I Commodity Market Developments and Prospects
- International Monetary Fund
- Published Date:
- January 1989
This report analyzes commodity price movements in 1988, examines their outlook over the near term, and assesses the implications for export earnings of both industrial and developing countries.
The strong upturn in non-fuel primary commodity prices that began during 1987 continued throughout 1988. Measured by the Fund’s world index, prices rose 19 percent in terms of SDRs and in U.S. dollars the increase was even larger—23 percent—reflecting the depreciation of the dollar (Table 1). These increases far exceeded those forecast at the beginning of the year.1 In real terms (i.e., relative to export unit values for manufactures), non-fuel commodity prices rose by 17 percent in 1988, the largest increase since 1973 (Table 2). The unanticipated sharp rise primarily reflected the stronger-than-expected growth of demand in industrial countries and the effects of inclement weather, in particular the North American drought. In early 1988, real growth in gross national product (GNP) in the seven major industrial countries2 for the year was forecast at just below 3 percent. Realized GNP growth of these countries is now estimated to have been over 4 percent (Table 1).
|Non-fuel commodity prices1|
|In U.S. dollars||–10.4||6.2||2.2||–13.1||–3.9||8.6||23.4|
|In U.S. dollars||–8.0||–9.6||–0.4||–4.5||–48.8||28.7||–20.4|
|Unit value of manufactured exports|
|In U.S. dollars||–2.1||–2.8||–3.0||1.0||17.7||12.0||6.0|
|Domestic prices in major industrial countries4|
|Consumer price index|
|In U.S. dollars||–0.1||1.6||0.3||2.5||16.7||10.7||7.0|
|In U.S. dollars||–0.4||1.8||0.0||1.9||18.0||10.6||6.9|
|Economic activity in major industrial countries4|
|Domestic fixed investment||–5.2||4.0||9.7||4.6||1.9||4.3||8.1|
|World consumption of non-fuel commodities5|
|Index of consumption||1.3||1.3||3.5||1.5||5.2||1.9||0.6|
|World supply of non-fuel commodities5|
|Index of production||–0.7||–0.7||8.0||1.5||–0.4||3.6||0.0|
|Index of supply6||1.2||1.2||5.3||2.8||1.6||1.3||–0.3|
|Index of closing stocks||10.5||–7.9||9.7||10.8||–7.3||–3.5||–11.9|
The commodity composition of the price increases in 1988 differed importantly from that observed in 1987. Whereas the rise in the Fund’s commodity price index during the second half of 1987 was driven by increases in prices of agricultural raw materials, as well as metals, the drive behind the continued rise in the index in the first half of 1988 was mainly the steep price increases for metals, related to the robust growth of output in the industrial countries. Prices of food commodities rose sharply in the second and third quarters of 1988. Prices of beverages remained weak in 1988 owing mainly to supply factors. Global earnings from exports of non-fuel primary commodities increased substantially in 1988. Because many of the commodities registering large price increases are exported predominantly by industrial countries, the earnings of industrial countries increased much more than those of developing countries.
On the assumptions of marginally lower growth of real GNP in industrial countries in 1989 than in 1988 and of no major disruptions in the supply of major primary commodities, it is expected that prices of those foods and metals showing the sharpest price increases in 1988 will begin to decline by mid-1989, while the prices for beverages and agricultural raw materials will remain largely unchanged throughout the year. The level of the overall price index for non-fuel primary commodities in 1989, however, is projected to average almost the same as the 1988 level. For 1990 a decline is projected as a result of the lower prices anticipated for food and metals in that year. As a consequence, assuming that prices of manufactured goods continue to rise at a rate similar to that in recent years, most of the real price rise in 1988 for non-fuel primary commodities is likely to be eroded by the end of 1990. Over the medium term (1991–94), a deceleration in the rate of growth of supply of these commodities is likely to result in small real price advances.
Non-Fuel Primary Commodity Prices in 1987 and 1988
The upturn in the Fund’s price index for non-fuel primary commodities began in the second quarter of 1987 and continued through the first quarter of 1989 (Chart 1). During 1987, the increase in the overall index can be attributed to price increases of raw materials used in manufacturing—both those derived from agricultural and forestry operations and from mining (Chart 2). During 1988, the prices of minerals and metals continued to rise, but those of agricultural raw materials fell somewhat from their end-of-1987 levels. Prices of food commodities climbed slowly in 1987 and the first part of 1988, then rose sharply in the second and third quarters of 1988, primarily because of the drought in North America. The availability, however, of large stocks accumulated in previous years dampened the upward price movement of food commodities. Beverage prices fell in the first quarter of 1987 and remained weak through 1988 mainly because of factors affecting supply: the near recovery of coffee production in Brazil following the drought-devastated 1986/87 crop; an excess in world cocoa production over consumption in a series of years beginning 1984/85; and strong growth in tea production in 1987 and 1988.
Chart 1.Prices in SDRs for Non-Fuel Primary Commodities, Petroleum, and Manufactures, First Quarter 1970–First Quarter 1989 Chart 2.Prices in SDRs for Non-Fuel Primary Commodities, January 1980–April 1989
Underlying these price movements was a strengthening of world economic activity, which had been underestimated by most forecasters, particularly for 1988. The rates of growth of real GNP, industrial production, and domestic fixed investment in the major industrial countries in 1988 were the highest of any year during the post-1982 expansion period except those for 1984. Many suppliers of commodities found that demand for their products was greater than anticipated; buyers had to restock sooner than planned to maintain their working inventories. High demand, in the United States, Japan, the newly industrializing economies of Asia, and, in 1988, in western Europe, reduced metals stocks worldwide and, to a lesser degree, stocks of agricultural raw materials. Stocks of metals were depleted, in part because much of the excess capacity that had overhung the metals market earlier in the decade had been idled. Furthermore, producers, in view of their experience in the early 1980s with excess capacity and low prices, were reluctant to reactivate this capacity unless there were signs that strong demand would continue. With regard to agricultural raw materials, the improved world economic environment contributed to strong demand for fibers and leather; new demand arose for products made from natural rubber; and in 1987 (although not in 1988) a surge of housing starts, particularly in Japan, increased demand for building materials, notably timber.
In 1988, the upturn in the overall non-fuel commodity price index was reinforced by the effects of the drought in North America on supplies of wheat, maize, and soybeans. The drought in the United States was the most severe the country had experienced since the 1930s: maize production fell by 34 percent; soybean production by 22 percent; and wheat production by 14 percent. The drought also affected much of Canada and parts of Mexico and Central America.
Movements in the overall price index and in price indices for the major groups of commodities have been mirrored by an inverse movement in stocks of commodities (Chart 3). Beginning-of-year stocks of all non-fuel commodities—measured in terms of months of consumption—increased during the first half of the 1980s and peaked in 1986. Stocks then declined to a level that at the beginning of 1989 was a little higher than at the start of 1980. The buildup and subsequent decline was most marked for stocks of minerals and metals. Movements in stocks of food commodities and agricultural raw materials generally have been similar to those of minerals and metals. Movement in the stocks of beverages has followed a different pattern, reflecting the long-term cyclical movements in capacity as well as weather; this resulted in low stocks during the mid-1980s, followed by a stock buildup in 1987 and 1988.
Chart 3.Non-Fuel Commodity Prices in Real Terms and Beginning Stocks Measured in Months of Consumption, 1980–89
Low stock levels have been associated with greater variability in commodity prices in 1988. The average month-to-month change in prices in terms of SDRs for the 39 commodities included in the Fund’s overall index was 3.3 percent compared with 2.2 percent for the period 1980–87. Prices for a number of individual metals were particularly volatile in 1988: the average month-to-month price change was 12 percent for nickel; 7 percent for aluminum; and nearly 5 percent for copper. The price of sugar in the free market also continued to be highly volatile with month-to-month changes averaging in excess of 7 percent during 1988.
Comparative Prices for Petroleum, Manufactures, and Non-Fuel Primary Commodities
In the final months of 1985 and through mid-1986, crude petroleum prices fell precipitously from the level prevailing in the first half of the decade. Approximately one half of the decline was reversed by mid-1987, but prices then drifted downward until late 1988. These developments mainly reflected changes in the flow of exports from major oil producing countries during the period. The Fund’s indicator spot price (an average of U.K. Brent, Dubai, and Alaska North Slope crudes, equally weighted, that is intended to reflect world consumption of light, medium, and heavy crudes, respectively) averaged $14.15 in 1988 compared with $27.00 in 1985 and $35.45 in 1980. During 1988, production of petroleum in the countries belonging to the Organization of Petroleum Exporting Countries (OPEC)3 rose from under 18 million barrels a day early in the year to about 22 million barrels a day near the end of the year. Petroleum prices began to recover in late November, however, following an OPEC agreement to reduce petroleum output in member countries to 18.5 million barrels a day beginning January 1, 1989. During the last week of December, platform and loading system damages in the North Sea that led to a 10 percent decline in offshore U.K. output also put upward pressure on prices. Average spot prices for crude petroleum continued to increase steadily in the first quarter of 1989 and reached $18.85 a barrel in April, a large increase over the average of $11.75 a barrel in November 1988.4 Contributing to this upward movement were commitments by non-OPEC oil producing countries to limit exports, an interruption of supplies from Alaska following a major oil spill, and another accident in the U.K. North Sea oil production complex.
The trend in the export prices of manufactured goods in the 1980s, unlike that of primary commodities, has been steadily upward, although the rate of increase has been much slower than in the 1970s. The rate of increase in the index of unit values of manufactured goods, measured in SDRs, fell from nearly 10 percent a year in 1980 to about 1 percent in 1983–84. The index then rose steadily at about 2 percent a year from 1985 to 1988. The rates of change in this index in terms of individual national currencies were more variable owing to large swings in exchange rates, in particular in the value of the U.S. dollar relative to other currencies. The unit value of manufactured exports in U. S. dollar terms fell each year from 1981 to 1984 but in 1986 increased by nearly 18 percent. In 1987 the rate of increase in this index declined to 12 percent in dollars and to 6 percent in 1988.
The persistent rise in prices of manufactured goods has meant that the purchasing power of exports of non-fuel primary commodities in terms of manufactured goods has been less than would be indicated by their nominal price movements. Nevertheless, the increase in the Fund’s index of prices of non-fuel primary commodities in 1988 in real terms, which is adjusted to take account of the increase in the prices of manufactures, was 17 percent, the largest year-on-year rise since 1973. The rise in the index in real terms using industrial countries’ export weights (as opposed to “world” export weights) was 20 percent, also the largest increase since 1973 (Table 3). The increase in the comparable index for developing countries was 12 percent, the largest rise since 1977. Most of the difference in the behavior of the series for industrial countries and the series for developing countries is attributable to developments relating to the prices of beverages, which have a large weight in the index for developing countries but an insignificant weight in the index for industrial countries. In contrast with the movement of real prices for non-fuel primary commodities, petroleum prices in 1988 fell by 25 percent in real terms.
|In SDRs||In U.S. dollars||Real Prices1,2|
|Year||Industrial countries||Developing countries||Industrial countries||Developing countries||Industrial countries||Developing countries|
Commodity Prices and Export Earnings
In 1988, global earnings from exports of non-fuel primary commodities increased substantially. In terms of SDRs, estimated aggregate earnings from exports of the 19 leading non-fuel commodities increased by 12 percent compared with 1987; in terms of dollars, the increase was 17 percent (Table 4). Large increases are estimated in earnings from exports of palm oil (50 percent in terms of SDRs), aluminum (46 percent), soybean meal (30 percent), copper (23 percent), wheat (22 percent), and soybeans (20 percent); a large decrease (24 percent) is estimated for earnings from cocoa exports. Many of the commodities registering large increases are primarily exported by industrial countries, rather than developing countries. For this reason, earnings of industrial countries from the exports of the 19 leading non-fuel primary commodities are estimated to have increased considerably more (21 percent) than those of developing countries (7 percent). The increased earnings from these commodities is attributable to rising prices; the aggregate export volume of the 19 commodities, for both industrial and developing countries, is estimated to have declined marginally in 1988 (Table 5).
|(In billions of SDRs)||(In billions of U.S. dollars)|
|Total 19 commodities||103||87||81||91||104||102||105||123|
|U.S.S.R. and Eastern European countries||4||4||4||4||4||5||5||6|
|Vegetable oils and protein meals||5.4||4.7||4.4||5.3||5.5||5.5||5.7||7.2|
|Agricultural raw materials||4.4||4.1||4.4||4.3||4.4||4.9||5.8||5.8|
|World (in terms of SDRs)1||97||104||113||102||86||80||91|
|World (in terms of U.S. dollars)1||83||86||89||79||78||80||94|
|World (in terms of SDRs)1||98||102||109||99||85||74||84|
|World (in terms of U.S. dollars)1||83||84||86||77||77||74||87|
|World (in real terms)1||88||92||97||86||73||63||70|
|World (in terms of SDRs)1||93||103||108||95||78||74||86|
|World (in terms of U.S. dollars)1||79||85||85||74||71||73||89|
|World (in real terms)1||84||93||96||82||67||62||72|
In line with the 7 percent rise in 1988 in the export earnings of developing countries from the exports of major non-fuel primary commodities, a 9.5 percent increase in total export earnings in terms of SDRs accrued to those Fund members with non-fuel primary commodities accounting for at least half of their export earnings (in a reference period 1984–86). This was the first increase in the aggregate export earnings for this group of 53 countries since 1984 (Table 6).5 For the subgroup of 13 countries exporting predominantly minerals and metals (not including fuel), the increase was entirely the result of price increases; the aggregate volume of exports fell by 3.5 percent for these countries. The subgroup of 40 countries with predominantly agricultural exports showed volume increases were more important than unit value increases, reflecting largely weak prices for exports of coffee, cocoa, and tea.
|Values (in terms of SDRs)||–5.1||–2.1||11.0||–3.4||–19.1||11.1||8.2|
|Non-fuel primary product exporters||–2.4||3.1||10.6||–0.1||–10.1||–5.8||9.5|
|Exporters of manufactures||4.5||7.7||19.4||1.8||–4.3||15.2||16.0|
|Service and remittance countries||–2.8||–2.3||8.1||–3.7||–9.9||–3.3||12.2|
|Diversified export base||–3.9||7.9||9.4||–6.2||–13.2||8.4||4.1|
|Values (in terms of U.S. dollars)||–11.1||–5.2||6.4||–4.3||–6.6||22.4||12.5|
|Non-fuel primary product exporters||–8.6||–0.1||6.0||–1.0||3.9||3.8||13.9|
|Exporters of manufactures||–2.1||4.3||14.5||0.9||10.6||27.0||20.5|
|Service and remittance countries||–9.0||–5.4||3.7||–4.6||4.2||6.5||16.6|
|Diversified export base||–10.0||4.5||4.9||–7.1||0.3||19.5||8.2|
|Non-fuel primary product exporters||1.4||1.5||2.2||5.5||4.2||2.4||3.2|
|Exporters of manufactures||1.9||10.3||14.5||4.1||8.7||18.1||12.7|
|Service and remittance countries||–1.4||–0.3||3.2||–1.1||12.2||2.1||8.6|
|Diversified export base||0.5||2.4||8.1||4.5||6.3||6.0||5.3|
|Unit values (in terms of SDRs)||1.6||–3.9||3.6||–4.2||–25.9||0.5||–2.5|
|Non-fuel primary product exporters||–3.7||1.6||8.2||–5.3||–13.8||–8.0||6.2|
|Exporters of manufactures||2.6||–2.4||4.2||–2.2||–11.9||–2.5||2.9|
|Service and remittance countries||–1.4||–2.0||4.7||–2.6||–19.6||–5.3||3.3|
|Diversified export base||–4.3||5.4||1.1||–10.2||–18.4||2.3||–1.1|
|Unit values (in terms of U.S. dollars)||–4.9||–7.0||–0.7||–5.1||–14.4||10.7||1.4|
|Non-fuel primary product exporters||–9.9||–1.6||3.7||–6.2||–0.4||1.4||10.3|
|Exporters of manufactures||–4.0||–5.5||–0.1||–3.1||1.7||7.5||6.9|
|Service and remittance countries||–7.7||–5.1||0.4||–3.5||–7.1||4.3||7.4|
|Diversified export base||–10.4||2.0||–3.0||–11.1||–5.7||12.7||2.8|
Although export earnings for most developing countries exporting mainly non-fuel primary commodities increased in 1988, the export performance of this group of countries continued to be less favorable than for developing countries exporting mainly manufactures. In 1988 the Fund members classified as developing countries exporting mainly manufactures (17 countries) increased their export earnings by 16 percent in SDRs, following a similar rise in 1987; these increases were derived largely from rising export volumes.
Commodity Prices and Aggregate Inflation
Movements in primary commodity prices convey important information in several ways: they signal changes in the major source of export earnings for most developing countries; they indicate changes in a significant component of the cost of producing many manufactured goods; and they may be a helpful leading indicator of changes in inflation in industrial countries. This last relationship arises because primary commodities are used in the production of manufactured goods and in services and because most primary commodities are traded in “auction” markets where prices tend to adjust to expected changes in supply and demand more quickly than in markets for manufactured goods.
An examination of the period since 1960 suggests that for major industrial countries as a group turning points in commodity price inflation—using a price index covering a broad basket of commodities—have frequently preceded turning points in consumer price inflation.6 In 1988, the broad index of commodity prices showed little change, as decreases in petroleum prices, until December, tended to largely offset increases in prices of metals and food. The index of consumer prices in the major industrial countries continued to rise at a rate of about 3 percent a year.
Commodity Trade and International Cooperation
During 1988, a number of issues were raised in discussions and negotiations on international trade matters. Of particular relevance are those under consideration in the Uruguay Round of the General Agreement on Tariffs and Trade (GATT). In addition, the steady progress toward unification by 1992 of the internal markets of the European Community (EC) and the ratification of the free trade agreement between Canada and the United States could have important implications for international commodity trade.
The negotiating groups established for the Uruguay Round met on a number of occasions throughout the year to discuss a wide range of issues. Negotiations on non-fuel primary commodities covered natural resource-based products, tropical products and, for the first time in the 40-year history of the GATT negotiations, agriculture was included. The negotiations culminated in the “Mid-Year Review of the Round,” convened at the ministerial level in Montreal, on December 5–9, 1988. Agreement on a complete set of proposals to guide future negotiations was not reached because the EC and the United States could not reach a consensus on the future course of negotiations on agriculture. The EC favored the introduction of gradual adjustment measures that would safeguard certain aspects of current policies, whereas the United States pressed for agreement on the long-term objective of freeing agriculture from the effects of a wide range of policies that tend to distort trade. Progress, nevertheless, was made in other areas of the multilateral trade negotiations, including services. Commitments were made on the liberalization of trade on natural resource-based products, including products in processed and semiprocessed forms. With regard to trade in tropical products, the major industrial countries and several developing countries announced concessions on tariff and nontariff measures and on improvements that could be implemented in the existing Generalized System of Preferences (GSP) before the scheduled conclusion of the Uruguay Round in 1990.
In early April 1989, despite the initial lack of consensus between the EC and the United States, an accord was reached in which the industrial countries, with other GATT members, pledged to freeze levels of export subsidies and other forms of farm support at 1987/88 average levels until the scheduled end of the Uruguay Round negotiations. In the interim, a long-term agreement to bring agriculture into the GATT framework for trade liberalization, possibly involving the conversion of existing agricultural trade barriers and price support schemes into tariffs, is to be developed by the negotiating group on agriculture.
The ultimate success of the Uruguay Round will also hinge on progress in other areas of the negotiations, especially in the textiles and apparel trade. Significant progress has not yet been reported in the discussions on liberalizing the Multifiber Arrangement, which sets administered limits on exports of textiles and apparel from Japan and the developing countries to the United States and other major industrial countries.
The impending unification of markets within the EC also has implications for international commodity trade. For example, a number of banana-exporting countries have already expressed concern about maintaining their competitive market positions in member countries of the Community (see Section II). In North America, the free trade agreement between Canada and the United States is also likely to have important implications for trade, in forestry products and fruit and vegetables in particular.
With reference to individual commodity markets, a sufficient number of countries ratified the International Natural Rubber Agreement to enable its entry into force in January 1989. Also, international exporter-importer agreements with respect to coffee and cocoa continued to be operative. These developments are discussed in Sections III and IV. Other commodity markets continued to be affected by agreements between producer countries—notably the petroleum market by the members of OPEC and the tin market by the members of the Association of Tin Exporting Countries (see Section V).
The International Monetary Fund in 1988 continued to provide compensatory financing of export shortfalls, while the EC continued to make disbursements under its Stabex scheme. Drawings by nine developing countries totaling SDR 730 million were made under the Fund’s compensatory financing facility. In 1988, Stabex transfers to the African, Caribbean, and Pacific (ACP) countries associated with the EC under the Lomé Conventions made in 1988 with respect to application year 1987 were SDR 331 million, more than 50 percent higher than in the previous year; transfers under the Stabex scheme for the least developed countries amounted to SDR 5 million in 1988.
In August 1988, the Fund established a new facility, the compensatory and contingency financing facility. This facility retains the essential features of the compensatory financing facility and also provides for contingency financing in conjunction with Fund-supported adjustment programs. Underlying the creation of the compensatory and contingency financing facility was the objective of assisting members to maintain the momentum of their adjustment efforts when faced with adverse exogenous shocks. Contingency financing is triggered when agreed key variables deviate from their projected paths. The key variables may include export prices, import prices, tourist receipts, workers’ remittances, and interest rates. In January 1989, the first arrangement to incorporate a contingency element under the new facility was approved.
Outlook for Commodity Prices in 1989–90 and for the Medium Term
The forecasting of prices for non-fuel commodities is particularly difficult when stocks are low and small changes in expectations with respect to supply—and, less frequently, demand—can trigger large price movements. By the end of 1988, stocks of both metals and food commodities were low (see Chart 3); the supply outlook remained uncertain. In the early 1980s, large excess stocks overhung the metals market and prices were low; since that time, metals producers have been reluctant to increase capacity because they have doubted the sustain-ability of the economic expansion. For many months, however, more distant positions on metals futures markets have traded at a considerable price discount to closer positions. In the case of food commodities, it is assumed that normal weather will return to North America following the drought in 1988, but dry subsoil will make the coming crop particularly vulnerable to any deficiency in rainfall. Furthermore, drought in early 1989 adversely affected the crops in Argentina. Realized and potential shortfalls for cereals, oilseeds, and sugar are especially important at a time when world stocks of these commodities are low. These supply caveats make the projections presented in this section tenuous and subject to an exceptionally wide margin of error.
The projections are based on the usual assumptions of fixed real exchange rates (at the levels prevailing in the second half of May 1989) and of no major changes in existing government policies. Also assumed is an average petroleum price of about $17.00 a barrel in 1989 that would remain unchanged in real terms during 1990 and over the medium term (1991–94). The growth of output in the major industrial countries is projected to drop from 4¼ percent in 1988 to about 3½ percent in 1989 and to approximately 3 percent in the period 1990–94. Export prices in dollar terms for manufactured goods are projected to remain unchanged in 1989 and to increase by about 2¾ percent by 1990 and by 3¾ percent in 1991–94.
Taking into account available information on supply and demand for specific commodities, and the assumptions specified above, the world index of prices of non-fuel primary commodities is projected to be over 4 percent above its 1988 level during 1989 in terms of SDRs and to remain almost unchanged in terms of dollars. An eventual decline in the prices of metals and food commodities is projected to have an important impact on the average for the overall index in 1990, which is projected to decline by about 8 percent in dollars.
Over the medium term, it is anticipated that a slowing of the rate of growth in the supply of non-fuel commodities will result in increases in the overall index, rising to about 4 percent a year in dollar terms. This increase would be marginally in excess of the price rise of manufactured goods exports assumed at 3.8 percent, and hence result in a small rise in prices for non-fuel commodities in real terms. This rise, however, is unlikely to be sufficient to improve in any appreciable way the terms of trade of those countries primarily dependent on exports of non-fuel primary commodities for their earnings of foreign exchange. There will, of course, continue to be periods when prices for individual commodities or groups of commodities will rise sharply because of unexpected production shortfalls or because of demand in excess of expectations. These periods, however, are likely to be brief and followed by offsetting price decreases.