 22 percent in 1985/86. Nevertheless, the growth of production was temporarily halted in 1986/87 and stocks remained near the previous year’s level. Reflecting this, prices began to recover in the second half of 1986.

Competition among exporting countries and among oilseeds and their products has intensified in recent years because of abundant supplies and limited consumption growth. Protein meal consumption in industrial countries probably has approached the saturation point. This has been reinforced by slow economic growth in developing countries. Furthermore, in the EC, which accounts for over one half of world soybean meal imports, demand for imported oilseeds was curtailed by abundant supplies of low-priced competing feedstuffs, such as nonfat dried milk, field peas and beans, and increased supplies of domestically produced rapeseed and sunflowerseed meals. Slower growth of consumption has been accompanied by strong competition among exporters, and since 1984 dominance of the relatively stagnant export market for soybean meal has shifted from industrial to developing countries.

Competition between palm oil, soybean oil, and rapeseed oil has intensified in recent years. India, a large vegetable oil importer, now imports mainly palm oil and increased quantities of lower priced rapeseed oil, whereas formerly most of the country’s imports consisted of soybean oil. Rapeseed oil and meal production and exports are expanding rapidly in competition with soybeans and soybean products. Rapeseed products are increasingly gaining world acceptance as edible oils and protein feedstuffs, as Canada and the EC have developed varieties in which the erucic acid content of the oil and sulfur compounds in the meal, factors which had previously limited their use, have been reduced.

After falling sharply during the first three quarters of 1986 because of burgeoning supplies, vegetable oil prices bottomed out during the fourth quarter, when the price of coconut oil increased by 67 percent and prices of other oils also increased.

In 1987 the annual index of prices of vegetable oils and protein meals, in terms of dollars, was 9 percent higher than in 1986, as higher average prices for coconut oil (49 percent), palm oil (33 percent), fish meal (20 percent), soybean meal (10 percent), and soybeans (3 percent), more than offset the effects of lower prices for soybean oil (2 percent), groundnut oil (12 percent), and groundnut meal (2 percent).

During the first quarter of 1987, soybean oil prices declined steadily, while the prices of palm oil and coconut oil increased in January but declined in February and March. The decline in soybean oil prices partly reflected reportedly good prospects for substantial increases in soybean production in 1986/87 in major exporting countries in South America. As a result, the relative price between soybean oil and palm oil changed, with palm oil selling at a premium to soybean oil for the first time since June 1984. Higher average prices for palm oil were partly attributable to the expected decline in Malaysian production in 1986/87 as a result of decreased fertilizer application and below normal rainfall. Furthermore, the EC Commission proposed a plan to limit budgetary expenditures on oilseed production, including the imposition of a consumption tax on both imports and domestic production of vegetable oils.

The decline in soybean oil prices was reversed during the second quarter of 1987, when prices increased by 12 percent. The prices of soybeans and soybean meal rose by 10 percent and 11 percent, respectively. Prices of coconut oil, groundnut oil, and palm oil also increased modestly during the quarter. The price increases for the soybean complex were attributable to concerns over the effects of prolonged dry weather on the U.S. soybean growing area and survey results indicating reduced planting intentions in the United States. The increase in the prices of coconut oil and palm oil is attributable to the expectation of lower yields, partly as a result of below average rainfall from December 1986 to March 1987 in copra and palm oil producing areas in the Philippines and Malaysia, respectively.

During the third quarter of 1987, the overall index of vegetable oils and protein meals declined by 6 percent between June and August, before recovering somewhat in September. Palm oil and soybean oil prices declined by 8 percent and 6 percent, respectively, partly reflecting larger-than-expected palm oil production in Malaysia in June, alleviation of previous concerns over the effects of dry weather on much of the U.S. soybean crop, and a smaller-than-expected decline in U.S. soybean acreage below last year’s level.

In the fourth quarter of 1987, the overall dollar index of vegetable oils and protein meals rose sharply by 10 percent, reflecting a 14 percent increase in the price of soybean meal as a result of large unexpected imports of soybeans and soybean meal by the U.S.S.R. and sharp price increases for palm oil (22 percent), soybean oil (11 percent), rapeseed oil (17 percent), and coconut oil (6 percent). The rise in vegetable oil prices, despite abundant world supplies, reflected substantial purchases by India because of drought damage to the country’s groundnut crop and the earlier-than-expected seasonal decline in palm oil production in Malaysia.

Reflecting both higher unit values and volumes, export earnings from the major oilseeds and their products (soybeans, soybean oil, soybean meal, and palm oil) increased by 20 percent from $13 billion in 1986 to an estimated $15 billion in 1987 (Tables 2023). This amount was still 12 percent lower than the $17 billion recorded in 1984. In terms of SDRs, export earnings increased by only 9 percent to SDR 12 billion in 1987, nearly 30 percent lower than the SDR 17 billion earned in 1984. About 56 percent of the increase in export proceeds was earned by the developing countries. Export volumes of the developing countries are estimated to have increased substantially in 1987, after declining in 1986. As a result of this and higher unit values, their share in total earnings increased from 43 percent in 1986 to 45 percent in 1987.

Table 20.Soybeans: Export Earnings, 1984–87
1984198519861987119841985198619871
(Values in SDRs)(Values in U.S. dollars)
Earnings (in billions)7.05.54.84.77.25.55.66.0
Industrial countries5.43.83.83.65.53.84.44.6
Developing countries1.61.71.01.11.71.71.21.4
Volumes (in millions of tons)25.825.527.628.725.825.527.628.7
Industrial countries19.717.121.722.019.717.121.722.0
United States19.516.921.421.619.516.921.421.6
Other countries0.20.20.30.40.20.20.30.4
Developing countries6.18.45.96.76.18.45.96.7
Argentina3.13.02.61.53.13.02.61.5
Brazil1.63.51.23.31.63.51.23.3
Other countries1.41.92.01.91.41.92.71.9
Unit values (a ton)271214172162278217202210
Industrial countries271219173163278222203211
Developing countries269204170160276207199207
Market prices (a ton)2275221178167282224208216
Sources: UN Food and Agriculture Organization, 1986 FAO Trade Yearbook (Rome) for exports; data on volume of exports for 1987 from Oil World: Statistical Update (Hamburg); Commodities Division, IMF Research Department for market prices.
Table 21.Soybean Oil: Export Earnings, 1984–87
1984198519861987119841985198619871
(Values in SDRs)(Values in U.S. dollars)
Earnings (in billions)2.82.21.01.22.92.31.21.6
Industrial countries1.61.20.60.71.71.20.81.0
Developing countries1.21.00.40.51.21.10.40.6
Volumes (in millions of tons)4.03.52.93.94.03.52.93.9
Industrial countries2.31.81.72.12.31.81.72.1
United States1.00.60.50.71.00.60.50.7
Netherlands0.30.30.30.40.30.30.30.4
Spain0.40.30.30.40.40.30.30.4
Other countries0.60.60.60.60.60.60.60.6
Developing countries1.71.71.21.81.71.71.21.8
Argentina0.50.50.70.70.50.50.70.7
Brazil0.91.00.40.90.91.00.40.9
Other countries0.30.20.10.20.30.20.10.2
Unit values (a ton)700630360310720640420400
Industrial countries710670400350730680460450
Developing countries680630300260700640350340
Market prices (a ton)2707567292258725576342334
Sources: UN Food and Agriculture Organization, 1986 FAO Trade Yearbook (Rome) for exports; Commodities Division, IMF Research Department for market prices.
Table 22.Soybean Meal: Export Earnings, 1984–87
1984198519861987119841985198619871
(Values in SDRs)(Values in U.S. dollars)
Earnings (in billions)4.23.53.54.24.33.64.15.4
Industrial countries2.01.71.82.22.11.82.12.8
Developing countries2.21.81.72.02.21.82.02.6
Volumes (in millions of tons)20.322.121.325.520.322.121.325.5
Industrial countries9.09.39.811.99.09.39.811.9
United States4.54.76.06.64.54.76.06.6
Netherlands1.71.71.41.71.71.71.41.7
Other countries2.82.92.43.62.82.92.43.6
Developing countries11.312.811.513.611.312.811.513.6
Brazil7.68.66.57.87.68.66.57.8
Other countries3.74.25.05.83.74.25.05.8
Unit values (a ton)204160165165209162194213
Industrial countries223183183183229186215236
Developing countries188142150149193144176193
Market prices (a ton)2192155157157197157185203
Sources: UN Food and Agriculture Organization, 1986 FAO Trade Yearbook (Rome) for exports; Commodities Division, IMF Research Department for market prices.
Table 23.Palm Oil: Export Earnings, 1984–87
1984198519861987119841985198619871
(Values in SDRs)(Values in U.S. dollars)
Earnings (in billions)2.82.61.61.72.92.61.82.3
Developing countries2.82.61.61.72.92.61.82.3
Volumes (in millions of tons)4.35.26.36.54.35.26.36.5
Developing countries4.35.26.36.54.35.26.36.5
Malaysia3.03.24.34.53.03.24.34.5
Other countries1.32.02.02.01.32.02.02.0
Unit values (a ton)650500250270660510290350
Market prices (a ton)2711493219265729501257343
Sources: UN Food and Agriculture Organization, 1986 FAO Trade Yearbook (Rome) for exports; export data include only exports from palm oil producing countries; Commodities Division, IMF Research Department for market prices.

In 1987/88 world oilseed production, in terms of oil equivalent, is expected to increase by 5 percent to 56.6 million tons, a new record level (Table 18). Most of the increased output is attributable to rapeseed (35 percent) and soybeans (27 percent), although sunflowerseed and palm oil production are also expected to show important increases. Strong demand for soybean meal, especially in the United States and in the U.S.S.R., is expected to be reflected in increased world soybean crushings and a further drawdown in stocks. Because soybean prices have been exceeding levels that trigger sales out of U.S. government stocks, these stocks have been reduced to very low levels. The growth in world consumption of vegetable oils is expected to increase from 3 percent in 1986/87 to about 5 percent in 1987/88. Of that growth, 43 percent is expected to be attributable to soybean oil, reflecting increased availability in Argentina, imports into India because of reduced vegetable oil production, and increased exports by the United States under the export enhancement program (EEP). Although world supplies are expected to remain abundant, projected consumption could exceed production and lead to a slight drawdown of vegetable oil stocks.

Soybeans and Soybean Products

Soybeans are the single most important oilseed in terms of output, accounting for about one third of world production (Table 18). After declining in 1983/84, soybean production rose by 12 percent in the 1984/85 marketing year (October/September), 4 percent in 1985/86, and 1 percent in 1986/87 (Table 24). This strong recovery and continued expansion has exerted downward pressure on international market prices for all oils and meals. Sizable increases in production also were recorded for other oilseeds, such as rapeseed and palm oil. In terms of oil equivalent, however, the growth in soybean production alone accounted for 28 percent of the increase in world oilseed output in the period between 1983/84 and 1986/87.

Table 24.Soybeans: World Commodity Balance, 1981/82–87/88(In millions of tons)
October/September Crop Years
1981/821982/831983/841984/851985/861986/8711987/882
Production86.193.683.293.196.998.0101.4
Argentina4.24.27.06.87.37.39.0
Brazil12.814.815.518.314.117.318.5
China9.39.09.89.710.511.611.8
United States54.159.644.550.657.152.851.8
Other countries5.76.06.47.77.99.010.3
Crushings72.376.270.973.876.984.386.8
Brazil12.813.712.513.112.514.414.1
European Community15.214.712.712.312.813.613.4
United States28.030.226.828.028.732.132.1
Other countries16.317.618.920.422.924.227.2
Noncrush use15.115.116.215.014.416.717.2
Closing stocks14.917.213.317.623.220.217.6
United States6.99.44.88.614.611.98.3
Other countries8.07.88.59.08.68.39.3
Source: U.S. Department of Agriculture, Foreign Agriculture Circular: Oilseeds and Products (Washington), various issues.

Over one half of world soybean production is concentrated in the United States. Reflecting lower prices paid to farmers, soybean acreage in the United States declined by 8 percent in 1986/87. As a result, soybean production in the United States declined by 8 percent from the 1985/86 level (Table 24), despite the maintenance of the record yields of the previous year. The decline in U.S. production was more than offset, however, by increased soybean production in Brazil, China, and other countries. Production in Brazil, the world’s second largest producer, recovered by 23 percent in 1986/87 because of favorable weather conditions throughout the growing season, which raised average yields by 23 percent; in 1985/86 a severe drought during the planting and growing season reduced planted area and yields.

World soybean crushings expanded by 10 percent in 1986/87 with 46 percent of that expansion occurring in the United States, where soybean crushings reached the highest level in over a decade. This was attributable to a combination of factors: larger-than-expected soybean meal imports by the U.S.S.R., increased meal imports relative to soybeans by the EC because large vegetable oil stocks in the EC had depressed crush margins, additional livestock feeding in Western Europe because of the severe winter, and increased domestic consumption in the United States, partly because of higher-than-expected poultry production. As a result of increased crushing, world stocks of soybean oil reached record levels, and over two fifths of those stocks are held in the United States. Consequently, while strong meal demand has been reflected in a strengthening of meal prices, soybean oil prices have weakened. Average soybean meal prices increased from $157 a ton in 1985 to $185 a ton in 1986 and to $203 a ton in 1987. In contrast, the soybean oil price fell from an average of $576 a ton in 1985 to $342 a ton in 1986 and $334 a ton in 1987.

In 1987/88, world soybean production is expected to increase by over 3 percent. Although soybean production in the United States is forecast at 51.8 million tons, 2 percent lower than in 1986/87, reflecting mainly a decline in soybean acreage,33 it is expected to be offset by increased production in other countries. In Argentina, low grain prices and less attractive returns from other crops are expected to encourage expansion of soybean acreage. In Brazil, soybean acreage also is expected to increase in response to a high soybean-corn price ratio. In the EC, the main market for U.S. soybeans and soybean meal, surplus capacity to produce grains is expected to be shifted into oilseeds. EC production of soybeans is expected to increase by 68 percent to 1.5 million tons in 1987/88, when it will represent 13 percent of EC oilseed production, compared with 2 percent in 1983/84.

World consumption of soybean meal is expected to increase by 4 percent, compared with a 9 percent rise in 1986/87 (Table 25). In the United States, soybean meal consumption is expected to increase in 1987/88 mainly in response to increasing livestock numbers, especially hogs and poultry. In the EC, however, soybean meal consumption should decline as a result of an expected rise in the price of soybean meal compared with the price of feed wheat, reflecting the availability of rain-damaged grains at discounted prices, record supplies of rapeseed and sunflowerseed meals at relatively lower prices, and larger-than-expected output of field peas and beans. World soybean crushings are expected to increase by 3 percent, with increased crushings in Argentina, the U.S.S.R., and other countries offsetting the projected decline in crushings in Brazil and the EC. After declining by 13 percent in 1986/87, closing stocks of soybeans are expected to decline by an additional 13 percent in 1987/88, while soybean oil stocks are expected to decline by 5 percent (Table 26).

Table 25.Soybean Meal: World Commodity Balance, 1981/82–87/88(In millions of tons)
October/September Crop Years
1981/821982/831983/841984/851985/861986/8711987/882
Production57.360.555.358.260.666.368.5
Brazil9.910.69.710.29.711.210.9
European Community12.211.710.19.810.210.910.6
United States22.424.220.722.322.625.225.4
Other countries12.814.014.815.918.119.021.6
Consumption57.859.854.858.560.566.068.5
European Community19.718.117.318.018.719.319.0
United States16.117.516.017.717.318.519.0
Other countries22.224.221.522.824.528.230.5
Closing stocks1.92.63.12.82.93.23.2
Source: U.S. Department of Agriculture, Foreign Agriculture Circular: Oilseeds and Products (Washington), various issues.
Table 26.Soybean Oil: World Commodity Balance, 1981/82–87/88(In millions of tons)
October/September Crop Years
1981/821982/831983/841984/851985/861986/8711987/882
Production12.713.612.813.313.815.015.5
Brazil2.42.62.42.52.42.72.6
European Community2.62.62.32.22.32.42.3
United States5.05.54.95.25.35.85.9
Other countries2.72.93.23.43.84.14.7
Consumption13.113.513.013.213.514.815.6
Brazil1.51.61.51.61.92.01.9
European Community1.71.51.41.41.41.51.4
United States4.34.54.44.54.64.95.1
Other countries5.65.95.75.75.66.47.2
Closing stocks1.41.51.31.41.71.91.8
Source: U.S. Department of Agriculture, Foreign Agriculture Circular: Oilseeds and Products (Washington), various issues.

World export volumes of soybean meal and oil are estimated to have increased by 20 percent and 34 percent, respectively, in 1987. An important share of the expansion in meal and, to a lesser extent, in oil is attributable to the United States. After declining from 1.0 million tons in 1984 to 0.5 million tons in 1986, the volume of U.S. soybean oil exports is estimated to have increased by 30 percent in 1987, partly reflecting sales under the EEP.34 The annual rate of growth in the volume of U.S. soybean meal exports has increased from 6 percent in 1985 to 26 percent in 1986 and an estimated 11 percent in 1987. One of the objectives of the U.S. Food Security Act of 1985, was to improve the competitiveness of U.S. exports of soybeans and their derivatives and increase market sales rather than government stockpiling. A gradual lowering of the price support level was expected to lead to increased demand and reduced supply.

Under the price support program for soybeans, a farmer can obtain a non-recourse loan35 for a period of nine months from the Commodity Credit Corporation (CCC) at the announced loan rate using his soybeans as collateral. At the end of the nine-month period, the farmer may repay the loan with interest and sell the crop at market prices or forfeit the crop to the government. In contrast to price support programs for other crops, participants in the soybean program cannot receive cash deficiency payments and are not required to reduce acreage planted to soybeans. When market prices have fallen below the loan rate plus interest charges, farmers have forfeited large quantities to the CCC. These stocks are in turn sold by the CCC at given resale prices plus carrying charges. While the loan rate helps to provide a floor for soybean market prices, the resale price, plus carrying charges, helps to set a ceiling for soybean market prices. The loan rate for soybeans was initially set at $5.02 a bushel for 1986 and 1987 in the 1985 Farm Bill, but the Secretary of Agriculture was authorized to lower it by up to 5 percent to $4.77 a bushel. Effective September 12, 1986, the loan rate for the 1986 crop was lowered to $4.77 a bushel and, as a result of the implementation of the Gramm-Rudman law, which had been passed in December 1985, the effective loan rate for that crop was further reduced to $4.56 a bushel. The initial loan rate for the 1987 soybean crop has again been reduced from $5.02 a bushel to $4.77 a bushel but no further reduction was made on account of the Gramm-Rudman law. Effective September 1, 1987, the minimum price at which the CCC can sell its soybean stocks in the market was reduced sharply from the $5.58 a bushel ($205 a ton) level that was in effect through August 31 to $5.14 a bushel ($189 a ton).36 Soybean prices have exceeded the CCC’s minimum soybean release prices in recent months. Reflecting this, the CCCs soybean inventory has declined to an estimated 38 million bushels as of January 1, 1988, compared with 48 million bushels on December 1, 1987, and 311 million bushels on January 1, 1987.

Abundant supplies of soybean and other vegetable oils are expected to limit increases in the price of soybean oil during 1988. Reflecting an expected strong demand for imports of soybean oil from China, India, Pakistan, and countries in North Africa, partly because of sales under the EEP in the United States, a further buildup in soybean oil stocks is not expected. As the price of soybean meal is already high relative to prices for grains, any further increase is expected to be limited. Increased soybean and soybean meal imports by the U.S.S.R. are expected to be more than offset by smaller imports by the EC, reflecting increased availability of domestically produced protein meals and other feedstuffs.

Palm Oil

After declining in 1986/87, palm oil production is expected to rise by 6 percent in 1987/88, resuming the long-term expansion in world palm oil production which began in 1970 (Table 27). Palm oil is second only to soybeans in production and trade. In 1986/87, soybeans accounted for 32 percent of world oilseed output, in terms of oil equivalent, and exports of soybeans and soybean oil accounted for 39 percent of world oilseed and oil exports. During the same year, palm oil represented 15 percent of world oilseed production and 22 percent of world exports of oilseeds and vegetable oils, in terms of oil equivalent.

Table 27.Palm Oil: World Commodity Balance, 1981/82–87/88(In millions of tons)
October/September Crop Years
1981/821982/831983/841984/851985/861986/8711987/882
Production6.05.96.36.98.18.08.5
Indonesia0.91.01.21.21.31.31.4
Malaysia3.43.23.33.84.84.64.8
Other countries1.71.71.81.92.02.12.3
Consumption5.76.26.06.77.87.98.5
European Community0.60.70.60.70.90.90.9
India0.40.60.50.70.80.81.1
Indonesia0.50.60.90.60.60.80.8
Nigeria0.50.70.60.60.80.70.7
Pakistan0.30.30.30.50.60.50.3
Other countries3.43.33.13.64.14.24.7
Closing stocks0.80.50.81.01.31.41.4
Sources: Based on statistics of U.S. Department of Agriculture, Foreign Agriculture Survey: Oilseeds and Products (Washington), various issues; and Oil World: Statistics Update (Hamburg), September 11, 1987 and October 18, 1986.

Owing to the ease of substitution in consumption between palm oil and soybean oil, prices of these two oils tend to move together over price cycles. Between 1982 and 1984, palm oil traded at a small discount of $14 a ton, on average, to soybean oil in two out of three years. In 1985 and 1986, however, the strong recovery in Malaysian palm oil production and record stock accumulation resulted in a considerable widening of this discount to $75 a ton in 1985 and to $85 a ton in 1986. Nevertheless, prospects for abundant soybean oil supplies combined with declining palm oil output caused this price relationship to be temporarily reversed during the first quarter of 1987, when palm oil commanded a $22 premium over soybean oil. Palm oil again traded at a slight discount of $4 a ton during the second quarter of 1987, when weather-related concerns about U.S. soybean production caused soybean oil prices to rise sharply; a slight discount also prevailed during the third quarter. During the fourth quarter, however, palm oil prices surged, resulting in a premium for palm oil of $39 a ton over soybean oil. This reflected the earlier-than-expected seasonal decline in output in Malaysia and major palm oil purchases by India. With palm oil production expected to increase in 1987/88, and stocks expected to remain at about the previous year’s level, palm oil was again traded at a discount to soybean oil in February 1988.

World production of palm oil declined by 1 percent in 1986/87 from the 1985/86 level, but remained 16 percent higher than in 1984/85. The slight production shortfall in 1986/87 was attributable to a sharp decline in palm oil yields in Malaysia following tree stress as a result of high yields during the preceding year, below-normal rainfall, and decreased fertilizer use, which can affect yields for over two years. After increasing by 26 percent in 1985/86, production in Malaysia, the world’s leading producer, declined by 4 percent to 4.6 million tons in 1986/87. Despite a small decline in world output in 1986/87, production once again exceeded consumption, and led to a further rise in an already record level of accumulated stocks. Palm oil stocks as a percentage of palm oil consumption increased from 8 percent in 1982/83 to 18 percent in 1986/87. Prospects are for palm oil production to increase from 8.0 million tons in 1986/87 to 8.5 million tons in 1987/88. Despite a decline in average yield, production in Indonesia, the second largest producer, is expected to increase by 8 percent as a result of a large expansion of mature acreage.37 Malaysian production is expected to increase by 4 percent, considerably less than the 26 percent increase recorded in 1985/86. In 1987/88, Indonesia and Malaysia together are expected to account for about 73 percent of world palm oil production.

World consumption of palm oil is expected to increase by 8 percent in 1987/88, compared with less than 2 percent during the previous year. While consumption in the EC and the United States is expected to decline as a result of an abundance of competitively priced rapeseed, sunflowerseed, and soybean oils, this decline is projected to be offset by increased consumption in China and India. The rise in palm oil consumption in these two countries is attributable to a number of factors, including market prices, the geographical proximity of consumers to exporters, providing a freight-cost advantage to Southeast Asian exporters over exporters in the EC and North America, and a domestic shortage of competing vegetable oils. Palm oil is expected to become the largest vegetable oil imported by China in 1987/88, when imports are expected to increase from 335,000 to 485,000 tons. In India, palm oil consumption is expected to expand from 831,000 tons in 1986/87 to 1.1 million tons in 1987/88. As a result of this increased consumption, closing world stocks of palm oil are expected to remain at about the previous year’s level, but to decline from 18 percent to 16 percent of annual world consumption. Prospects for a decline in the stocks/consumption ratio are expected to augur well for palm oil prices, but the continued abundance of vegetable oil supplies are expected to limit any upward movement in prices in 1988.

Coconut Oil

Between 1984 and 1986, the average annual price of coconut oil decreased from $1,155 a ton to $296 a ton, the lowest level since 1972, mainly reflecting a substantial recovery of copra production in the Philippines from a decline in 1983/84 caused by typhoon damage and drought. During the fourth quarter of 1986, however, coconut oil prices increased sharply and the recovery in prices continued during 1987, when they averaged $442 a ton. Coconut oil traded at a premium over soybean oil from 1978 to 1984, but was quoted at a discount from the second quarter of 1985 until the third quarter of 1986. Since then, coconut oil again has traded at a premium over soybean oil and the premium has widened from an average of $58 a ton in the fourth quarter of 1986 to an average of $140 a ton during the second half of 1987. The sharp rise in the price of coconut oil, despite the generally abundant supply of vegetable oils, can be attributed to the demand response of industrial soap and detergent producers to declining coconut oil supplies.38 On average, coconut oil in 1986 continued to trade at a premium over palm kernel oil, a by-product of the palm oil industry and its closest substitute among the lauric oils, although the premium declined from an average of $118 a ton in 1985 to only $8 a ton in 1986. In 1987, coconut oil’s premium increased, reaching an average of $28 a ton during the second half of the year. The volume of palm kernel oil exports represents over 50 percent of the volume of coconut oil exports, and palm kernel oil accounts for over one third of the market for lauric oils, a share that has been increasing in recent years.

World copra production increased by 25 percent in 1984/85 and 14 percent in 1985/86 to reach a record high of 5.4 million tons. Production in the Philippines, the world’s largest producer, increased from 1.2 million tons in 1983/84 to 1.8 million tons in 1984/85 and about 2.4 million tons in 1985/86. The Philippines accounted for 46 percent of output in 1985/86 and Indonesia, the second largest producer, for 24 percent. Reflecting excellent rainfall during the two previous seasons, copra yields in the Philippines in 1985/86 were 14 percent above the average level of the five preceding years, while the harvested area increased by 2 percent. The increase in copra production was reflected in an expansion of coconut oil production of 13 percent in 1984/85 and 27 percent in 1985/86. Coconut oil consumption also expanded rapidly in response to lower prices and record world availabilities but fell short of production. As a result, stocks increased from an average of 240,000 tons in 1983/84–84/85 to 390,000 tons in 1985/86.

In 1986/87 world copra production declined by about 12 percent to 4.7 million tons, mainly as a result of cyclical declines in copra yields in Indonesia and Sri Lanka.39 Yields in Sri Lanka, a large exporter of coconut oil, were also adversely affected by severe drought in the period beginning August 1986. Coconut oil production declined by 12 percent in 1986/87. Reflecting both the fall in production and the sharp rise in coconut oil prices relative to other competing oils, world consumption declined in 1986/87. With production exceeding consumption, coconut oil stocks increased by 8 percent to a level 83 percent higher than in 1984/85.

Prospects are for a further decline of 5 percent in world copra production in 1987/88 to 4.5 million tons. Reflecting prolonged dry conditions in the Philippines during the period December 1986–June 1987 and typhoon-related damage to coconut trees, the Philippine crop is expected to decline by about 23 percent. About one fourth of the decline in production in the Philippines is expected to be offset by a 12 percent increase in output in Indonesia. Reduced world copra production is expected to be reflected in a 7 percent decline in coconut oil production. Although coconut oil consumption is currently forecast to remain at the 1986/87 level, it is expected to exceed coconut oil production. By the end of 1987/88, world stocks of coconut oil are expected to fall by 26 percent, but remain 35 percent above the 1984/85 level. While domestic consumption of coconut oil is expected to remain unchanged in the Philippines, it is expected to decline in Indonesia, where domestic pricing policies have encouraged a shift toward palm oil consumption and increased exports of coconut oil.

Since the autumn of 1986, with the steep rise in coconut oil prices relative to the prices of competing oils, the competitive position of coconut oil has deteriorated markedly. Between August 1986 and December 1987, the price of coconut oil increased by 151 percent, compared with increases of 119 percent for palm oil, 56 percent for rapeseed oil, 45 percent for soybean oil, and 30 percent for sunflowerseed oil. In August 1986 coconut oil traded at a discount of $93 to sunflowerseed oil, $60 to soybean oil, and $20 to rapeseed oil, and at a premium of $14 to palm oil. In December 1987, however, coconut oil commanded premiums over each of these oils ranging from $160 a ton for rapeseed oil to $97 a ton for palm oil. These developments, combined with the general oversupply of vegetable oils, could limit upward movement in coconut oil prices in 1988, as users of edible oils switch to lower-priced substitutes. Nevertheless, with the decline in the level of stocks as a percentage of consumption from 15 percent in 1986/87 to a forecast 11 percent in 1987/88, a further increase in prices is not unlikely.

Groundnuts and Groundnut Oil

In terms of oil equivalent, groundnuts have accounted for about 11 percent of world oilseed production in recent years. Nearly half of that production is consumed directly as nuts, while the remainder is crushed to produce groundnut oil and meal. Groundnuts are 55 percent meal and 42 percent oil by weight. Groundnut oil accounts for about 6 percent of world production of vegetable oils, and groundnut meal accounts for 4 percent of world meal production.

Only about 11 percent of world production has entered international trade in recent years. Market structure and weather-related fluctuations in production have caused groundnut product prices to be particularly volatile. Changes in the volume of exports depend mainly upon production levels in a few important exporting countries. Variations in production in other large producing countries appear to have a relatively greater influence on domestic consumption levels and on the volume of substitutable imports.

The three largest producers of groundnuts in the world are China, India, and the United States. In 1986/87, China and India each accounted for 30 percent of world output, and the United States accounted for 9 percent. China and the United States are the main exporters of groundnuts for confectionary use. The major exporters of groundnut oil are Argentina, China, and Senegal, while India and Senegal are the major exporters of groundnut meal.40

Although India is the leading exporter of groundnut meal, the country is not a major exporter of groundnuts or groundnut oil. The projected poor 1987/88 groundnut crop in India, discussed below, is not, therefore, expected to have a substantial effect on world prices for groundnut oil. In addition, India is expected to meet domestic consumption requirements by importing lower-priced palm, soybean, and rapeseed oils, rather than by purchases of groundnut oil.

In line with the trend in prices of other vegetable oils, the average annual price of groundnut oil rose sharply in 1984, when it reached $1,017 per ton, but declined in 1985 and in 1986. In 1986, it was quoted at $569 a ton, 44 percent lower than in 1984. The market price for groundnut oil continued to decline in 1987, averaging $500 a ton or 12 percent lower than in the previous year.

Groundnut oil’s competitive position in relation to other major vegetable oils improved during 1987 and this is expected to help maintain demand in important export markets. Exports to the EC are expected to remain at the 1986 level, despite abundant supplies of other vegetable oils in this market, including sunflowerseed oil, soybean oil, and rapeseed oil.41 Although the average annual price of groundnut oil declined by 11 percent in 1985 and 37 percent in 1986, its premium over soybean oil increased from an average of 57 percent in 1985 to 66 percent in 1986. During 1987, however, groundnut oil’s premium over soybean oil decreased to 50 percent. Groundnut oil’s premium over sunflowerseed oil also decreased from 55 percent in 1986 to 39 percent in 1987.

World production of groundnuts and groundnut oil in 1986/87 remained at virtually the same level as in the previous year. An estimated 12 percent decline in groundnut production in China was largely offset by increased production in Argentina, India, Senegal, and Sudan. Increased availability of supplies in exporting countries, however, permitted exports of groundnuts and groundnut oil to increase by 4 percent in 1986/87, compared to an increase of 19 percent in 1985/86. These increases in supply, combined with the increased availability of lower-priced competing oils, especially in the EC, the major importer of groundnuts and groundnut oil, exerted downward pressure on the price of groundnut oil in the period 1985–87. Production of sunflowerseed oil in the EC increased by 11 percent between 1984/85 and 1986/87, with most of the increase attributable to France, the single most important importer of groundnut oil in the world.

World output of groundnuts, in terms of oil equivalent, is projected to decline by 7 percent in 1987/88. While severe drought in June–August 1987 in major groundnut producing areas in India is expected to reduce groundnut output in that country by 15 percent, and drought conditions are expected to result in lower production in Senegal by 11 percent, groundnut production in China is expected to increase by 5 percent. Consequently, exports of groundnuts and groundnut oil, in terms of oil equivalent, are expected to decline by 4 percent in 1987/88 but to remain slightly above the 1985/86 level. Reflecting the decline in groundnut production, especially in India, groundnut meal output and the volume of groundnut meal exports are expected to decline by about 12 percent and 19 percent, respectively. The average annual price of groundnut meal has moved broadly in line with, and at a discount to, soybean meal. Since 1984, however, groundnut meal has traded at a widening discount to soybean meal, the discount increasing from 5 percent in 1984 to 10 percent in 1986 and 20 percent during 1987. Market prices for groundnut meal, after increasing by 14 percent in 1986, declined by 2 percent to $162 a ton in 1987.

Rapeseed Oil

Rapeseed oil is currently the most competitive of the leading vegetable oils, underpricing both soybean and palm oil at Rotterdam. Rapeseed meal is gaining wider acceptance in producing countries and export markets as a feed ingredient.

World rapeseed production has been increasing rapidly (Table 28). As a share of world oilseed production, rapeseed is expected in 1987/88 to become the third most important oilseed. In terms of oil equivalent, production increased by 38 percent between 1983/84 and 1986/87, compared with increases of 16 percent for soybeans, 27 percent for palm oil, and 23 percent for sunflowerseed during that period. A further increase of 13 percent is expected in 1987/88.

Table 28.Rapeseed: World Commodity Balance, 1981/82–87/88(In millions of tons)
October/September Crop Years
1981/821982/831983/841984/851985/861986/8711987/882
Production12.314.814.317.018.619.522.3
Canada1.82.22.63.43.53.83.5
China4.15.74.34.25.65.96.1
European Community2.02.72.43.43.63.76.0
India2.42.22.63.12.63.03.1
Other countries2.02.02.42.93.33.13.6
Crushings12.013.813.315.416.818.219.2
Canada0.90.91.21.31.21.61.4
China3.75.13.83.85.05.35.4
European Community2.32.72.93.53.94.04.8
India2.22.02.12.92.62.72.8
Japan1.21.21.31.41.41.61.6
Other countries1.71.92.02.52.73.03.7
Noncrush use0.91.11.21.21.61.42.2
Closing stocks0.90.80.71.11.31.22.1
European Community0.00.10.10.10.20.21.0
Canada0.70.50.10.51.00.60.6
Other countries0.20.20.50.50.10.40.5
Sources: U.S. Department of Agriculture, Foreign Agriculture Circular: Oilseeds and Products (Washington), various issues; and Oil World: Statistics Update (Hamburg), various issues.

China, the EC, and Canada together account for over two thirds of world rapeseed production. China, the world’s leading producer, accounted for 31 percent of the increase in output in the three years ended 1986/87. While China exports large quantities of rapeseed meal, it exports little rapeseed and virtually no rapeseed oil, as almost the entire production of rapeseed oil is consumed domestically (Tables 29 and 30). In 1987/88, rapeseed production in China is expected to increase by 3 percent, but the more rapid expansion of production in the EC is expected to reduce China’s share in world output from 30 percent in 1986/87 to 27 percent. The EC and Canada contributed 25 percent and 23 percent, respectively, of the increase in rape-seed production during the period 1983/84–1986/87. The EC’s production of rapeseed increased by 54 percent in that three-year period and a further substantial increase of 62 percent is projected for 1987/88 alone. As a result, the EC’s share of world rapeseed production, after increasing from 17 percent to 19 percent in the period 1983/84–1986/87, is expected to reach 27 percent in 1987/88. Rapeseed exports of countries in the EC have, however, been largely intracommunity, but in 1987/88 the EC is expected to become a net exporter of rapeseed outside the EC. Thus far, Canada has been the main exporter of rapeseed, most of which has been exported to Japan, while the EC has been the leading exporter of rapeseed oil. Net exports of rapeseed oil by the EC are expected to represent 46 percent of world exports of rapeseed oil in 1987/88. However, the EC is still a net importer of rapeseed meal.

Table 29.Rapeseed Oil: World Commodity Balance, 1981/82–87/88(In millions of tons)
October/September Crop Years
1981/821982/831983/841984/851985/861986/8711987/882
Production4.45.04.95.66.26.77.0
Canada0.40.40.50.50.50.60.6
China1.21.71.31.21.71.71.8
European Community0.91.11.11.41.51.51.8
India0.70.70.71.00.90.90.9
Other countries1.21.11.31.51.62.01.9
Consumption4.54.94.95.66.16.67.0
China1.21.71.21.21.61.81.9
European Community0.60.80.80.80.91.01.1
India0.90.80.91.21.01.21.3
Japan0.50.50.50.60.60.60.6
Other countries1.31.11.51.82.02.02.1
Closing stocks0.10.20.20.20.30.40.4
Sources: U.S. Department of Agriculture, Foreign Agriculture Circular: Oilseeds and Products (Washington), various issues; and Oil World: Statistics Update (Hamburg), various issues.
Table 30.Rapeseed Meal: World Commodity Balance, 1981/82–87/88(In millions of tons)
October/September Crop Years
1981/821982/831983/841984/851985/861986/8711987/882
Production7.38.48.19.410.211.011.6
Canada0.60.50.70.80.70.90.8
China2.33.22.42.33.13.33.4
European Community1.31.61.72.12.22.42.8
India1.51.31.41.91.71.81.8
Japan0.70.70.70.80.80.90.9
Other countries0.91.11.21.51.71.71.9
Consumption7.38.48.09.510.110.911.7
Canada0.40.40.40.40.40.50.5
China2.33.02.12.12.62.62.8
European Community1.51.92.12.42.73.03.3
India1.21.21.31.81.61.71.6
Japan0.70.70.81.01.01.11.1
Other countries1.21.21.31.81.82.02.4
Closing stocks0.20.20.30.20.30.40.3
Sources: U.S. Department of Agriculture, Foreign Agriculture Circular: Oilseeds and Products (Washington), various issues; and Oil World: Statistics Update (Hamburg), various issues.

Production of oilseeds, mainly rapeseed and sunflowerseed, has increased sharply in the EC in response to the incentives offered under the EC’s oilseeds policy, which has encouraged both a rapid expansion of oilseed production as well as an increase in the crushing and use of that production in the EC. This has been achieved through payments to EC processors, enabling them to purchase oilseeds from domestic producers at relatively high target prices and sell the oil and meal produced at world market prices. Despite recent reductions in support prices, the oilseeds sector is reportedly the third most costly to support, exceeded only by milk and cereals. The cost of the so-called deficiency payments or producer aids, which are made to the oilseed crusher, has increased from ECU 268 million in 1977 to ECU 1.7 billion in 1984, ECU 2.9 billion in 1986, and an estimated ECU 4 billion in 1987.42

To reduce the spiraling budgetary costs of community support for the oils and fats sector, the EC Commission, in February 1987, proposed a series of measures. Subsequently, effective July 1, 1987, the target price for rapeseed was reduced by 3 percent to ECU 450.2 a ton, which is more than twice the current world market price. To help control rapeseed production, a production threshold, or maximum guaranteed quantity (MGQ) level, was set at 3.5 million tons, and the producer support price declines by 1 percent for each 1 percent increase in production above the specified maximum guaranteed level. The maximum reduction in support prices, however, was set at 10 percent.43 Since the EC’s rapeseed crop (estimated at 5.9 million tons in 1987/88) is substantially in excess of the MGQ, support prices for the entire crop will be reduced by 10 percent below the target price.

In February 1988, at the EC summit meeting in Brussels, it was agreed to fix production thresholds, or the MGQs, for the years 1988/89, 1989/90, and 1990/91 at 4.5 million tons annually for rapeseed, 2.0 million tons annually for sunflowerseed, and 1.3 million tons annually for soybeans, for all members combined, excluding Spain and Portugal. If actual output exceeds the MGQs, as is likely, the institutional support prices will be reduced by 0.45 percent for each 1 percent produced in excess of the MGQ in 1988/89 and by 0.5 percent for each 1 percent overproduced in subsequent marketing years. The new prices would come into effect on August 31, 1988, for rapeseed, September 30 for sunflowerseed, and October 31 for soybeans.

Reflecting the strong rise in production and exports and competition from abundant supplies of competing vegetable oils, the price of rapeseed oil declined sharply in 1985 and 1986 and continued to weaken in 1987. The average annual price of rapeseed oil decreased by 21 percent in 1985 and 43 percent in 1986. In that period, rapeseed oil traded at an average discount of about $35 a ton under soybean oil but at premia of $39 a ton and $50 a ton, respectively, over palm oil in 1985 and 1986. In 1987, the price of rapeseed oil averaged about 1 percent lower than in 1986, while palm oil prices strengthened. As a result, rapeseed oil traded at an average discount of $38 a ton under palm oil and $29 a ton under soybean oil during that period.

Sunflowerseed Oil

After declining in 1986/87, world production of sunflowerseed is expected to increase to a record 20.5 million tons in 1987/88. The U.S.S.R., the EC, and Argentina are the three largest producers of sunflowerseed, accounting for 28 percent, 17 percent, and 12 percent of world output, respectively, in 1986/87. Argentina is the leading exporter of sunflowerseed oil and meal, while the EC, the United States, and Argentina together account for over 90 percent of gross exports of sunflowerseed. The EC, however, was a net importer of sunflowerseed until bumper crops have made the Community virtually self-sufficient in 1986/87. In 1987/88 the EC is expected to become a net exporter of sunflowerseed. The EC has been a net exporter of sunflowerseed oil since 1986/87. Net imports of sunflowerseed by the EC have decreased from 714,000 tons in 1984/85 to 49,000 tons in 1986/87, and net exports are projected at 26,000 tons in 1987/88. The EC nevertheless remains the world’s largest net importer of sunflowerseed meal.

World production of sunflowerseed has increased rapidly from 15.5 million tons in 1983/84 to 19.5 million tons in 1985/86. In 1986/87 output decreased by 2 percent to 19.1 million tons. Most of the increase in world production between 1983/84 and 1985/86 was attributable to Argentina (54 percent) and the EC (25 percent). In Argentina, area harvested increased from 2.0 million hectares in 1983/84 to 3.0 million hectares in 1985/86 and yields from an average of 1.1 tons a hectare to 1.4 tons a hectare over the same period. As a result, in 1985/86 Argentina’s output rose by 97 percent to a record crop of 4.3 million tons. Production in the EC expanded by 57 percent between 1983/84 and 1985/86 to 2.8 million tons, of which two thirds was attributable to France, where the area harvested increased by 51 percent and yields by 19 percent. In 1986/87 sunflowerseed production expanded by over 18 percent to 3.3 million tons in the EC, but this was insufficient to offset a 49 percent decline in Argentina’s output, as well as lower production in other countries, including the United States and China. The steep decline in Argentina’s production reflected crop losses as a result of flood and wind damage and lower average yield. Area harvested is estimated to have fallen by 43 percent to 1.7 million hectares while yields declined by 11 percent.

In 1987/88, world production of sunflowerseed is expected to increase by over 7 percent to 20.5 million tons, thereby exceeding even the record level achieved in 1985/86. The increase is expected to result from a recovery of production in Argentina and the expansion of output in the U.S.S.R. and the EC, which are expected to more than offset lower production in the United States and several Eastern European countries.

EC production is expected to reach 3.7 million tons, or the equivalent of 18 percent of world output in 1987/88, compared with 11 percent of world production in 1983/84. In 1987/88, target and intervention prices in the EC for sunflowerseed remained unchanged at ECU 583.5 and ECU 534.7 a ton, and the MGQ was set at 3.95 million tons. As production is expected to remain below this threshold level, target prices are not expected to be reduced. For the years 1988/89–90/91, the MGQ for sunflowerseed, as mentioned earlier, has been fixed at 2 million tons annually, and, if output exceeds this level, support prices will be reduced by 0.5 percent for each 1 percent produced in excess of that amount in 1988/89 and by 0.5 percent for each 1 percent of overproduction in subsequent years.

Although sunflowerseed oil production and stocks declined in 1986/87, stocks remained 15 percent higher than in 1984/85. Reflecting this, the average annual price of sunflowerseed oil declined by 39 percent in 1986 and an additional 2 percent during 1987, and the competitive position of sunflowerseed oil relative to soybean oil, rapeseed oil, and groundnut oil declined. Between 1985 and 1987, sunflowerseed oil increased its premium over soybean oil from 5 percent to 10 percent and its premium over rapeseed oil from 12 percent to 21 percent, while its discount to groundnut oil declined from 35 percent to 28 percent. With the expected increase in export supplies from Argentina in 1988, improvement in the competitive position of sunflowerseed oil is not unlikely.

Fish Meal

Fish meal is used in poultry, swine, and other animal feed as well as feed in aquaculture. After increasing by 15 percent in 1986, in line with the strengthening of other protein meal prices, the price of fish meal increased by an additional 19 percent during 1987 owing to a marked tightening of supply. In December 1987, the price of fish meal reached its most recent peak of $473 a ton, the highest level since January 1984, and 86 percent above the level recorded in July 1985. Fish meal generally is sold at a premium over soybean and other protein meals and, with its recent rise in price, fish meal’s premium to soybean meal increased from an average of 74 percent ($136 a ton) in 1986 to an average of 89 percent ($180 a ton) during 1987. On a quarterly basis, fish meal’s average premium over soybean oil rose from 80 percent in the first quarter of 1987 to over 100 percent in the third quarter and eased to 91 percent in the fourth quarter.

After increasing by 6 percent to a record level of 6.3 million tons in 1985/86, fish meal production declined by 7 percent to 5.9 million tons in 1986/87. The decline in production is mainly attributable to lower output in Chile and Peru, the world’s two largest producers, reflecting poor fishing conditions as a result of the El Niño weather disturbances. Chilean production declined by an estimated 19 percent to 1 million tons, reflecting reduced catch because of poor fishing conditions combined with bans on fishing to protect its fish population during the spawning season. Nevertheless, a sharp drawdown in stocks enabled Chile to maintain export volume at only 1 percent below the 1985/86 level. Production in Peru declined by 25 percent to 0.7 million tons, but a substantial decline in stocks permitted export volume to increase by 3 percent in 1986/87. As a result of the decline in world output, combined with a continued high level of consumption, world stocks fell by 36 percent in 1986/87 to 0.45 million tons, the lowest level since 1982/83. World consumption of fish meal increased by 5 percent to 6.3 million tons in 1985/86 and declined to about 2 percent below that level in 1986/87. The Federal Republic of Germany and Taiwan Province of China are the largest importers of fish meal, accounting for about 12 percent each of world imports.

In 1987/88 world production of fish meal is expected to increase by 6 percent to 6.2 million tons. Higher consumption is currently expected to reduce stocks slightly below the low level at the end of 1986/87. EC production of poultry products is expected to continue to expand, although slower growth in pork output, accelerated growth in domestic production of oilseeds and pulses, and the recent sharp rise in fish meal prices relative to prices of other meals could cause a reduction in protein meal imports, including fish meal. Fish meal’s reduced competitiveness in relation to soybean, rapeseed, and other oilseed meals could therefore encourage substitution in importing countries, thereby narrowing fish meal’s premium over competing protein meals.

Meat

The largest components of the global meat trade are beef and veal. In 1985 (the latest year for which complete data are available), exports of beef and veal amounted to 3.3 million tons (43 percent of the volume of global meat trade, including intra-EC trade), while pork exports were 2.1 million tons (28 percent). Although there has been a secular increase in global poultry production, the share of poultry in global meat trade has declined in recent years. In 1985 poultry exports of 1.5 million tons accounted for 19 percent of global meat trade, compared with 23 percent in 1981. The balance of meat trade is mostly lamb and mutton; exports in 1985 of 725,000 tons were 10 percent of global meat trade.

Beef

After allowing for the secular decline in the demand for beef in industrial countries related to health concerns in favor of light meats, such as pork and especially poultry, the major influence on the price of internationally traded beef in recent years has been fluctuations in supply. Herd liquidation in the EC in response to measures to control the growth of dairy output led to heightened competition for export markets in 1984, and U.S. dollar prices fell to 103 cents a pound from an average of 111 cents a pound in 1983 (Table 31).44 In 1985 herd rebuilding in Australia was interrupted by dry weather, while herd liquidation in the United States continued in response to the high indebtedness of producers and Government programs to curtail the output of dairy products. Prices fell further to an average of 98 cents a pound for the year. In 1986 the main influence on prices was the dairy termination program under the 1985 U.S. farm bill which accelerated the rate of dairy cow slaughter in the United States and led to a sharp increase in U.S. beef exports.45 The average price of beef in 1986 declined by a further 3 percent to 95 cents a pound, the lowest price recorded since 1978.

Table 31.Prices of Beef and Lamb, 1979–88
YearBeef1Lamb2Beef1Lamb2
(In SDRs a pound)(In U.S. dollars a pound)
19791.010.841.311.09
19800.961.011.251.31
19810.951.061.121.25
19820.980.981.081.09
19831.040.821.110.88
19841.010.861.030.88
19850.960.820.980.84
19860.810.790.950.93
19870.840.761.080.98
1986I0.880.760.990.85
II0.800.850.930.99
III0.760.810.910.97
IV0.810.740.970.89
1987I0.810.771.030.97
II0.830.771.081.00
III0.840.751.080.95
IV0.850.761.151.02
1988I0.850.821.161.12
Source: Commodities Division, IMF Research Department.

Prices strengthened to 105 cents a pound in the first half of 1987 in anticipation of a tightening of supplies with the imminent end of the dairy termination program and the possible limitation of imports from Australia and New Zealand under voluntary restraint agreements. Low grain prices also raised profitability of fattening cattle on feedlots, which, in turn, raised the demand for and prices of feeder cattle. Higher feeder cattle prices were then carried over to higher prices of finished cattle and meat, which were sustained by firm retail demand. Prices rose further to 108 cents a pound in the third quarter, reflecting a temporary ban by the United States on imports from Australia in August/September on account of an unacceptably high level of pesticide residues in some shipments and a reduction in the flow of imports from Australia in October and November under the voluntary restraint agreement. Prices peaked in November 1987 at 116 cents a pound but then weakened a little in December following U.S. government reports of higher-than-anticipated numbers of cattle on feedlots. For the year as a whole, beef prices were 14 percent higher than in 1986.

After rising by 2 percent in 1985, world production of beef and veal rose by an additional 1 percent in 1986, and remained unchanged in 1987 at 43.9 million tons. Higher beef production in Argentina, Australia, the EC, and the U.S.S.R. offset declines in Brazil and Eastern Europe in 1986. In 1987, higher output in Brazil, the EC, and the U.S.S.R. balanced lower slaughtering in countries entering the rebuilding phase of the cattle cycle—Argentina, Australia, Canada, and the United States. In the EC, output increased by 2 percent in 1986 in response to the dairy outgoers scheme which aims to compensate farmers for a 3 percent reduction in their milk production quotas in the two years to April 1988. Additional measures designed to reduce the flow of beef into intervention stores were introduced in December 1986, including an effective cut in intervention prices of between 1015 percent. The impact of these measures on beef production in 1987 was offset by tighter controls on milk output (leading to increased slaughter) introduced at the same time,46 and output is estimated to have increased by 1 percent. In the U.S.S.R., increased investment in the livestock sector resulted in higher cattle numbers and meat output in both years. Brazil’s cattle slaughterings fell sharply (by 13 percent) in 1986 as producers withheld cattle from the market in protest against a freeze on prices. With domestic demand raised by high consumer purchasing power, Brazil changed from being the third largest net exporter of beef and veal in 1985 to the second largest net importer (after the United States) in 1986. The additional import demand did not, however, result in higher international prices because of competition between the EC and the United States to reduce Government stocks.47 Brazilian meat output returned to normal in 1987 after the relaxation of price controls in March. Australian production of bovine meat rose by 10 percent in 1986 on account of additional slaughterings because of dry weather in the eastern states, but declined by an estimated 4 percent in 1987 as herds were rebuilt. United States production increased by 3 percent in 1986 and declined by an estimated 4 percent in 1987 under the influence of the dairy termination program. The secular decline in global per capita consumption of beef and veal halted temporarily in 1985 at 35.9 pounds (carcass weight) as low prices stimulated consumption in the EC, Canada, and the United States. Although consumption increased further in 1986 throughout much of the world because of low prices, a sharp decline in Brazilian consumption related to reduced availability of domestic beef was mainly responsible for global per capita consumption resuming its downward trend, falling to 35.7 pounds. It is estimated that per capita consumption declined further in 1987 owing to higher prices and a further shift in demand from beef to pork and poultry, particularly in North America. In the United States, in terms of retail weight, estimates indicate that poultry consumption exceeded beef and veal consumption for the first time in 1987.

The outlook for 1988 is for global beef and veal production to remain almost unchanged from 1987, as higher output in the U.S.S.R. should balance reduced output in most other countries. Global per capita consumption is projected to decline further as competing meats will be in good supply, and this, together with large stocks of frozen beef available in the EC48 should restrain any upward movement of prices.

Lamb

After increasing by 2 percent in 1985, world production of sheep and goat meat fell by 6 percent in 1986 as higher output in Australia was offset by lower output in the EC, New Zealand, and the United States. In New Zealand, which accounts for about 14 percent of world sheepmeat production and about 70 percent of world exports, a seven-week strike by meatworkers in February–March, the on-going contraction of the sheep farming sector owing to the withdrawal of Government supports, and a greater emphasis on wool production led to a 16 percent reduction in output in 1986. Flock rebuilding with greater ewe retention in the EC and the United States resulted in a 3 percent and 6 percent fall in sheepmeat output, respectively. Sheepmeat production in Australia increased by 6 percent mainly because of drought-induced slaughter in the first half year, but also because the decline in New Zealand production opened up export opportunities in the United States market.49

The meatworkers strike in New Zealand occurred just before the seasonal peak in demand at Easter, and the shortage of supplies was mainly responsible for a sharp increase in prices, from 83 cents a pound in January 1986 to 108 cents a pound in June (Table 31).50 Following the resumption of New Zealand exports, prices declined to 106 cents a pound in July, and then declined more rapidly, averaging just over 93 cents a pound in the second half year. For 1986 as a whole, prices averaged under 93 cents a pound, or 11 percent higher than in 1985. In the first half of 1987, prices averaged 98 cents a pound, boosted by seasonal demand. A peak of 101 cents a pound was recorded in May, after which prices weakened slightly, averaging 99 cents a pound in the second half year. For the year as a whole, prices were 5 percent higher than in 1986.

The overall rise in prices in 1986–87 was also attributable in part to increased consumption of lamb, especially in the United Kingdom, where demand was boosted by improved marketing and packaging in the form of boneless roast lamb. More strict attention by suppliers to religious requirements in slaughtering facilitated an increase in imports of lamb by Middle Eastern countries, and imported chilled lamb gained greater acceptance in Japan. On the other hand, lamb consumption per capita in the United States declined owing to an increase in price relative to pork and poultry.

World output of sheep and goat meat rose by an estimated 2 percent in 1987. Production in Australia increased by 7 percent owing both to rising sheep numbers as high wool prices and low cereal prices led to the expansion of forage for sheep and to an increased rate of slaughter of lambs to take advantage of high meat prices. In a reversal of trend, sheep numbers in New Zealand rose by 3 percent owing to high meat and wool prices, but production remained unchanged because of a higher rate of ewe retention. Low feed costs and improved returns resulted in continued flock buildup in the United States, and sheepmeat production declined by over 10 percent. Meat production is estimated to have increased marginally both in the EC and the U.S.S.R. as a result of previous flock expansion.

The outlook for sheepmeat production in 1988 is for only a modest increase. Although Australian pastures are close to their maximum carrying capacity, the rate of slaughter may be constrained by extremely favorable wool prices. New Zealand output may decline marginally because carrying capacity of pastures will be reduced by lower fertilizer application; many farmers are in a strained financial situation owing to high mortgage and other interest payments. Sheepmeat prices in 1988 are expected to remain fairly stable at about the level prevailing at the end of 1987.

Sugar

Sugar prices have been depressed in the 1980s because of high levels of production, slow growth of world sugar consumption, and a related buildup in stocks. At the same time, international trade in sugar beginning in 1983 has progressively declined in absolute terms. The free market price declined from an average of 29 U.S. cents a pound in 1980 to 4 cents a pound in 1985 and fluctuated between 5 and 7½ cents a pound in 1986 and 1987 (Table 32). World sugar production reached 101 million tons in 1981/82 and 1982/83 (September/August) (Table 33). Between then and 1986/87, despite the sharp decline in prices, world sugar production declined only twice—in 1983/84 and in 1985/86—and in both years the declines were largely attributable to adverse weather conditions. In 1986/87 world production was a record 103 million tons; a small decline is forecast for 1987/88. In the period from 1981/82 to 1986/87, world sugar consumption has increased by about 2 percent annually, averaging 96 million tons a year (Table 33). The level of stocks rose sharply from 18.6 million tons in 1980/81 to 31.6 million tons in 1982/83, but declined thereafter. End-of-period stocks averaged about 30 percent of world consumption during the period 1981/82–86/87, compared with a “normal” level of 24 percent. Meanwhile, the volume of world sugar exports declined from 31 million tons in 1982 to an estimated 28 million tons in 1987.

Table 32.Prices of Sugar, 1979–88
YearFree Market1European Community2United States3Free Market1European Community2United States3
(In SDR 0.01 a pound)(In U.S. cents a pound)
19797.514.912.09.719.315.5
198022.017.023.128.722.130.0
198114.316.116.716.918.919.7
19827.616.418.08.418.119.9
19837.916.420.68.517.622.0
19845.115.621.25.216.021.7
19854.015.920.04.116.120.4
19865.215.917.96.118.621.0
19875.216.216.96.820.921.8
1986I5.216.118.65.818.120.9
II6.416.418.07.519.020.9
III4.415.817.45.319.020.9
IV4.715.117.55.718.321.1
1987I5.715.617.27.119.721.7
II5.116.217.06.621.022.0
III4.616.217.25.820.721.9
IV5.516.716.27.422.421.7
1988I6.516.816.18.920.922.0
Source: Commodities Division, IMF Research Department.
Table 33.Sugar: World Commodity Balance, 1981/82–87/88(In millions of tons, raw value, unless otherwise indicated)
September/August Crop Years
1981/821982/831983/841984/851985/861986/8711987/882
Production100.6101.396.5100.399.3102.9101.3
Australia3.43.53.43.53.43.83.4
Brazil8.49.39.49.38.48.89.2
China3.44.13.84.65.55.85.7
Cuba8.27.28.38.17.17.27.3
European Community17.116.013.314.414.414.913.4
India9.79.57.07.18.09.18.9
United States5.55.45.35.35.56.26.5
U.S.S.R.6.47.48.78.68.78.78.3
Other countries38.538.937.339.438.338.438.6
Consumption90.593.895.996.598.4101.4102.7
Brazil5.86.26.36.36.36.56.7
China4.54.95.05.66.17.07.1
European Community11.911.711.511.611.411.411.6
India6.87.68.99.19.39.710.0
United States8.48.07.97.27.37.47.4
U.S.S.R.13.013.013.313.313.513.413.4
Other countries40.142.443.043.444.546.046.5
Losses, discrepancy0.0-1.9-3.4-2.7-2.5-2.3-0.8
Reported closing stocks26.031.628.829.928.327.525.3
Change from previous year (in percent)39.621.5-8.93.8-5.4-2.8-8.0
Stocks/consumption ratio (in percent)29343031292725
Sources: Commodities Division, IMF Research Department for prices. Data for world commodity balance from U.S. Department of Agriculture, Foreign Agriculture Circular: Sugar, Molasses, and Honey (Washington), various issues.

In 1986/87 world production increased by nearly 4 percent to 102.9 million tons. Most of the expansion was attributable to increased production in India, where output rose by 14 percent because of better weather and increased area under cultivation, and in the United States, where output grew by 13 percent to 6.2 million tons (the highest level since 1975/76) as a result of higher yields from a substantially larger harvested area. Production also increased in other countries, including Brazil and those in the EC, because of higher yields, and China, reflecting both an increase in yields and the use of improved cane varieties. The production increase was accompanied by a 3 percent growth in world consumption to 101.4 million tons. China alone accounted for 30 percent of the rise in world consumption in 1986/87, reflecting increased demand for refined sugar in China’s expanding food-processing sector.

In 1987/88 world production is expected to decline by about 2 percent, mainly because of weather-related problems in some major producing countries, and is expected to fall short of consumption, which is projected to expand by 1 percent. As a result of the projected production shortfall, world sugar stocks are expected to fall. The absolute level of reported stocks is expected to fall by 2 million tons and the stock/consumption ratio, which has been falling in recent years, is expected to decline further. The improvement in overall market balance is expected to result in higher prices.

After increasing by 26 percent in the first quarter of 1987 to 7.6 cents a pound in March, the average quarterly price of sugar on the free market declined by 7 percent during the second quarter and by a further 11 percent in the third quarter to a low of 5.6 cents a pound in August. The rise in prices in the early months of the year is mainly attributable to major purchases by the U.S.S.R. to supplement domestic production and normal purchases from Cuba, tight export availabilities in Brazil stemming from drought damage to production and sharply increasing domestic demand, and a poor supply situation in Cuba, because of low production in two successive years as a result of drought and hurricane damage. The fall in the free market price during the period March–August 1987 reflects increases in previously estimated production for 1986/87 and in projected output for 1987/88, indicating a continuation of the stock overhang. However, reports of possible weather-induced damage to sugar crops in major producing countries and an anticipated stock drawdown in 1987/88 because world production is expected to decline below world consumption for the first time in over five years caused prices to move up in subsequent months, averaging 8.3 cents a pound in December 1987. For 1987 as a whole, the free market price of sugar averaged 11 percent higher than in 1986 but 39 percent lower than the average annual price in the period 1980–86 and 76 percent lower than in 1980.

Sharply lower prices in recent years have not had much of an impact on world sugar output mainly because of support prices in most industrial countries, and, to a lesser extent, in developing countries. These policies support production through government-administered prices and other production incentives and by preferential trade arrangements. A comparison of sugar prices in the United States and EC markets with free market prices is indicative of the degree of protection provided to domestic producers. In 1986 and 1987 the price in the U.S. market averaged about 21-22 cents a pound and the price of sugar in the EC averaged 19-20 cents a pound, compared to a free market price of 6-7 cents a pound.

Prices in the United States sugar market have been maintained at a relatively high level by means of guaranteed loans for domestic producers and of limiting the supply of sugar through import quotas. The Food Security Act of 1985 mandates that raw sugar prices be supported at no less than 18 cents a pound through 1990. The Commodity Credit Corporation (CCC) guarantees nonrecourse commodity loans available to sugar processors, who can use sugar as collateral to receive the loans. Processors are permitted, without penalty, to forfeit the sugar used as collateral, and do so if market prices are not high enough to cover the loan proceeds and at least marketing expenses (insurance and transportation charges) and interest charges on the loan.51 Since May 1982, the United States has maintained import quotas for sugar (Table 34) to maintain domestic prices high enough to prevent loan defaults.52

Table 34.U.S. Sugar Quota Allocations by Country, 1982/83–87/881(In thousands of tons; raw value)
Country10/01/82–09/30/83209/26/83–09/30/84310/01/84–11/30/85 (14 months)12/01/85–12/31/86 (13 months)01/01/87–12/31/8701/01/88–12/31/88
Argentina109.2118.799.166.935.527.3
Australia210.8229.0191.3129.268.552.7
Barbados17.819.316.111.36.85.2
Belize27.930.425.317.19.17.0
Bolivia20.322.118.412.56.85.2
Brazil368.3400.1334.1225.7119.792.1
Canada27.930.425.317.19.17.0
Colombia60.966.255.337.419.815.2
Congo0.015.211.311.36.85.2
Costa Rica38.156.647.431.515.911.9
Côte d’Ivoire15.015.211.311.36.8115.2
Dominican Republic447.1485.7405.5274.0145.3111.7
Ecuador27.930.425.317.19.17.0
El Salvador66.080.967.645.423.617.9
Fiji17.819.316.111.322.85.7
Gabon0.00.011.311.36.85.2
Guatemala121.9132.5110.674.739.630.5
Guyana30.533.127.718.79.97.6
Haiti15.015.211.311.36.85.2
Honduras25.454.045.429.714.410.5
India20.322.118.411.56.85.2
Jamaica27.930.425.317.19.17.0
Madagascar15.015.211.311.36.85.2
Malawi17.826.632.115.68.36.3
Mauritius27.930.425.327.79.97.6
Mexico15.015.211.311.36.85.2
Mozambique33.035.930.020.210.78.3
Nicaragua53.35.45.40.00.00.0
Panama73.780.066.845.123.918.4
Papua New Guinea0.00.011.311.36.85.2
Paraguay15.015.211.311.36.85.2
Peru104.1113.194.563.833.826.0
Philippines342.9372.6311.1210.1130.4100.3
St. Kitts and Nevis15.015.211.311.36.85.2
South Africa58.463.553.035.80.00.0
Swaziland40.644.236.924.913.210.2
Taiwan Province of China30.533.127.718.79.97.6
Thailand35.638.632.221.811.68.9
Trinidad and Tobago17.819.316.111.36.85.2
Uruguay0.015.211.311.36.85.2
Zimbabwe30.533.127.718.79.97.6
Total2,6222,8792,4261,675908685
Total prorated to 12 months2,6222,8792,0791,546908685
Percentage change0.09.8-27.8-25.6-41.3-24.6
Source: U.S. Department of Agriculture. Converted at 1 short ton = .907 metric ton.

The relatively high sugar price in the United States and the relatively greater profitability of sugar production over production of alternative crops has been reflected in increased U.S. sugar production and increased substitution of more competitively priced high fructose corn syrup (HFCS) for sugar in processed foods. U.S. sugar consumption has fallen from nearly 9 million tons in 1980/81 to about 7 million tons annually on average in the years 1984/85–86/87, reflecting the displacement of sugar by caloric and also noncaloric sweeteners. Meanwhile, sugar production in 1987/88 is expected to be 18 percent higher than in 1985/86. Consequently, the U.S. import market has continued to contract, and it is possible that the United States may become a net exporter of domestically produced sugar within two to four years.

In the EC sugar market, domestic prices and production have been supported through a system of mechanisms, including quotas on domestic production and imports (Table 35). There are guaranteed prices, expressed in terms of ECUs, intervention purchases of domestic sugar, variable import levies that effectively eliminate all imports except those emanating from the African, Caribbean, and Pacific (ACP) countries, and a system of export refunds, or restitutions, which provide for the payment of refunds to exporters whenever export prices for quota sugar are below the guaranteed domestic prices.53 The sugar regime has effectively insulated the EC sugar market from world sugar market conditions and has transformed the EC from a net importer of sugar in the 1970s to one of the world’s four leading sugar exporters and the single largest exporter to the free market.

Table 35.European Community Sugar Quota Allocations by Country, 1981/82–87/88

(In thousands of tons; raw value)1

July/June Quota Years
Country1981/821982/831983/841984/851985/861986/871987/882
Barbados53.653.653.654.454.454.754.7
Belize42.842.842.843.643.643.943.9
Congo5.45.48.710.910.911.111.1
Côte d’Ivoire0.00.02.210.910.911.111.1
Fiji177.8177.8177.8179.2179.2179.7179.7
Guyana171.4171.4171.4172.8172.8173.3173.3
India0.00.010.910.910.910.910.9
Jamaica128.6128.6128.6128.6128.6129.0129.0
Kenya0.14.34.35.45.40.00.0
Madagascar10.910.910.911.511.511.711.7
Malawi21.721.721.722.422.422.622.6
Mauritius529.6529.6529.6532.5532.5533.7533.7
St. Kitts and Nevis16.116.116.116.716.716.916.9
Swaziland126.5126.5126.5127.7127.7128.1128.1
Tanzania10.910.910.910.910.911.111.1
Trinidad and Tobago75.075.075.047.347.347.647.6
Zimbabwe6.627.227.232.632.632.932.9
Total1,3771,4011,4181,4181,4181,4181,418
Sources: Regulation 3225/80 (Protocol No. 7) giving the text of the Second Lome Convention. Regulation 1255/82 on Zimbabwe’s accession to the Lome Convention. Regulation 1243/84 partially restoring India’s quota. Regulation 1764/84 giving the Côte d’Ivoire an ACP quota. Regulation 1763/84 giving full ACP membership to St. Christopher and Nevis, and Regulation 1256/82 doing the same for Belize. Council Decision 75/456/EEC of July 15, 1975 on India’s sugar quota. Notices of the Commission in Official Journal CI 12 (May 13, 1978), C97 (April 18, 1979), C108 (April 29, 1982), C124 (May 15, 1982), and C328 (December 14, 1982). Reallocation of Trinidad’s shortfall and Kenya’s shortfall by Commission Decisions.

The EC sugar regime is largely self-financing. The main direct cost to the EC budget is the export refunds known as “restitutions,” on the 1.4 million tons of ACP sugar (Table 35). Restitutions are paid to exporters in order to bridge the gap between the guaranteed domestic price and the world price. Restitutions are also paid on EC exports of sugar produced within the system of production quotas (about 2 million tons a year), and these are financed mainly by producer levies.54 These levies, however, have been insufficient to cover the heavy cost of restitutions owing to depressed world prices.

Similarly in Japan, import stabilization fund, customs, and consumption taxes have increased the imported price of sugar substantially above the free market price; sugar production increased by 16 percent between 1982 and 1986, while consumption and net imports decreased by 6 percent and 19 percent, respectively, in that period.

As a consequence of the policy measures in many countries, in 1986 internationally traded sugar accounted for less than 27 percent of world production, and only 18 percent of production was traded at competitive prices on the free market. As countries have increasingly insulated producers and consumers from the sharp swings in free market prices, the absolute size of the residual free market has been reduced; net exports to the free market have fallen from about 22 million tons in 1982 to 18 million tons in 1986. About one fifth of international sugar trade is conducted under special long-term bilateral and multilateral supply and purchase arrangements. Importing countries typically pay higher than free market prices for imports under terms of such agreements. An example of special arrangement trading in sugar is the barter arrangement between Cuba, the world’s leading sugar exporter, and the U.S.S.R., which acquires much of its imported sugar from Cuba at very high rates of compensation in the form of machinery and other goods. Another example is EC imports of sugar from ACP countries under the Sugar Protocol of the Lomé Convention. Net sugar imports by the U.S.S.R. have declined in recent years, from a record level of 7.1 million tons in 1982 to 5.2 million tons in 1986. This reflects increasing self-sufficiency, partly as a result of the recovery in output after three successive years of adverse weather conditions.

As a result of exports under such arrangements and to the preferential U.S. market, overall unit values of sugar exports have been considerably higher than prices on the free market. As purchase agreements are renewed, however, some reflect lower free market prices. Furthermore, as U.S. import quotas have been reduced, supplies in excess of quota limitations have had to be channeled to other free market outlets at substantially lower prices. The unit value of sugar exports of developing countries (excluding Cuba) has declined from an average of $545 a ton in 1980–81 to an estimated $218 in 1984–87 (Table 36). Reflecting this and lower export volumes since 1982, the value of sugar exports of developing countries has fallen from nearly $6 billion in 1980 to only $2.5 billion in 1986 and 1987.

Table 36.Sugar: World Trade, 1984–87
1984198519861987119841985198619871
(Values in SDRs)(Values in U.S. dollars)
Exports
Earnings (in billions)9.88.88.07.610.18.99.49.8
Industrial countries2.01.71.71.92.11.72.02.4
Developing countries7.66.96.05.47.87.07.17.1
U.S.S.R. and Eastern European countries0.20.20.30.30.20.20.30.3
Volumes (in millions of tons)28.728.328.227.928.728.328.227.9
Industrial countries8.38.18.89.38.38.18.89.3
France2.92.42.22.02.92.42.22.0
Australia2.42.52.82.82.42.52.82.8
Other3.03.23.84.53.03.23.84.5
Developing countries19.419.217.817.119.419.217.917.1
Brazil3.22.72.42.33.22.72.42.3
Cuba6.76.96.76.46.76.96.76.4
Other9.59.68.78.49.59.68.88.4
U.S.S.R. and Eastern European countries1.01.01.51.51.01.01.51.5
Unit values (a ton)343310285271352315335351
Industrial countries248213198200254216232258
Developing countries391359339318401365397412
(Developing countries excluding Cuba)232182184179238185216231
U.S.S.R. and Eastern European countries205167188170210170220220
Imports
Values (in billions)10.59.08.67.610.89.210.19.8
Industrial countries2.92.22.01.92.92.22.42.4
Developing countries2.92.42.32.13.02.52.72.8
U.S.S.R. and Eastern European countries4.74.44.33.64.94.55.04.6
Volumes (in millions of tons)28.127.426.825.128.127.426.825.1
Industrial countries9.38.58.07.49.38.58.07.4
United States3.12.61.91.53.12.61.91.5
Japan1.81.91.81.71.81.91.81.7
United Kingdom1.41.11.31.41.41.11.31.4
Other3.02.93.02.83.02.93.02.8
Developing countries11.913.112.411.811.913.112.411.8
U.S.S.R. and Eastern European countries6.95.86.45.96.95.86.45.9
U.S.S.R.5.84.55.24.75.84.55.24.7
Other1.11.31.21.21.11.31.21.2
Unit values (a ton)373330322302383335378390
Industrial countries308260251256316264295331
Developing countries246183183174252185215225
U.S.S.R. and Eastern European countries680768679615697779797795
Market prices (a ton)
Free market21128811411511589133149
European Community3345350350357353355410462
United States4468442394372479449462481
Sources: UN Food and Agriculture Organization, 1986 FAO Trade Yearbook (Rome), for exports and imports; Commodities Division, IMF Research Department for market prices.

Among developing countries, expanding domestic production has sharply reduced sugar imports by a number of countries. Mexico’s imports declined from an average of 701,000 tons annually in the period 1980–83 to 273,000 tons in 1984, and since 1985 Mexico has been a net sugar exporter.

The shrinkage of world sugar trade reflecting structural changes in regard to both supply and demand, which appear to be extending the length of sugar price cycles, could limit the extent of future price increases.55 Historically, high sugar prices have tended to induce over-expansion of production. Burdensome stocks and low prices help to discourage further increases in production, which tend to be inflexible in a downward direction. Increasing consumption helps to absorb excess supplies, and if this is accompanied by a large, typically weather-induced, shortfall in output in one or more major producers, prices may rise sharply. As a result, the sugar price cycle has typically involved a short period of high prices followed by a long period of low prices. The average length of time between peaks has been about 6 years, with the most recent peaks in 1974 and 1980, when prices averaged 30 cents a pound and 29 cents a pound, respectively.

Developments since the mid-1970s appear to have reduced the average potential response time of producers to higher prices. These include the expansion of output in the EC and its emergence as a major world exporter of sugar. The EC produces beet sugar, a crop whose production can be substantially increased in less than a year in response to appropriate price signals. Another potential supply response to high prices could be the cane used in Brazil’s alcohol industry. About 40 percent of Brazil’s cane production is used to produce sugar; some market analysts feel that a substantial rise in prices could induce Brazil to divert part of its sugarcane output from alcohol to sugar production, and this possibility should be factored into consideration of possible supply developments. Furthermore, the long period of low world market prices has caused many sugar exporters to maintain production by increasing efficiency and reducing production costs. Prices in the range of 7–10 cents a pound, basis New York, are now quoted as adequate to profitably export sugar. Higher prices could provide an incentive to such producers, and to those that cut back production as a result of adverse market developments, to expand output, or to increase it to former levels, both to increase rates of return and possibly also to recapture lost market shares.

The structure of the world sugar market has also changed substantially on the demand side. Whereas the industrial countries accounted for about two thirds of world imports in the mid-1970s, they accounted for only about 30 percent in 1986, with developing countries now accounting for the largest share. This is mainly attributable to the displacement of sugar by high fructose corn syrup, especially in the United States and to a lesser extent in Japan. In recent years, the U.S.S.R. has replaced the United States as the world’s leading sugar importer, but the U.S.S.R.’s purchases on the free market have tended to fluctuate sharply, depending upon both domestic production prospects and production in Cuba, its major supplier. The shift in world import demand away from industrial countries, where price and income elasticities of demand are very low, to developing countries, where elasticities are relatively high, has made world demand for imported sugar more sensitive to movements in prices.

Free market prices are expected to improve in 1988 as a result of the expected reduction in world stocks, especially the expected decline in surplus stocks in exporting countries. Nevertheless, the extent and duration of the price rise is expected to be limited. Structural changes in the market, such as the increased share of beet sugar in world trade as a result of the expansion of beet sugar production in the EC and the development of the sugar cane-based alcohol industry in Brazil, have reduced the potential response time required by producers to adjust to changing price signals. World beet and cane processing capacity, which already substantially exceeds consumption, is still continuing to expand. Furthermore, because of the marked rise in the share of developing countries in world sugar imports in recent years, the elasticity of market demand with respect to price has increased, and any major price increase could result in reduced purchases. In addition, a strong rise in world prices in 1988–89 could encourage further major shifts in consumption away from sugar toward high fructose corn syrup and high intensity sweeteners. HFCS could potentially displace sugar in markets other than those in the United States and Japan, and, over the longer term, trade in crystar (crystaline corn fructose) and low-calorie sweeteners could increase.

Bananas

The volume of world exports of bananas increased by 5 percent in 1986 to 7.4 million tons; it is estimated to have increased further in 1987. Ninety-five percent of world exports come from developing countries, of which the members of the UPEB (Union de Paises Exportadores de Banano) account for more than 50 percent. With the exception of Colombia and Guatemala for which export volumes were unchanged, member countries of UPEB registered substantial increases in 1987 exports: Costa Rica, 5 percent; Honduras, 15 percent; and Panama, 19 percent. Ecuador, normally accounting for about 20 percent of total trade, is estimated to have exported 1.4 million tons. In 1986, exports of the Philippines rose by 12 percent to 900,000 tons and by the Caribbean countries by 18 percent to 535,000 tons.

By far the biggest importers are the industrial countries, representing 93 percent of the total world import demand in 1986. Imports of the United States at 2.7 million tons were unchanged compared with 1985, while the imports of the EC increased by 6 percent to 2.4 million tons, and Japan increased imports by 12 percent to 760,000 tons. Except for Portugal and Spain, all member countries of the EC increased their imports individually; per capita imports also rose, with the Federal Republic of Germany reaching 10.5 kilograms, the highest level in the EC and close to that of the United States.

U.S. dollar prices on average in 1987 were 5 percent lower than in 1986. Prices in deutsche mark fell in 1987 by 4 percent; in Japan prices in Japanese yen fell at least 15 percent, whereas in French ports, prices in French francs rose by 3 percent. Prices in terms of dollars rose substantially in Europe: in the Federal Republic of Germany by 14 percent and in France by 18 percent, whereas in Japan they remained virtually unchanged (Table 37).

Table 37.Bananas: Prices in Selected Markets, 1985–87(A ton)
YearAverageJan.Feb.Mar.AprilMayJuneJulyAug.Sept.Oct.Nov.Dec.
New York
In U.S. dollars1985378376443454484457380321422362278275285
1986382329386500578387345331321424375294311
1987362357402420373402355410304328247381356
Hamburg
In deutsche mark19851,3401,2871,4941,8772,0111,8031,5091,1681,1001,223822937848
19861,2101,1851,3231,4471,6851,5231,5408791,0661,0541,002855947
19871,1607751,1971,4101,2821,2881,5211,3231,2641,1291,020909811
In U.S. dollars1985455406454567652579493400394431311361377
1986557485567639741684689408517517500422475
1987632396655769708721836716632583568505497
French ports
In French francs19854,9704,5004,8905,7505,7905,4904,9404,6104,6104,7604,9204,7104,660
19865,0604,7605,0805,6005,4905,2105,3004,7104,8205,0205,0204,8704,820
19875,2104,7004,8405,6205,4205,3305,5505,5405,5205,4505,3604,9704,220
In U.S. dollars1985553464486569615580529519541550610597605
1986731635709804763732743680717752767735737
1987864759795921899893914901883882895871763
Japanese ports
In thousands of Japanese yen19851058889951221311331161071181077973
19868473808796991141088477646165
198771586274857976686572727373
In U.S. dollars1985439346342367486519536480450500497388358
1986498366433484548592676683544500412375401
1987496375404488594562526453441503503540570
Sources: UN Food and Agriculture Organization, FAO Monthly Bulletin of Statistics (Rome), and Commodities Division, IMF Research Department.

Different price movements for bananas in different countries not only reflect exchange rate changes but also are an indication of the segmentation of this market. In many cases, importing countries have long-standing bilateral trade relations with individual exporting countries. For example, shipments to continental France come mainly from the Overseas Departments and from Cameroon and Côte d’Ivoire under preferential import regimes. Caribbean countries are the major suppliers for the British market, providing about 225,000 tons out of a total import demand of 350,000 tons in 1987 under special arrangements. Japan, a country without quantitative import restrictions on bananas but with significant duties, is supplied with bananas to a large extent by the Philippines. In the case of the Federal Republic of Germany, there are no particular bilateral links to banana-producing countries and no quantitative import restrictions. The German market is mainly supplied from the same sources as the U.S. market, that is, the countries in Latin America. Even differences in seasonal policy patterns can be related partly to this segmentation. The pattern of German prices is similar to the U.S. price pattern, while French prices seem to move within a more narrow range. Price movements throughout the year in Japan differ considerably from those in the United States and Europe, with the tendency toward one peak around mid-year. In Japan the traditional peak demand during the second quarter of the year is only partly in line with the production cycle in the Philippines, where peaks occur in both the second and fourth quarters.

Mainly because of the increasing variety of competing fruit, import demand for bananas in the traditional major markets may only have a limited growth potential. Substantial increases of imports into the EC and Japan in 1986 and 1987, contrasting with the stagnation in previous years, could be misleading if interpreted as long-term trends. Lower-than-expected availabilities of competitive fruit owing to a severe winter in 1985/86, as well as the generally favorable import prices for bananas and the alleviation of some of the supply problems that were evident in the early 1980s, contributed to the far-above-average increase. A return to the high growth rates of the 1970s in markets in eastern Europe and the U.S.S.R. can only be expected in the event of major changes in foreign trade regimes of these countries. In any event, these countries account for only about 3 percent of world trade. Even imports into the United States, growing throughout the whole postwar period, seem to have lost some strength after the per capita import reached a level above 11 kilograms in the mid-1980s. Plans for substantial expansion of production in the Caribbean and some UPEB countries could, therefore, contribute to an underlying tendency for growth in supply to exceed growth in consumption and to a deterioration of already weak price prospects for bananas.

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