II. Food Commodities

International Monetary Fund
Published Date:
January 1989
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Increases in the prices of most food commodities in 1988 were substantial (Chart 4). The largest–over 30 percent on average, in terms of SDKs—occurred for vegetable oils and protein meals, but price rises for cereals and for “free market” sugar were almost as great. Despite the advances, the aggregate price index for food commodities in 1988 remained substantially below the level of the index observed during the early to mid-1980s.

Chart 4.Food Commodity Prices in SDKs, January 1980–April 1989

(1980 = IPO)

A number of factors contributed to the increases. Although the strong growth of world output, in general, and output in the major industrial countries, in particular, was important, the principal factor was the decline in production of most food commodities (Table 7). After three consecutive years of robust growth, world production of foods declined by about 1 percent in 1987 and by over 2 percent in 1988. Unfavorable weather, especially the droughts in North America, Central America, and major crop-producing areas of South America, was largely responsible for the decline. The continuing adjustment of production, however, through administered and voluntary acreage reductions in many countries, also played a role.

Table 7.Movements in the Prices of Food Commodities and Related Economic Indicators, 1982–88(Annual percentage change)
Prices of food commodities1
In SDRs–9.412.53.3–14.3–24.0–7.423.2
In U.S. dollars–15.28.7–0.7–15.5–12.22.427.7
Domestic prices in major industrial countries3
Consumer price index
In SDRs6.
In U.S. dollars–
GNP deflator
In SDRs6.
In U.S. dollars–
Real GNP in major industrial countries3–
World consumption of food commodities4
Index of consumption2.–0.6
World supply of food commodities4
Index of production5.0––0.9–2.4
Index of supply54.7––0.7–3.5
Index of closing stocks16.7–12.719.717.6–1.9–8.0–24.0
Sources: Commodities Division and Current Studies Division. IMF Research Department.

The main question relating to the outlook for 1989 concerns the extent to which production in a number of major producing countries will rebound from the low levels of the 1988/89 crop year. Given the demonstrated productivity and past responsiveness to higher prices of food producers worldwide, it is likely that world production of food commodities will increase appreciably in 1989 with the result that most food prices will begin to fall in the latter part of the year.


The rapidly changing nature of the world cereals market has been clearly demonstrated over the last five years. In the 1983/84 crop year, drought in a number of countries and acreage reductions in the United States were key contributing factors to a 4 percent drop in global cereals output and a sharp decline in cereal stocks to a level equivalent to 20 percent of annual utilization, compared with 24 percent a year earlier (Table 8). Largely reflecting the changed supply situation, cereals prices, as measured by an index of the weighted average price of wheat, maize, and rice, increased in 1983 by 11 percent in terms of SDRs and by 8 percent in U.S. dollar terms (Table 9). In each of the succeeding three years, world grain output exceeded utilization by a substantial margin, resulting in a buildup of stocks at the end of the crop year 1986/87 to the equivalent of 28 percent of annual utilization, a ratio not previously attained. This accumulation of stocks contributed to a collapse of prices; the index of cereals prices in SDR terms fell by nearly one half between 1983 and 1987. The rebound in production in these years reflected a record rise in yields as a consequence of favorable weather, combined with increased use of high-yielding seeds, irrigation, fertilizer, and pesticides.

Table 8.Cereals: World Supply and Utilization, 1980/81–88/89





(In millions of hectares)(In tons a hectare)(In millions of tons)(In percent)
Source: United States, Department of Agriculture, World Grain Situation and Outlook (Washington, April 1989).
Table 9.Prices of Cereals, 1979–First Quarter 1989

of Cereal

(1980 = 100)(In SDRs a ton)
(1980 = 100)(In U.S. dollars a ton)
Source: Commodities Division, IMF Research Department.

Nevertheless, the record cereal stocks available at the end of crop year 1986/87 were seriously depleted in only two years. In crop year 1987/88, world cereal production fell by 5 percent, mainly because of less acreage harvested in the United States, where acreage reduction programs designed to reduce the cost of holding inventories were intensified; low prices in Australia and Argentina, which led to land being diverted to other uses; and, marginal land continuing to be taken out of production in the U.S.S.R. Wet weather in Europe and the failure of the summer monsoon in South and Southeast Asia also lowered yields. In crop year 1988/89, overall cereal production is estimated to fall by a further 4 percent, as a 2 percent increase in rice production is likely to be more than offset by a 10 percent drop in coarse grains output. The production of wheat may be roughly unchanged from crop year 1987/88 because a sharp decrease in North American output should be offset by higher output in other countries.

The main cause of the decline in aggregate cereal output was severe drought in North America, Central America, and the major cereal producing areas of South America during the second and third quarters of 1988. The drought in the United States was the most severe on record since the 1930s. Although, widespread food shortages have not occurred because the shortfall in production in 1988/89 was mainly in food-exporting countries, some countries have experienced severe famine related to civil disturbances.

Cereal production in the low-income food deficit countries, as defined by the Food and Agriculture Organization of the United Nations (FAO), was generally above normal, and in some cases at record levels in 1988. With cereal utilization rising at an annual average rate of 1.5 percent a year during the past five years, global cereal stocks are projected to decline to the equivalent of 17 percent of annual utilization by mid-1989, the level regarded by the FAO as the minimum necessary to ensure world food security.

Cereal prices rose sharply in 1988 in response to the anticipated loss of production of wheat and coarse grains and strong demand for rice for stock replenishment by countries experiencing a production shortfall in 1987. The index of cereal prices in SDRs increased by 29 percent in 1988; a sharp increase in rice prices occurred in the first quarter of the year, and wheat and coarse grains prices rose sharply in the third quarter.

A recovery in global cereal output is projected for 1989/90 in response to increased acreage planted in North America and an expected improvement in yields. The extent of the recovery in yields, however, is uncertain because the subsoil moisture in the major cereal producing regions of the United States and Canada had not been restored to normal by the end of 1988.


Despite fluctuations caused mainly by variations in yield, global wheat output exceeded utilization each crop year from 1981/82 through 1986/87 (years ended June). The ratio of end-of-period stocks to annual utilization reached 34 percent in 1985/86, the highest level since the late 1960s, and remained unchanged in 1986/87 when global output peaked at 530 million tons (Table 10). A complete turnaround in the market for wheat, however, occurred in crop years 1987/88 and 1988/89. In 1987/88 excessive rainfall in Europe and the U.S.S.R. and less acreage planted in a number of countries contributed to a 5 percent fall in production to 504 million tons, while world utilization rose by 2 percent to 534 million tons. The ratio of world stocks to world utilization fell to 27 percent. In crop year 1988/89, utilization is again estimated to exceed production by about 36 million tons owing to drought-related output losses in a number of countries, and the ratio of stocks to utilization is expected to decline to 21 percent, which would be the lowest level recorded since the early 1970s. Reflecting these developments, wheat prices declined from an average of $173 a ton in 1980 to $113 a ton in 1987 but then recovered to $172 a ton in the first quarter of 1989.

Table 10.Wheat: World Commodity Balance, 1982/83–88/89(In millions of tons, unless otherwise indicated)
July–June Crop Year
European Community65648372727175
United States75667166575749
Other countries147158156154172161159
United States25303129333029
Other countries255268279275284296299
Closing Stocks130145164168176146110
United States41383952503415
Other countries8910712511612611295
Stocks/utilization ratio (in percent)28313334342721
Source: United States, Department of Agriculture, Foreign Agriculture Circular: World Grain Situation and Outlook (Washington, April 1989).

The price quotations for wheat in this section are U.S. export prices and refer to No. 2 hard red winter wheat, ordinary protein, f.o.b. at Gulf of Mexico ports. During 1988, these prices exceeded spot prices on the Kansas City Board of Trade (KCBT) by about $10 a ton, the differential relating mainly to transportation costs. The spot prices are determined by auction in association with an active futures market and futures options market on the KCBT. Other futures markets for different classes of wheat operate on the Chicago Board of Trade (for seven types, primarily soft red wheat), the Minneapolis Grain Exchange (for durum and northern spring wheat), the Winnipeg Commodity Exchange (for Canadian feed wheat), and the London Grain Futures Exchange (for EC wheat).

During the first half of 1987, U.S. export prices for wheat rose significantly owing to fears of frost damage to the winter crop and strong export demand, including the sale of 4 million tons of subsidized wheat to the U.S.S.R. under the U.S. Export Enhancement Program (EEP). From an average of $113 a ton in the first half of 1987, the export price fell to $105 a ton in July following beneficial rains in the U.S. midwest, which ensured a good spring harvest. In addition, the Government reduced the prices at which wheat could be redeemed by “generic certificates,”7 and set the loan rate for the crop for the following season (1988) at the statutory minimum of $79.74 a ton.8 Large sales by wheat farmers from the 1987 winter crop also contributed to the decline in prices.

The major turnaround in prices began in August 1987 as U.S. farmers slowed their sales of the spring crop, and there was a growing realization that the global carryover of wheat for crop year 1987/88 would be lower than expected. The 5 percent fall in global production in 1987/88 from the peak of 530 million tons in 1986/87 resulted from a combination of less acreage planted and harvested in all major producing countries except the EC, and bad weather in Europe, South Asia, and the U.S.S.R. The area harvested in the United States fell by 8 percent reflecting the acreage reduction provisions of the 1985 Farm Bill; for the 1987 crop, the required reduction was set at 27.5 percent of base acreage, an increase from 22.5 percent.9 Nevertheless, with improved weather in the spring of 1987 compared with 1986, the yield rose by 9 percent and output increased slightly to a little over 57 million tons. A 15 percent reduction in initial price support payments in Canada contributed to a 5 percent decline in area harvested, and with yield returning to a more usual level after reaching a record level in 1986, a 17 percent fall in production to 26 million tons was recorded.10 Output dropped by 24 percent in Australia mainly as a consequence of low world prices in preceding years, which had led to a 20 percent reduction in the area harvested; the crop yield also declined owing to hot and dry weather in the last quarter of 1987.11 Despite the elimination of a 5 percent export tax on wheat in July 1987, low prices also led to a 6 percent decline in harvested area in Argentina; however, with improved weather, yields increased and output rose by 2 percent to 9 million tons. In the U.S.S.R., wet weather reduced the crop yield by 6 percent, and with marginal lands taken out of production, output declined by 10 percent to 83 million tons. The area harvested in China fell by 3 percent as relative official procurement prices were adjusted in favor of other export crops, but with good weather, output declined by only 2 percent to 88 million tons. In India, the failure of the monsoon reduced yields sharply, and output declined by 2 percent to 44 million tons.

In the EC, intervention prices for crop year 1987/88 were unchanged in ECU terms, but intervention purchases were only made at prices equal to 94 percent of the intervention price. Also, the monthly increment to intervention prices was lowered from ECU 2.45 to ECU 2 a ton. Devaluation of the green currency rates, however, raised national currency intervention prices in two major producing countries—France and the United Kingdom—so that the planted area for the EC as a whole rose by 1 percent. Wet weather at harvest reduced the quality and yield of the crop so that output declined by 1 percent to under 72 million tons.

The 2 percent increase in global utilization of wheat in crop year 1987/88 followed a 5 percent increase in crop year 1986/87. Utilization in 1987/88 fell, however, in both the U.S.S.R. and the United States. Utilization and use in the U.S.S.R. fell by 1 million tons (1 percent) reflecting lower output of feed quality wheat; utilization of food quality wheat remained unchanged only with the assistance of large-scale imports. Utilization in the United States declined by 3 million tons (10 percent) because relative prices favored the substitution of corn for wheat in feed use. By contrast, utilization in China rose by 4 million tons (4 percent), and in other countries it rose by 12 million tons (4 percent), mainly reflecting higher food use.

Despite a temporary weakness in prices associated with a reduction of speculative activity after the stock market crash in October 1987, wheat prices continued to rise from August 1987 through late February 1988, averaging $132 a ton in February. In addition to the changed global market for wheat, the U.S. market was also influenced in August and September by EEP sales to China, the Philippines, and Poland; by the extension of EEP eligibility to Brazil and Colombia—traditionally customers of Argentina; and by the prospect of export sales to Asian countries affected by a shortfall in rice production and a steep rise in rice prices. The market was strengthened in November by a number of new export agreements under the EEP, including one with the U.S.S.R of 2.4 million tons, another with the U.S.S.R. for 2.35 million tons, and one with Morocco for 1.5 million tons.12 In these agreements, prices ranged from $29 to $42 a ton below the U.S. export price with the subsidy paid for in government-owned stocks through the use of generic certificates. The net price paid by importers rose during the year from about $80 a ton in May to $99 a ton in December, reflecting the reduced availability of global supply. 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) began in November. Prices were strengthened in early 1988 with the news of another U.S. export agreement with the U.S.S.R., for 2 million tons, and of the entry of India into the import market for the first time since 1984 to replenish stocks drawn down in 1987.

In late February, the U.S. Government expanded its auction program to three a week for up to 10 million bushels each, signaling its determination to avoid a tighter market until the harvest of the winter wheat crop around midyear. With favorable reports concerning the condition of the winter wheat crop, prices retreated in March to an average of $ 125 a ton but then moved up a little in April and May as a result of new export agreements with the U.S.S.R. for 1 million tons, with India for 1.2 million tons, and with China for 2 million tons.

Limiting any upward movement of prices in the early months of 1988 was the anticipated heavy selling of wheat from the winter crop by farmers, as farm gate prices were well above the loan rate. Consequently, the first indications in April that extremely dry weather would affect the sowing and yield of the spring wheat crop in the United States and Canada had little immediate price impact. By late May, however, the continued absence of adequate rainfall throughout much of North America led to concerns that the U.S. winter crop would also suffer yield losses, and prices rose sharply. The U.S. export price increased by 16 percent in June to an average of $150 a ton and fluctuated around that level during July and August as intermittent rainfall led to temporary price weakness but failed to break the drought. Prices rose further to an average of $159 a ton in September because of strong export sales under the EEP and reduced estimates of the harvest in the U.S.S.R. and in Argentina, where severe drought delayed the planting of wheat in favor of corn and soybeans. Despite official projections that the U.S. carryover at the end of the 1988/89 crop year would be the lowest since the early 1970s, the EEP program remained in force to protect the U.S. market share, albeit at a reduced rate of subsidy ranging from $ 12 to $22 a ton. A number of tendered export agreements were rejected by the Government on the grounds that the proposed rate of subsidy was too high.

Widespread heavy rainfall in mid-September in the aftermath of Hurricane Gilbert provided substantial relief from drought in the United States and subsequent rainfall assisted the planting of the 1989 U.S. winter crop. Overall precipitation, unfortunately, was not sufficient to restore subsoil moisture to normal levels. Prices were supported at this time by dry weather in Australia, which reduced estimates of the Australian 1988/89 crop, and by heavy rain in Canada at harvest time which lowered the quality of a crop already decimated by drought. Despite negative influences, such as the mid-October announcement of the release of 1.5 million tons from the U.S. Food Security Reserve for P.L.480 programs in 1989, and the absence of new export sales following the extension to the end of 1990 of the long-term grain agreement between the United States and the U.S.S.R., prices continued to rise, averaging $164 a ton in the final quarter of 1988. The underlying strength in prices reflected the tightest supply situation, particularly in high quality milling wheat, in many years.

In the United States, the mandatory acreage reduction requirement for participation in the support program in crop year 1988/89 was unchanged at 27.5 percent of base acreage, and the area planted with wheat remained at about the same level as in 1987/88.13 The drought, however, caused a 4 percent fall in the harvested area and a 10 percent fall in yield. Although the winter wheat crop was almost fully grown before the onset of the drought, production fell by 14 percent to 49 million tons, the lowest level since 1978/79.14 In Canada, reduction in the area harvested and the yield caused by the drought was even more drastic; with spring wheat predominant in total output, the average yield fell by 38 percent and production by 40 percent to 16 million tons.15 Severe drought in Argentina through mid-September delayed the planting of the 1988/89 wheat crop and induced producers to switch to maize and oilseeds, which are planted later in the year. The wheat area harvested declined by 6 percent, and with the yield impaired by dry weather, output is expected to fall by 17 percent to 7 million tons.

Notwithstanding these large reductions in the United States, Canada, and Argentina, global wheat production in the 1988/89 crop year is expected to remain at about the same level as in 1987/88 because of offsetting output increases in other countries.

A bumper crop of 75 million tons (an increase of 6 percent) was harvested in the EC as increased average yields resulting from improved weather more than offset a 3 percent decline in area harvested.16 Production in the U.S.S.R. increased by 6 percent to 84 million tons, a level well below the targeted output, partly reflecting the substitution of wheat for coarse grains in area planted with cereals. Although the yield of the spring wheat crop was affected by dry weather, growing conditions for the winter wheat crop were more favorable than in 1987/88. Although a higher area was cultivated under “intensive technology,” overall yield declined by 1 percent.17 The upswing in world prices induced Australian producers to increase the area planted with wheat by 4 percent, 18 but excessive rainfall in the later stages of crop development prevented an expected increase in yields and is expected to limit the increase in production to 5 percent. Although dry conditions in the spring affected the development of China’s winter wheat crop, and heavy rainfall and flooding in summer reduced the yield of the spring crop, output remained unchanged from 1987/88 because of higher planted area in response to a 7 percent increase in official procurement prices.

Global utilization of wheat is expected to be about 536 million tons in crop year 1988/89, a marginal increase over 1987/88. The growing food needs of the world’s population are likely to be balanced by a reduction in purchasing power of importing countries caused by higher wheat prices and the lower availability of good quality wheat. In the U.S.S.R., modestly higher domestic production is expected to be allocated to food use while feed use will decline sharply. Utilization in the United States may decline slightly as higher food and seed use will be more than offset by lower feed use. Feed use in other producing countries, however, is expected to increase.

The excess of global utilization over global production in crop year 1988/89 is expected to lead to a fall in global wheat stocks of about 36 million tons, bringing the ratio of stocks to utilization at the end of June 1989 to 21 percent. This would represent only 2½ months’ utilization, compared with 4 months’ utilization two years earlier at the end of 1986/87 crop year.

Largely reflecting sharply higher unit values, global export earnings from wheat in 1988 rose by an estimated 22 percent in terms of SDRs to $12 billion (Table 11). The volume of global trade in wheat increased by only 1 percent, although this increase was on top of a 14 percent increase in 1987. Among exporting countries, lower output in Australia and Canada constrained their export volumes, while higher output enabled the EC to increase its exports. A marked increase in the U.S. export volume was made possible by running down stocks. In 1989, imports by the U.S.S.R. may fall substantially because of higher domestic output in the 1988/89 crop year. Imports by China and Korea may also be lower than in 1988, as relative prices for feed grains will favor maize imports. Thus, the volume of global trade is likely to decline but the value of trade should be supported by a further rise in average unit values.

Table 11.Wheat: Export Earnings, 1985–88
(In SDRs)(In U.S. dollars)
Earnings (in billions)
Industrial countries12.910.19.010.913.111.911.614.6
Developing countries1.
U.S.S.R. and Eastern European countries0.
Unit values (a ton)14311689108145136115145
Industrial countries14511790109147137116146
Developing countries12610581101127123105136
U.S.S.R. and Eastern European countries1421028298144119106132
Market prices (a ton)21349887108136115113145
(In million of tons)
Industrial countries88.586.499.5100.088.586.499.5100.0
United States26.126.532.637.826.126.532.637.8
Developing countries11.
U.S.S.R. and Eastern European countries4.
Sources: United Nations, Food and Agriculture Organization, 1987 FAO Trade Yearbook (Rome), for exports; and Commodities Division, IMF Research Department, for market prices.

The outlook for wheat prices in 1989 depends largely on the extent of the recovery in North American output in the 1989/90 crop year. The response in other countries to the higher prices now prevailing is likely to be restrained; there may not be much increase in area planted with wheat in Australia and Argentina because of more profitable alternatives such as wool, beef, and soybeans; production of wheat in the EC may also be constrained by a 3 percent cut in intervention prices for 1989, triggered by total grain output in 1988 exceeding the support ceiling of 160 million tons.19 Changes in government programs in both the United States and Canada should result in large increases in areas planted;20 however, yield may not return to normal because of insufficient moisture in the subsoil. Although the International Wheat Council has suggested that global output may increase by up to 50 million tons to a new record level in 1989/90, it is possible that not even the previous peak of 530 million tons in 1986/87 will be attained. In this event, since food use of wheat may increase at about the long-term annual average rate of 2 percent so that total utilization should exceed 530 million tons, a further reduction in global stocks could occur during the year. Prices are expected to continue to rise during the first half of 1989 until it is fairly certain that the weather will favor the development of the U.S. winter wheat crop. If good weather continues for the spring crops in the United States and Canada, prices should decline in the second half of 1989. If normal weather does not return, rising prices throughout 1989 may be anticipated.


The impact of the 1988 drought on world market conditions was much greater for maize than for wheat because of the dominant position of the United States in world maize production and trade.21 Except for 1983/84 (crop years ended September), global maize production exceeded global utilization each year in the 1980s up to 1986/87 when the ratio of closing stocks to utilization rose to a record 35 percent (Table 12). This ratio declined to 31 percent in 1987/88 and is expected to drop to 16 percent in 1988/89, mainly because of the drought. By comparison, the ratio of wheat stocks to utilization is expected to be reduced only from 27 percent in 1987/88 to 21 percent in 1988/89. Maize prices have also risen more sharply than wheat prices in response to these developments. After declining from $136 a ton in 1984 to $76 a ton in 1987, U.S. export prices for maize rose by 41 percent to $107 a ton in 1988, whereas wheat prices increased by only 28 percent from 1987 to 1988.

Table 12.Maize: World Commodity Balance, 1982/83–88/89(In millions of tons, unless otherwise indicated)
October–September Crop Year
United States209106195225210180125
Other countries171173191191196187192
United States138122131133150152134
Other countries218224238226237237254
Closing stocks132658914416114575
United States90264210312410847
Other countries42394741373728
Stocks/utilization ratio (in percent)32162034353116
Source: United States, Department of Agriculture, Foreign Agriculture Circular: World Grain Situation and Outlook (Washington, April 1989).

The quotations for U.S. export prices in this section refer to U.S. No. 2 yellow maize, f.o.b. at Gulf of Mexico ports. During 1988, these prices exceeded spot prices on the Chicago Board of Trade by about $8 a ton, the differential reflecting mainly transportation costs. Spot prices and futures prices are interdependent, and in this case maize spot prices are influenced by the futures market in No. 2 yellow maize on the Chicago Board of Trade, the only maize futures market in the world. Beginning in 1986 an important determinant of maize market supply and prices has been actions by the U.S. Government to influence the use of generic certificates by producers to redeem maize placed previously under loan and held in government storage.22 By lowering the price at which loans could be redeemed (the posted county price) the government was able to make redemption more attractive, and thereby channel additional maize into the market.

Although the average maize price of $76 a ton in 1987 was the lowest since the early 1970s; prices rose during the year from $69 a ton in the first quarter of 1987 to $78 a ton in the second quarter as production shortfalls in Argentina and South Africa led to increased demand for U.S. exports, and imports by the U.S.S.R. were higher than expected. Forecasts of hot, dry weather in the United States also helped to raise prices. Summer growing conditions proved to be almost ideal, however, and, influenced by government action to promote the use of generic certificates, prices declined to an average of $73 a ton in the third quarter of 1987.23

The global area planted with maize for the 1987/88 crop declined by 4 percent under the influence of more restrictive government support programs for maize in some countries and more profitable alternative crops. As a consequence, world production of maize in 1987/88 declined by 30 million tons (6 percent) to 447 million tons. Production in the United States fell by 30 million tons (14 percent), as a record yield was unable to offset a sharp reduction in area planted. Production in China, the world’s second largest producer, increased by 9 million tons (13 percent) on account of both higher area planted and yield, but this increase was offset by a combined reduction in output of 9 million tons in other countries. Of these countries, lower output was recorded in Brazil and Argentina, in response to the greater profitability of soybeans, and in Thailand and India, where the failure of the monsoon caused a sharp fall in yield. By contrast, improved yield in the EC, the world’s third largest producing group, enabled output to increase by almost 1 million tons,24 and higher area planted in the U.S.S.R. resulted in an output increase of almost 2 million tons.

After rising by 8 percent in 1986/87, global utilization of maize increased by a further 1 percent to 463 million tons in crop year 1987/88. To promote the development of their livestock industries, maize consumption rose by over 1 million tons in China, in Japan, and in the U.S.S.R. Utilization in the United States increased by about 2 million tons as the relative prices of maize and wheat favored maize consumption.

In the final quarter of 1987 (the first quarter of the 1987/88 crop year), prices rose to $81 a ton, reflecting the expectation that market conditions would tighten somewhat by the end of the crop year as well as large-scale imports by the U.S.S.R. to upgrade the domestic livestock industry. Export prices in the first quarter of 1988 averaged $88 a ton, buoyed by the U.S. Government’s announcement that it would not hold a weekly auction for maize similar to that for wheat and by strong demand for U.S. exports, including sales of 2.3 million tons to the U.S.S.R. in March. Although producer prices moved above the loan rate in January, the use of generic certificates for maize redemption continued, as variations in posted country prices provided producers with opportunities to profit from redemptions. The pace of U.S. exports slackened off in the second quarter of 1988, as new Southern Hemisphere crops became available. Also exerting a downward influence on prices were surveys indicating a 3 percent increase in the area intended to be planted to maize in the United States in 1988, reflecting producers’ optimism on market prices and a less attractive price support program.25

Beginning in May there were fears—increasingly realized—that persistent dry weather would seriously affect the U.S. maize crop. In June, when the dry weather affected the crop in the critical stage of ear formation, maize prices rose by one third to an average of $120 a ton. Also contributing to the strong upturn at this time were large purchases of U.S. maize by Japanese buyers. In July, the continuing drought affected the maize crop in the next critical production stage—kernel formation—and prices rose to $127 a ton.

Prices were therefore not only well above the U.S. Government loan rate of $71.65 a ton for 1987 crop maize in storage but also above the target price of $119.29 a ton for release of 1987 crop maize from the “farmer-owned reserve.”26 Because they anticipated even higher prices, farmers were slow to redeem loans with cash or certifications to make sales of the 1987 maize crop.

Crop prospects, however, improved somewhat with intermittent rainfall in August in parts of the corn belt and heavy rainfall in mid-September associated with Hurricane Gilbert, and export prices remained near $120 a ton through the end of 1988. A number of factors other than the weather damage to the U.S. maize crop led to the high level of prices in the second half of the year. Important among these factors were purchases of U.S. and Argentine maize by the U.S.S.R. and higher estimates of domestic U.S. feed use caused by shortages of other feed grains, especially oats. At the end of November, the long-term grain agreement between the United States and the U.S.S.R. was extended to the end of 1990.27 In addition, there were fears that part of the U.S. crop had been contaminated with aflatoxin—a carcinogen produced by a fungus in hot, dry weather.

Under the influence of higher price expectations, the global area planted with maize is estimated to be marginally higher in the 1988/89 crop year, but global production is estimated to fall by about 55 million tons (12 percent) because of drought. Output in the United States is estimated to have fallen by 55 million tons (31 percent), in response to a decline in yield. Drought is also mainly responsible for expected output reductions in China (5 million tons), and Brazil (estimated at 2 million tons). Partly offsetting these losses are increases in production estimated for Thailand and the U.S.S.R., mainly in response to better yields, and in Argentina and the EC, entirely reflecting increased area planted. In the EC, planted area increased by 8 percent as effective intervention prices were not reduced from those prevailing in the 1987/88 crop year.28 The transfer of acreage from wheat to maize production in Argentina should more than offset the impact of the 1988 drought on the early development and ultimate yield of the Argentine crop, although dry conditions that prevailed early in 1989 may also lower the yield. Global utilization in crop year 1988/89 is expected to remain unchanged at 462 million tons, reflecting expanded demand in the U.S.S.R. and some other countries, offsetting lower utilization in the United States as a result mainly of lower livestock numbers.

The development of maize prices in 1989 will depend partly on the development of the 1988/89 crop in the main exporting countries of the Southern Hemisphere—Argentina and South Africa—but mainly on the extent of the rebound of the U.S. crop in 1989. There will be a significant increase in area planted in the United States for harvesting in the last quarter of 1989;29 however, as a full assessment of the condition of the crop cannot be made until July at the earliest, prices should continue to rise through the first half of 1989, even if good weather prevails for the maturation of the Southern Hemisphere crops. Assuming that normal weather prevails in the second and third quarters of 1989 in the United States, the maize prices should decline somewhat in the second half of the year.

Following a large increase of 12 percent in the volume of world trade in maize in 1987 on account of increased imports by Japan, Korea, and the U.S.S.R., the volume of world trade in 1988 is estimated to have fallen by 1 percent (Table 13). Imports in 1988 by China continued to fall as a consequence of a bumper crop in 1987/88, while imports by Japan and the U.S.S.R. continued to increase. By contrast with 1987, sharply higher unit values will enable global export earnings to increase to an estimated SDR 5.6 billion (an increase of 10 percent). With the tightening of wheat availability in 1989, relative prices for feed grains will favor maize, and the global volume of trade in maize may rebound by about 5 percent, assuming a continuation in the recent trends in demand for feed grains from Korea, Japan, Taiwan Province of China, and the U.S.S.R. In addition, earnings in 1989 are likely to increase substantially on the strength of the higher unit values received on shipments made at least in the early part of the year compared with shipments in corresponding months of 1988.

Table 13.Maize: Export Earnings, 1985–88
(In SDRs)(In U.S. dollars)
Earnings (in billions)
Industrial countries6.
Developing countries2.
Unit values (a ton)1241008090125117104121
Industrial countries1271088393129127107125
Developing countries11386687411510188100
Market prices (a ton)21117558801128876107
(In millions of tons)
Industrial countries50.434.549.253.050.434.549.253.0
United States44.027.140.946.
Developing countries18.322.114.310.018.322.114.310.0
Sources: United Nations, Food and Agriculture Organization, 1987 FAO Trade Yearbook (Rome), for exports; and Commodities Division, IMF Research Department, for market prices.


Rice production is concentrated in Asia and is highly dependent on the timeliness and duration of monsoon rains, particularly in countries where the share of irrigated area in total rice acreage is quite low. Since rice is mostly consumed in the countries where it is produced, only about 4 percent of world production is traded, compared with 20 percent for wheat and 12 percent for maize. Therefore, production shortfalls in a few countries can cause an immediate and significant rise in international prices. The delayed arrival of the summer monsoon in 1987 was mainly responsible for the surge in rice prices in the second half of 1987, but also influential in the timing of the upswing was severe flooding in Bangladesh, a major importing country, in July and August 1987.

The international rice market is less transparent than the markets for wheat and maize. Approximately half the transactions are government-to-government contracts at prices believed to be well below market prices. The market is also more segmented, with significant differences in the price movements of rice of various types and quality. Thailand is the world’s largest rice exporter, accounting for about 35 percent of global export volume, followed by the United States (19 percent) and Pakistan (9 percent). The price quotations reported in this section refer mainly to Thai milled white rice, 5 percent broken, f.o.b. Bangkok. Reference is made to two price series for this type of rice—the price posted by the Thai Board of Trade, and the average of nominal market quotations by millers, as collected by U.S. officials in Bangkok. The latter series is more variable and may be more representative of actual prices in world trade. Reference is also made to U.S. export prices at California and Gulf of Mexico ports, which are influenced by the futures market prices for unmilled (rough) rice on the Chicago Board of Trade.

An important determinant of world prices since 1986 has been the support provided to producers in the United States under the 1985 Farm Bill. The key feature of the rice support program is the “marketing loan” whereby producers can repay their loans at a level below the loan rate determined as the higher of the world market price (as set by the government) or a specified percentage of the loan rate. This percentage was 50 percent in 1986 and 1987, 60 percent in 1988, and will be 70 percent in 1989 and 1990. The marketing loan allowed U.S. export prices to fall below the loan rate in 1986 and 1987 to the extent necessary to maintain the U.S. share of the world export market.30

Low rice prices in 1985 and 1986 came in the wake of the large world crop in 1984/85. This crop exceeded considerably annual utilization and was followed by near balance between production and utilization in 1985/86 (Table 14).31 Because of the accumulation of rice stocks, the increase in price—a consequence of the lower 1986/87 crop—was small until August 1987; at that time deteriorating prospects for the main harvests for the 1987/88 crops in Thailand and India, owing to insufficient monsoon rainfall, coincided with severe flooding at the transplanting stage for rice in Bangladesh. The flooding that accompanied the eventual arrival of the monsoon in September further reduced the prospective harvest in Thailand, giving additional impetus to the upsurge in prices. The posted Bangkok price averaged $251 a ton in the second half of 1987, an increase of 20 percent over the first half year. Export prices for U.S. rice increased even faster over the same period, by 48 percent, reflecting, in addition to the global situation, low initial U.S. stocks and a 4 percent reduction in U.S. output. The United States was the main source for high quality rice in the period between the U.S. harvest in August and the Asian harvests at the end of the year. World prices peaked in February 1988 following the completion of the Asian harvests when the posted Bangkok price reached $310 a ton. This peak was, however, well below the previous one of $535 a ton in mid-1981, which was associated with production shortfalls in India in 1980 and Korea in 1981.

Table 14.Rice: World Commodity Balance, 1982/83–88/89(In millions of tons)
Crop Year1
Production (unmilled)420453468468468458475
United States7566667
Other countries109112116115118113115
Production (milled)286308319319318312323
Utilization (milled)286304311320322319323
Other countries90939395969396
Closing stocks (milled)43475554504343
United States2122211
Other countries14121314131010
Stocks/utilization ratio (in percent)15151817161313
Source: United States, Department of Agriculture, World Grain Situation and Outlook (Washington, January 1989).

World paddy production of 458 million tons in 1987/88 was 10 million tons (2 percent) lower than production in the previous year. Production in India declined by 6 million tons (7 percent) mainly as a result of a 10 percent reduction in yield because of drought. The yield in Thailand declined by 7 percent and output fell by 5 percent (1 million tons). Drought also lowered production in Korea, Laos, the Philippines, and Vietnam, while reductions in planted area were responsible for reduced output in Burma, Indonesia, Japan, Pakistan, and the United States.32 Favorable weather, however, enabled output to increase by 2 million tons in China, and by a combined total of 1 million tons in Brazil and Australia. The harvest in Bangladesh proved to be unaffected by the floods of August 1987 because most of the crop was replanted successfully.

Global utilization of milled rice fell by 3 million tons (1 percent) in 1987/88 to 319 million tons, reflecting in part the substitution of wheat for human consumption and maize for animal feed.

Large carryover stocks in importing countries and a shift in import demand from rice to much lower priced wheat and maize by Asian and African consuming countries helped contain the upward movement in the price of rice that began in mid-1987. Market conditions eased considerably by the second quarter of 1988, largely in response to a bumper secondary rice crop in Thailand and the availability of an exportable surplus in Brazil. Also, it was anticipated that high prices would induce a sharp increase in global area planted for the main 1988/89 crops. Although the posted Bangkok price declined modestly to $301 a ton, the nominal market quotations in Bangkok fell from $305 a ton in February to an average of $270 a ton in the second quarter. The market tightened a little between July and November 1988 with the posted price and nominal market quotations averaging $305 a ton and $272 a ton, respectively. There were larger-than-expected imports by India to replenish stocks and severe flooding in Bangladesh, Pakistan, and Thailand in August and September.

World paddy production in 1988/89 is projected to recover by about 17 million tons (4 percent) to set a new record at 475 million tons. With higher planted area and exceptionally good monsoon rainfall, production is expected to rebound by 13 million tons in India, 3 million tons in Thailand, 1.5 million tons in Burma, and by 0.5 million tons in the Philippines. Higher producer prices and a lower acreage reduction requirement contributed to an increase of 1.3 million tons in U.S. output in 1988.33 In China, however, a reduction in output estimated at 3 million tons occurred because of summer flooding in the Yangtze Valley, the main rice growing region. The relatively higher price of rice compared with other cereals is expected to limit the increase of global utilization in 1988/89 to about 323 million tons. This amount is equal to the milled equivalent of estimated world paddy production.

In December 1988, the prospect of sharply increased supply in 1989 contributed to a fall in posted price to $289 a ton while the nominal market quotations declined to even lower levels. During 1989 further reductions in price are projected, although market conditions are expected to remain fairly tight as importers continue to replenish depleted stocks.34 The price in the first quarter of 1989 averaged $279 a ton.

The volume of global trade is estimated to have declined in 1988 by 1.1 million tons to 11.4 million tons (Table 15), reflecting mainly lower exports by China, Pakistan, and the United States. An increase in imports of 0.6 million tons by India and 0.2 million tons by the Philippines for stock replenishment was more than offset by reduced import demand by other countries owing to high prices or improved domestic output. Despite the fall in trade volume, a sharp increase in average unit values is estimated to have enabled the value of global trade in rice to rise from SDR 2.5 billion in 1987 to SDR 2.9 billion in 1988.

Table 15.Rice: Export Earnings, 1985–88
(In SDRs)(In U.S. dollars)
Earnings (in billions)
Industrial countries1.
Developing countries1.
Unit values (a ton)282211200255286247258342
Industrial countries374291267331380341345444
Developing countries239176170219243207220295
Market prices (a ton)2214179177225217210230302
(In millions of tons)
Industrial countries3.
United States1.
Developing countries7.
Sources: United Nations, Food and Agriculture Organization, 1987 FAO Trade Yearbook (Rome), for exports; and Commodities Division, IMF Research Department, for market prices.

Vegetable Oils and Protein Meals

The steep rise in prices of vegetable oils and protein meals in 1988 (Table 16) is mainly attributable to drought-related damage to the U.S. soybean crop following substantial reduction in its soybean stocks over the past two years. Prices in 1989, however, are not expected to rise significantly above the average levels recorded in 1988, as most of the decline in U.S. soybean production is expected to be offset by increased output of soybeans and other oilseeds in other major producing countries. Vegetable oil stocks at the end of September 1988 (1987/88 crop year) were at a record level.

Table 16.Prices of Vegetable Oils and Protein Meals, 1979–First Quarter 1989
YearIndex of Prices of Vegetable Oils and Protein Meals1Soybean Oil2Palm Oil3Sunflowerseed Oil4Rapeseed Oil5Coconut Oil6Groundnut Oil7Soybean Meal8Groundnut Meal9Fish Meal10
(1980 = 100)(In SDRs a ton)
(1980 = 100)(In U.S. dollars a ton)
Source: Commodities Division, IMF Research Department.

Vegetable oils and protein meals are mainly derived from oilseeds. Most oilseeds are processed to expel their oil content and to produce meal rather than consumed directly. Vegetable oil demand is derived primarily from the demand of the food and soap or detergent manufacturing industries. As meals are mainly used to produce animal feed, demand for them is derived from the demand for livestock products. Products are highly substitutable in both the oil and meal markets. While some products may be preferred over others in particular end uses, either for technical reasons or because of consumer preferences, technological improvements in processing have increased the interchangeability of vegetable oils. As a result, price has become a more important criterion in the choice of oil by consumers. Price is also a prime consideration in the choice of animal feedstuffs; these can be manufactured from a wide variety of materials, including oilseed meals, grains, grain by-products, cassava, and citrus and beet pulp.

The market is considerably more heterogeneous and complex on the supply side. For example, some oilseeds are produced as annual crops (mainly soybeans, sunflowerseed, cottonseed, groundnuts, and rapeseed); others are produced as perennial tree crops (mainly coconut, oil palm, and olives). Most producers of annual oilseed crops can adjust supply rapidly (generally within a year) to changes in market prospects, but producers of tree crops have considerably less flexibility to vary supply in the short term; tree crops have long gestation periods, lengthy economic life spans, and low variable costs of cultivation and harvest. The economic life span of an oil palm tree, for example, is about thirty years; the first crop is produced in about the third year after planting and peak output is achieved between the eighth and tenth years.

Different market forces govern the demand for oils and the demand for meals, but most oils are produced as a joint product with meal in the processing of oilseeds. The relative importance of these components varies considerably among oilseeds; for example, while soybeans are 80 percent meal and 18 percent oil by weight, rapeseeds are 60 percent meal and 37 percent oil by weight. The soybean complex dominates prices in both the oil and meal markets. Soybean meal comprises over 60 percent of world meal production; its oil provides over 30 percent of world vegetable oil production. The United States alone accounts for over 50 percent of world soybean production. Soybean oil is the most important vegetable oil produced, strongly influencing the prices of other oils, and the commodity’s supply structure has contributed to making prices of vegetable oil highly unstable. Protein meal prices have been relatively stable, however, because of substitution with alternative feedstuffs.

Soybeans are crushed mainly in response to meal demand. In recent years soybean meal has accounted for over two thirds of the value of the soybean. Soybean meal is perishable, with an average storage time of only about six months; however, soybean oil may be stored over a considerably longer period of time of one to two years. Thus, the demand for meal, rather than the direct demand for soybean oil, tends to determine the supply of soybean oil. As a result, strong demand for meal can lead to increased soybean oil supplies. Conversely, weak demand for meal can act to reduce the volume of beans crushed, particularly since meal is perishable; consequently, the volume of soybean oil produced is also reduced, with little consideration of the prevailing market prices for soybean oil.

World oilseed production expanded rapidly in the 1970s in response to strong demand for oilseed meals used in animal feeds and for vegetable oils, and production has continued to grow rapidly in the 1980s, despite low prices for these commodities. In the 1987/88 crop year, world oilseed production, in terms of oil equivalent, increased by 6 percent to a record level of 57.7 million tons and is expected to remain at about that level during 1988/89 (Table 17). Production of soybeans and rapeseeds increased by 6 percent and 18 percent, respectively, in 1987/88 and together accounted for 69 percent of the increase in total output for that year. In 1988/89, however, soybean production is expected to decline by 10 percent and that of rapeseed by 5 percent. The combined increase in palm oil and groundnut production, however, is expected to offset much of the decline in output of soybeans and rapeseed. Output of cottonseed, sunflowerseed, and copra also are expected to increase sufficiently to offset much of the remaining production shortfall.

Table 17.Major Oilseeds (Oil Equivalent): World Commodity Balance, 1982/83–88/89
October–September Crop Year
(In millions of tons; oil equivalent)3
Palm oil5.
Palm kernels0.
Noncrush use7.
Crushings/oil production39.838.542.545.746.848.750.0
Soybean oil13.612.813.313.815.115.214.8
Palm oil5.
Sunflowerseed oil5.
Rapeseed oil5.
Groundnut oil2.
Cottonseed oil3.
Coconut oil2.
Palm kernel oil0.
Oil consumption39.638.541.944.546.648.350.2
Soybean oil13.513.013.213.514.815.015.0
Palm oil6.
Sunflowerseed oil5.
Rapeseed oil4.
Groundnut oil2.
Cottonseed oil3.
Coconut oil2.
Palm kernel oil0.
Closing stocks6.96.07.910.09.510.28.8
As oilseeds44.
As oil52.
Soybean oil1.
Palm oil0.
Source: United States, Department of Agriculture, Foreign Agriculture Survey: Oilseeds and Products (Washington), various issues.

In 1988/89, world consumption of protein meals is expected to be slightly above the previous year’s level, resulting in a drawdown in world stocks of oilseeds (Table 18). World consumption of vegetable oils is expected to increase by 4 percent, or at a slightly faster rate than in 1987/88. Nearly 90 percent of the growth in consumption would be attributable to palm oil, sunflowerseed oil, and groundnut oil. Vegetable oil stocks are expected to decline to slightly below the high end-of-1987/88 level. Vegetable oil stocks, which increased from the equivalent of 7 percent of consumption in 1982/83 to over 11 percent in 1987/88, are forecast to be at about 11 percent of consumption in 1988/89.

Table 18.Major Oilseeds (Meal Equivalent): World Commodity Balance, 1982/83–88/89
October–September Crop Year
(In millions of tons; meal equivalent)3
Palm kernels1.
Noncrush use19.720.620.620.621.624.022.5
Crushings/meal production91.885.794.597.3102.9106.2105.4
Soybean meal60.555.358.260.966.967.465.5
Cottonseed meal9.99.612.611.19.811.211.6
Rapeseed meal8.48.19.410.211.112.511.8
Sunflowerseed meal6.
Groundnut meal3.
Copra meal1.
Palm kernel meal0.
Meal consumption91.584.894.697.2102.7105.9106.0
Soybean meal59.854.858.560.866.767.266.0
Cottonseed meal10.19.612.411.
Rapeseed meal8.48.09.410.111.012.411.9
Sunflowerseed meal6.
Groundnut meal3.
Copra meal1.
Palm kernel meal1.
Closing stocks18.115.419.423.921.221.916.5
As oilseeds415.011.415.519.917.017.512.7
As meal53.
Soybean meal2.
Source: United States, Department of Agriculture, Foreign Agriculture Survey: Oilseeds and Products (Washington), various issues.

The increase in the index of vegetable oils and protein meals in 1988 was 31 percent in terms of SDRs and 36 percent in terms of dollars, a result of higher average prices for all commodities in the group. Reflecting the higher export unit values that resulted from these price increases, export earnings from major oilseeds and their products (soybeans, soybean oil, soybean meal, and palm oil) rose by 26 percent from SDR 10.6 billion in 1987 to SDR 13.5 billion in 1988 (Tables 4 and 1922). Volumes are estimated to have remained virtually unchanged from 1987 levels; increases by developing countries offset decreases by industrial countries. With substantially higher export volumes and unit values, export earnings of developing countries increased by 40 percent, raising their share in total earnings from 45 percent in 1987 to 50 percent in 1988.

Table 19.Soybeans: Export Earnings, 1985–88
(In SDRs)(In U.S. dollars)
Earnings (in billions)
Industrial countries3.
Developing countries1.
Unit values (a ton)214170154206217200199277
Industrial countries218173158214222203204287
Developing countries205159139188208186180253
Market prices (a ton)2221178167227224208216304
(In millions of tons)
Industrial countries17.121.721.818.617.121.721.818.6
United States16.921.421.318.116.921.421.318.1
Developing countries8.
Sources: United Nations, Food and Agriculture Organization, 1987 FAO Trade Yearbook (Rome), for exports; and Commodities Division, IMF Research Department, for market prices.
Table 20.Soybean Oil: Export Earnings, 1985–88
(In SDRs)(In U.S. dollars)
Earnings (in billions)
Industrial countries1.
Developing countries1.
Unit values (a ton)634351266361644411344486
Industrial countries665395298398675464386535
Developing countries602292234313611342303420
Market prices (a ton)2567292258346576342334463
(In millions of tons)
Industrial countries1.
United States0.
Developing countries1.
Sources: United Nations, Food and Agriculture Organization, 1987 FAO Trade Yearbook (Rome), for exports; and Commodities Division, IMF Research Department, for market prices.
Table 21.Soybean Meal: Export Earnings, 1985–88
(In SDRs)(In U.S. dollars)
Earnings (in billions)
Industrial countries1.
Developing countries1.
Unit values (a ton)157164154193159192199260
Industrial countries183181167212186213216285
Developing countries138150143182140176185244
Market prices (a ton)2155157157199157185203268
(In millions of tons)
Industrial countries9.39.810.610.59.39.810.610.5
United States4.
Developing countries12.812.613.814.512.812.613.814.5
Sources: United Nations, Food and Agriculture Organization, 1987 FAO Trade Yearbook (Rome), for exports; and Commodities Division, IMF Research Department, for market prices.
Table 22.Palm Oil: Export Earnings, 1985–88
(In SDRs)(In U.S. dollars)
Earnings (in billions)
Developing countries2.
Unit values (a ton)489239247310497281320417
Market prices (a ton)2493219265325501257343437
(In millions of tons)
Developing countries5.
Sources: United Nations, Food and Agriculture Organization, 1987 FAO Trade Yearbook (Rome), for exports (export data include only exports from palm oil producing countries); and Commodities Division, IMF Research Department, for market prices.

Soybeans and Soybean Products

Soybeans are the single most important oilseed, and in recent years, the United States has accounted for over half of world production (Table 23). The largest futures exchange for soybeans, soybean oil, and soybean meal is the Chicago Board of Trade; the main activity is trading in soybeans. Physical or cash markets for soybeans and soybean derivatives are located in New Orleans, Decatur, and other delivery points in the United States. Cash markets are also located in São Paulo, Buenos Aires, and Rotterdam. The price quoted for soybean oil in Rotterdam is usually lower than that quoted in U.S. cash markets; most of the oil destined for Rotterdam emanates from South America.

Table 23.Soybeans: World Commodity Balance, 1982/83–88/89(In millions of tons)
October–September Crop Year
United States59.644.550.657.152.852.341.9
Other countries6.
European Community14.712.712.312.813.512.911.0
United States30.226.828.028.732.132.028.6
Other countries17.618.920.523.324.827.128.4
Noncrush use15.116.214.914.116.518.115.7
Closing stocks17.213.317.623.219.720.014.2
United States9.44.88.614.611.98.24.0
Other countries7.
Stocks/utilization ratio (in percent)18.815.319.825.419.419.414.4
Source: United States, Department of Agriculture, Foreign Agriculture Circular: Oilseeds and Products (Washington), various issues.

Both the level of U.S. production and its share in world production have declined in the 1980s. In 1982/83 (October–September crop year), the United States produced 60 million tons, or 64 percent of world soybean output; in 1987/88, production amounted to only 52 million tons, or 51 percent of world output. The decline is attributable to reductions in area under soybean cultivation from 28½ million hectares in 1979/80 to slightly less than 23 million hectares during the 1988/89 marketing year. Other factors, including farmer expectations about soybean prices, have contributed to the downward trend, but most important is the policies contained in U.S. commodity programs. For example, under the Food Security Act of 1985, known as the Farm Bill, farmers who sign up and comply with acreage reduction requirements for program crops are eligible to receive a per bushel deficiency payment, which is calculated as the difference between market prices and the announced target price for program crops. Although soybeans are not a program crop, they may be affected. After harvesting the winter wheat crop, producers in some regions plant soybeans in the summer as a second crop. Acreage that has been enrolled in the wheat program and idled under annual program provisions cannot be planted with soybeans, however. Only the portion of acreage that is enrolled in the wheat program and permitted to be planted with wheat can be planted with soybeans as a second crop. As a result, although cash prices for soybeans have improved substantially in relation to maize prices since the 1985/86 marketing year, soybean acreage has continued to decline in the United States. The ratio of cash prices for soybeans to target prices for maize, on the other hand, has been considerably less favorable to soybeans in recent years. With the uncertain financial situation of most of the agricultural sector, a high percentage of producers has been encouraged to sign up for government programs that guarantee attractive target prices for program crops, rather than engage in the much riskier cultivation of soybeans.

In contrast, the combined production of Brazil and Argentina has increased from about 19 million tons in 1982/83 to about 28 million tons in 1987/88, or by nearly two thirds, mainly reflecting increased plantings of soybeans. In 1987/88, production in Brazil and Argentina rose by 15 percent. Argentina accounted for much of the increase, which in turn was attributable to a 21 percent expansion in the area harvested and a 17 percent increase in average yield per hectare.

In 1987/88, world soybean crushings remained only slightly below the high level recorded in 1986/87. Soybean crushings declined by 12 percent in Brazil, owing to drought in March in Grande do Sul, a major producing area, and delayed soybean crop marketing in anticipation of higher prices; lower demand in the EC related to competition from other feedstuffs, especially grains, lower hog and cattle inventories, and declining poultry production; unfavorable crushing margins that led crushers to slow processing or temporarily close down their operations; and increased crushings of rapeseed and sunflowerseed produced in the EC. This decline was offset by increased crushings in other countries, notably a 10 percent rise in Argentina and a 30 percent increase in China. Despite the continued high level of crushing and a 10 percent increase in use of uncrushed soybeans, world soybean stocks grew by 2 percent in 1987/88.

Reflecting the continuous buildup in end-of-period stocks since 1984/85, average soybean oil prices declined from $725 a ton in 1984 to $334 a ton in 1987. Although prices moved sharply higher in mid-1988 on account of anticipated weather-related damage to the U.S. soybean crop, average monthly prices have declined substantially since July, as increased availability of other oilseeds with higher oil extraction rates than soybeans caused world stocks of vegetable oils to increase further. The average monthly price of soybean oil has declined from $600 a ton in July 1988 to about $444 a ton in December, or by 26 percent. In the first quarter of 1989, the average price of soybean oil fell below the level recorded in the fourth quarter of 1988. Contributing to the weakness in prices were a U.S. Department of Agriculture announcement in January of a larger-than-expected 1988 U.S. soybean crop and a smaller decline in U.S. soybean stocks than previously estimated. Meanwhile, strong meal demand and, in 1988, concern about supply availability have strengthened meal prices; average annual prices increased from $157 a ton in 1985 to $203 a ton in 1987 and to $268 a ton in 1988. The average price of soybean meal weakened by 3 percent from the fourth quarter of 1988 to the first quarter of 1989, reflecting news of timely rains in Brazil where an earlier drought threatened yields in major producing areas.

In 1988/89, world soybean output is expected to fall by 10 percent. U.S. soybean production is forecast to fall by 20 percent to 42 million tons, reflecting a decline in average yield per hectare. Soybean production also is expected to decline by 10 percent in China because of drought and flooding in soybean growing areas, and by 16 percent in Argentina because of drought. One fourth of the production declines in the United States and China is expected to be offset by increased output in Brazil, where further expansion of the area planted with soybeans could lead to a record crop.

World consumption of soybean meal is expected to decline by a modest 2 percent in 1988/89 (Table 24), resulting mainly from lower consumption in the United States and the EC; world consumption of soybean oil is expected to remain unchanged (Table 25). Soybean meal consumption in the United States is expected to decline by 8 percent, apparently owing to competition from other protein sources including fish meal and lysine-maize formulations in hog feeding rations. Soybean meal consumption in the EC is expected to decline as a result of greater availability of sunflowerseed meal and dry pulses and increased grain usage for feed because of the steep rise in the price ratio of soybean meal to feed grain. World soybean crushings are forecast to decline slightly, with reduced crushings in the United States, the EC, the U.S.S.R., and other countries more than offsetting the projected increase in crushings in Brazil and Argentina. In 1988/89, closing stocks of soybeans are expected to drop sharply by 29 percent to about 14.2 million tons and world stocks of soybean oil are expected to fall by 5 percent. Soybean stocks held by the United States are projected to decline to only about 4 million tons at the end of September 1989, compared with a level of approximately 15 million tons at the end of September 1986.

Table 24.Soybean Meal: World Commodity Balance, 1982/83–88/89(In millions of tons)
October–September Crop Year
European Community11.710.19.810.210.810.38.8
United States24.220.722.322.625.225.522.4
Other countries14.014.815.918.419.621.622.4
European Community18.117.318.018.719.218.217.1
United States17.516.017.717.318.519.317.7
Other countries24.221.522.824.829.029.731.1
Closing stocks2.
Stocks/consumption ratio (in percent)
Source: United States, Department of Agriculture, Foreign Agriculture Circular: Oilseeds and Products (Washington), various issues.
Table 25.Soybean Oil: World Commodity Balance, 1982/83–88/89(In millions of tons)
October–September Crop Year
European Community2.
United States5.
Other countries2.
European Community1.
United States4.
Other countries5.
Closing stocks1.
Stocks/consumption ratio (in percent)
Source: United States, Department of Agriculture, Foreign Agriculture Circular: Oilseeds and Products (Washington), various issues.

In 1988, the world export volume of soybean oil is estimated to have declined by 8 percent while that for soybean meal is estimated to have increased by 2 percent. U.S. exports of soybean oil have climbed sharply in recent years as an increasing share of these exports has been assisted through various export credit programs and the EEP.35 Partly reflecting sales under the EEP and other government programs, the volume of U.S. soybean oil exports is estimated to have increased by 17 percent in 1988 to 0.7 million tons (Table 20). On the other hand, the volume of U.S. soybean meal exports only grew by 5 percent in 1988.

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 soybean products through a gradual lowering of the price support level. The price support program for soybeans allows a farmer to obtain a nonrecourse36 loan for nine months from the Commodity Credit Corporation (CCC) at the announced loan rate with soybeans used as collateral. The farmer may repay the loan with interest at the end of the nine months and sell the crop at market prices, or forfeit the crop to the government. Participants in the soybean program, in contrast to those in price support programs for other crops, cannot receive cash deficiency payments and are not required to reduce acreage planted with soybeans. Farmers have forfeited, however, large quantities of soybeans to the CCC in years when market prices have fallen below the loan rate plus interest charges; the stocks have, in turn, been sold by the CCC at given resale prices plus carrying charges.

Initially, the loan rate for soybeans was set at $5.02 a bushel for 1986 and 1987 in the 1985 Farm Bill; however, the Secretary of Agriculture was authorized to lower the loan rate by up to 5 percent to $4.77 a bushel, and effective September 12, 1986, the loan rate for 1986 was set at $4.77 a bushel. Subsequently, the effective loan rate was reduced further to $4.56 a bushel as a result of the implementation of the Gramm-Rudman law. For the 1987 soybean crop, the initial loan rate was again reduced from $5.02 a bushel to $4.77 a bushel, but no further reduction was required on account of the Gramm-Rudman law. The U.S. soybean loan level for the 1988 crop remained unchanged from the 1987 level, at $4.77 a bushel. With the 1988 target price for maize set at $2.84 a bushel, and a ratio of maize to soybeans of only 1.68:1, it is expected that high soybean prices will be required to encourage producers to plant soybeans rather than opt for the guaranteed returns for maize and other crops under the U.S. feed grain program.

Some increase in soybean acreage may result from the provisions of the Disaster Assistance Act of 1988, under which the Secretary of Agriculture may permit farmers participating in price support programs and in compliance with the terms of these programs to plant soybeans and sunflowerseed on 10–20 percent of their program acreage base without affecting the size of the acreage base. The Secretary of Agriculture may, however, limit or prohibit such an expansion of soybean acreage onto the program base if he determines that the season average producer price will fall below 115 percent of the previous year’s loan rate, or $5.49 a bushel. Farmers would have to be convinced at the time the crop is planted that high soybean prices would offset the risk of planting soybeans over program crops, especially maize. Some expansion in soybean area is currently expected in 1989 in the maize growing areas.

World production of soybeans and other oilseeds, in terms of oil equivalent, is expected to stagnate during 1988/89. With consumption expected to remain strong, world stocks of oilseeds and vegetable oils as a ratio to utilization are expected to fall to the lowest level since 1983/84. After falling from 19 percent in 1985/86 to about 18 percent in 1987/88, the stocks/utilization ratio is expected to fall to 15 percent in 1988/89.

Despite the tight stock situation, prices have weakened since reaching peak levels in mid-1988. Many commercial buyers reportedly have postponed purchases in order to take advantage of the expected weakening of prices in response to the large crop expected to be harvested in Brazil and the recovery of U.S. production.

In the United States, the March 31, 1989 report by the U.S. Department of Agriculture on U.S. farmers’ planting intentions indicated that U.S. soybean acreage would increase by 4.8 percent to 61.7 million acres, a level moderately below market expectations. The potential size of the crop will also depend upon the pattern and adequacy of rainfall during the planting and growing season. Concerns have arisen about dry soil in important soybean growing regions in the center and the west of the mid-western United States prior to the spring planting season and about the possibility of dry weather in the summer.

As world production of oilseeds in 1988/89 is expected to remain at approximately the 1987/88 level, prices for soybeans and soybean products are not expected to rise much above the average levels recorded in 1988. Upward movement in soybean oil prices may be dampened by the availability of large carryover stocks from 1987/88 of soybean and other vegetable oils. Prospects for vegetable oil prices, on the other hand, have improved following a sharp drop in palm oil stocks during March 1989. With world stocks of oilseed at very low levels, if persistent weather problems were to develop in major oilseed producing areas in the world, or if the threat of crop damage in major producing areas were reported, prices could move sharply higher.

Palm Oil

The main physical markets for palm oil are located in Kuala Lumpur and Rotterdam; some oil is also traded in San Francisco. A futures market for palm oil is located in Kuala Lumpur.

Palm oil production increased by 5 percent in 1987/88 and is expected to rise by 11 percent in 1988/89 to a new record level of 9.4 million tons (Table 26). In recent years palm oil has generally been second only to soybeans in production. In terms of oil equivalent, soybeans represented 32 percent of world oilseed production in 1987/88; palm oil and rapeseed each accounted for 15 percent.

Table 26.Palm Oil: World Commodity Balance, 1982/83–88/89(In millions of tons)
October–September Crop Year
Other countries1.
European Community0.
Other countries3.
Closing stocks0.
Stock/consumption ratio (in percent)8.113.314.919.517.117.918.5
Sources: Based on statistics of United States, Department of Agriculture, Foreign Agriculture Survey: Oilseeds and Products (Washington), various issues; and Oil World: Statistics Update (Hamburg), October 28, 1988.

Palm oil and soybean oil prices tend to move in tandem over the long run, though wide differentials may be observed from time to time. Palm oil traded at a discount of $26 a ton, on average, to soybean oil during the period 1982–83 and at a small premium of $4 a ton, on average, to soybean oil in 1984; however, with the strong recovery in world palm oil production and a sharp buildup in stocks, palm oil traded at a widening discount to soybean oil of $75 a ton and of $85 a ton in 1985 and 1986, respectively. In 1987, declining palm oil production, abundant soybean oil supplies, and major palm oil purchases by India pushed palm oil prices sharply up, resulting in a slight premium of $9 a ton, on average, over soybean oil. Palm oil continued to trade at a small premium of $11 a ton to soybean oil during the first quarter of 1988, but this price relationship was sharply reversed again in the second and third quarters when crop damage resulting from the drought in the mid-western part of the United States caused soybean and soybean product prices to rise sharply. Consequently, palm oil traded at an average discount of $23 a ton to soybean oil, in the second quarter and at $72 a ton in the third quarter. The average monthly discount narrowed considerably, however, to $21 a ton in the fourth quarter, reflecting mainly the steep decline in soybean oil prices.

World production of palm oil increased by 5 percent in 1987/88 to 8.5 million tons following a 1 percent decline in 1986/87. Three fourths of the production increase in 1987/88 is attributable to Malaysia, the world’s leading producer, and reflected an improvement in average yields owing to generally normal weather, increased fertilizer usage, and an expansion in mature area. Production in Indonesia also expanded in 1987/88, as mature acreage increased by an estimated 15 percent, despite a sharp reduction in average yield resulting partly from drought in 1985 and reduced fertilizer usage in 1986. Although world palm oil consumption increased by 2 percent in 1987/88, mainly because of increased consumption in India, it was exceeded by production, raising the level of accumulated stocks. Specifically, palm oil stocks, which had decreased from the equivalent 20 percent of world consumption in 1985/86 to 17 percent in 1986/87, increased to 18 percent in 1987/88.

In 1988/89, world palm oil production is expected to increase further to a record level of 9.4 million tons. Malaysian production is forecast to increase by over 8 percent as a result of higher crude palm oil yields, owing partly to above normal rainfall in major producing areas during 1988 and because of further expansion in mature area. In Indonesia production is expected to rise by 14 percent in 1988/89, reflecting a recovery in average yield with the return of nearly normal weather and increased fertilizer usage in 1987 and 1988. The combined production of Malaysia and Indonesia is estimated to represent 73 percent of world output of palm oil in 1988/89.

World consumption of palm oil in 1988/89 is expected to increase by 10 percent, or five times that of the preceding year. Palm oil consumption in India is expected to decline by 18 percent, because of large carryover stocks and the expected sharp increase in domestically produced groundnut and other vegetable oils. However, with the anticipated tightening of soybean oil supplies, abundant palm oil supplies in 1988/89, and a forecast increase in the ratio of palm oil stocks to consumption, palm oil is likely to continue to be traded at a discount to soybean and other competing oils. Reflecting this, palm oil consumption is expected to rise substantially, especially in China, where domestic production of vegetable oils is estimated to fall by 16 percent. Excluding India, where large groundnut, cottonseed, and rapeseed crops forecast during 1988/89 are expected to sharply reduce vegetable oil imports, palm oil is expected to displace soybean oil in world vegetable oil consumption, and, in some countries, may also displace rapeseed, sunflowerseed, coconut, and cottonseed oils. World palm oil stocks are expected to increase by 13 percent above the end-of-1987/88 level. They may rise to 19 percent of annual world consumption, which is the highest level since 1985/86, when stocks reached the equivalent of 20 percent of world consumption. As a consequence, prospects for an increase in average palm oil prices in 1989 may be limited by abundant palm oil supplies, the high end-of-1987/88 level of world vegetable oil stocks, and an expected recovery of U.S. soybean production in late 1989.

Coconut Oil

Physical, or cash, markets for coconut oil are located in Rotterdam and at Gulf of Mexico ports and on the West Coast of the United States. There is no futures market for this commodity.

Coconut oil prices increased sharply in 1983 and 1984, when the average annual price reached $1,155 a ton, but subsequently dropped to $296 a ton in 1985 and 1986, the lowest level since 1972. These price movements reflected typhoon and drought-related damage in 1983/84 to copra production in the Philippines, the world’s leading producer, and the country’s subsequent recovery in production over the following two years. Coconut oil prices began increasing in the fourth quarter of 1986 and continued to rise during 1987 to an average of $442 a ton, reflecting the demand response of the industrial soap and detergent producers to a decline in world copra and coconut oil production in 1987/88.37 Wariness of the effect of the U.S. drought on the supply of vegetable oils caused a continued climb in prices through the third quarter of 1988, despite an expected improvement in the world production of coconut oil. In the last quarter, prices dropped in view of less pessimistic assessments of the drought’s impact.

On average, coconut oil traded at a premium over soybean oil from 1978 to 1985, but was quoted at a discount to soybean oil in 1986. The average premium increased from $20 a ton in 1982 to $430 a ton by 1984; however, it fell to $14 a ton in 1985 and, in 1986, coconut oil traded at an average discount of $46 a ton to soybean oil. In 1987 and 1988, coconut oil again traded at an average premium over soybean oil of $108 a ton and $102 a ton, respectively. On a quarterly basis, the average premium declined from $ 125 a ton in the first quarter of 1988 to $89 a ton and $66 a ton in the second and third quarters, respectively. In the fourth quarter, however, coconut oil again traded at an average premium of $126 a ton, partly in response to an anticipated reduction in estimated coconut production in the Philippines during 1988/89 resulting from typhoon damage to coconut areas in October and November 1988. Coconut oil has, on average, traded at a premium over palm kernel oil, a byproduct of the palm oil industry and its nearest substitute among the lauric oils; the premium declined sharply from an average of $39 a ton in 1985 to $9 a ton in 1986 but increased in 1987 and in 1988 to an average of $26 a ton. The volume of palm kernel oil exports is equivalent to about 53 percent of the volume of coconut oil exports; in recent years, the share of palm kernel oil in the market for lauric oils has been growing and is currently about 35 percent.

In 1987/88, world copra production declined by 10 percent to 4.2 million tons. The reduction is mainly attributable to a 25 percent decline in output in the Philippines as a result of serious drought in the first half of 1987, which reduced copra production in the second half of 1987 and throughout most of 1988. Drought in both 1986 and 1987 and typhoon-related damage to coconut trees helped reduce copra production in Sri Lanka by 42 percent in 1986/87, and by an additional 40 percent in 1987/88. Reflecting these developments, world production of coconut oil declined by 13 percent in 1987/88 to 2.6 million tons. World consumption also fell, and world stocks of coconut oil increased by about 6 percent by the end of 1987/88.

Prospects are for world copra production to increase by 8 percent in 1988/89, mainly in anticipation of an expected recovery in coconut production in the Philippines. Rainfall in the Philippines returned to near normal levels in the second half of 1987 and in 1988, and this is expected to result in some recovery in copra production in 1988/89. Increased world copra production is likely to bring increases of about 8 percent each in world production and consumption of coconut oil. World stocks of coconut oil are expected to decline by 18 percent or from the equivalent of 15 percent of consumption to 11 percent. Nevertheless, world stocks at the end of 1988/89 are forecast to remain 41 percent higher than at the end of 1984/85, when the stock/consumption ratio was 8 percent. With the expanding production of copra, especially in the Philippines, coconut oil prices are projected to weaken in 1989.

Groundnuts and Groundnut Oil

In recent years, groundnuts have represented about 10 percent of world oilseed production in terms of oil equivalent. Over half of world groundnut output is crushed to produce groundnut oil and meal, and the remainder is consumed directly as nuts. Groundnuts are 42 percent oil and 55 percent meal by weight. Groundnut oil represents 6 percent of world output of vegetable oils, and groundnut meal accounts for 4 percent of world production of protein meals.

Only about 6 percent of world groundnut production and about 11 percent of groundnut oil production have entered international trade in recent years. Because of market structure and weather-related fluctuations in output, prices of groundnut products have been particularly volatile. Fluctuations in the volume of exports are related to changes in production in a small number of important exporting countries.

The world’s three main producers of groundnuts, India, China, and the United States, together account for about two thirds of world production. China and the United States are the main exporters of groundnuts for confectionery use. The main exporter of groundnut oil in recent years has been Senegal, followed by China and Argentina; together they account for 70 percent of world exports but only 9 percent of world production of groundnut oil. India and Senegal are the world’s leading exporters of groundnut meal.

Groundnut oil’s main physical or cash market is located in Rotterdam. The average annual price of groundnut oil rose sharply in line with the general upturn in vegetable oil prices during the period 1982–84. The price subsequently declined sharply, however, with the recovery in world vegetable oil production and the substantial buildup in world stocks. The average annual price of groundnut oil declined by over 51 percent between 1984 and 1987 but increased substantially in 1988 as a result of the drought-damaged U.S. soybean crop. On a quarterly basis, the average price of groundnut oil increased from $515 a ton in the first quarter of 1988 to $705 a ton in the third, but prices fell sharply in the fourth quarter reflecting the high level of vegetable oil stocks at the end of 1987/88, the expected large increase in oilseed supplies emanating from South American producers in 1988/89, and the seasonal upturn in Malaysian palm oil production. The average price of groundnut oil increased from $528 a ton in the fourth quarter of 1988 to $656 a ton in the first quarter of 1989, however. This increase is mainly attributable to an expected decline in groundnut oil production in important exporting countries.

Groundnut oil traded at an average premium38 of $429 a ton over soybean oil in 1984 but the premiums narrowed in each of the following three years to $ 128 a ton during 1988. Groundnut oil also traded at a narrowing average premium over sunflowerseed oil and rapeseed oil during these years.

In 1987/88, world production of groundnuts and groundnut oil declined by 3 percent and 6 percent, respectively. Groundnut production in India fell by 21 percent in 1987/88 because of severe drought in the major groundnut-producing areas during June–August 1987; however, this fall was partly offset by increased production in other countries, including China, Senegal, and South Africa. The EC, by far the world’s leading importer of groundnuts and groundnut oil, accounted for nearly half of world imports of groundnuts and over 70 percent of world imports of groundnut oil in 1987/88. Groundnut meal production declined by 7 percent in 1987/88, on account of the decline in world groundnut production, especially in India.

World production of groundnuts, in terms of oil equivalent, is forecast to increase by 9 percent to a record level of 6.1 million tons in 1988/89. India’s groundnut harvest is expected to recover substantially from the drought-reduced level of the previous year, and the U.S. groundnut crop is expected to be the second largest on record as a result of improved average yield and an expansion in area planted with groundnuts. Production in China, however, is expected to decline by 6 percent owing to the effects on average yield of poor weather and a reduction in area planted with groundnuts. Production in Senegal is forecast to fall by 26 percent because of a reduction in average yield as a result of irregular rainfall and locust damage, while in Argentina, severe drought adversely affected planting. World exports of groundnuts and groundnut oil, in terms of oil equivalent, are expected to decline by 7 percent in 1988/89.

Reflecting the recovery in groundnut output, especially in India, groundnut meal production is estimated to expand by 17 percent in 1988/89; nevertheless, world exports of groundnut meal are expected to decline by 10 percent, as increased exports from India are likely to be more than offset by reduced exports from Senegal. On average, the price of groundnut meal has moved broadly in line with and at a discount to soybean meal. In recent years, the discount of groundnut meal to soybean meal has widened from $9 a ton in 1984 to $41 a ton in 1987 and an average of $59 a ton during 1988, reflecting the steep rise in soybean meal prices on account of anticipated drought-related damage to the U.S. soybean crop.

Rapeseed Oil

The main physical or cash markets for rapeseed, rapeseed oil, and rapeseed meal are located in Rotterdam, in various points in Western Canada, and in Hamburg. A futures market for rapeseed is located in Winnipeg, where the commodity is known as “canola.”

Throughout 1987 and the first half of 1988 rapeseed oil was the most competitive of the leading vegetable oils, trading at a discount to both palm oil and soybean oil at Rotterdam.

World production of rapeseed and rapeseed products has increased rapidly in recent years (Tables 2729); consequently, the share of rapeseed in world oilseed production, in terms of oil equivalent, has risen from 11 percent in 1982/83 to 15 percent in 1987/88. China, the EC, Canada, and India are the world’s four leading producers; their combined output represents over 80 percent of world rapeseed production. The EC and Canada are relatively important net exporters of rapeseed oil; Canada is the leading net exporter of rapeseed; and China and Canada are the leading net exporters of rapeseed meal.

Table 27.Rapeseed: World Commodity Balance, 1982/83–88/89(In millions of tons)
October–September Crop Year
European Community2.
Other countries2.
European Community2.
Other countries1.
Noncrush use1.
Closing stocks0.
European Community0.
Other countries0.
Stocks/utilization ratio (in percent)
Sources: United States, Department of Agriculture, Foreign Agriculture Circular: Oilseeds and Products (Washington), various issues.
Table 28.Rapeseed Oil: World Commodity Balance, 1982/83–88/89(In millions of tons)
October–September Crop Year
European Community1.
Other countries1.
European Community0.
Other countries1.
Closing stocks0.
Stocks/consumption ratio (in percent)
Sources: United States, Department of Agriculture, Foreign Agriculture Circular: Oilseeds and Products (Washington), various issues.
Table 29.Rapeseed Meal: World Commodity Balance, 1982/83–88/89(In millions of tons)
October–September Crop Year
European Community1.
Other countries1.
European Community1.
Other countries1.
Closing stocks0.
Stocks/consumption ratio (in percent)
Sources: United States, Department of Agriculture, Foreign Agriculture Circular: Oilseeds and Products (Washington), various issues.

In 1987/88, world rapeseed production increased by 18 percent to a record level of 23 million tons. The EC and China accounted for 66 percent and 20 percent, respectively, of the growth in world production. The area planted to rapeseed in the EC increased by 46 percent, or from 1.27 million hectares in 1986/87 to 1.86 million hectares in 1987/88, and the average yield per ton increased by 10 percent, or from 2.91 tons a hectare to 3.20 tons a hectare. As a result, production in the EC increased by 62 percent to a record level of 6 million tons, and the EC’s share in world rapeseed production increased from 19 percent in 1986/87 to 26 percent in 1987/88. Production in China rose by 12 percent on account of a 7 percent increase in area under rapeseed cultivation and a 4 percent rise in average yield per ton.

The steep upward trend in world production of rape-seed and rapeseed products is expected to be interrupted in 1988/89, when world rapeseed production is forecast to decline by 6 percent. Rapeseed output in China is forecast to decline by 1.6 million tons, or 24 percent, resulting from a reduction in yields because of dry spring weather and a smaller area planted to rapeseed because of substitution of soft winter wheat for rapeseed during fall planting. In the EC, a reduction in average yield to historical levels is expected to reduce rapeseed production by 0.7 million tons, or by 12 percent, in 1988/89 compared with the previous year’s level. The shortfall in the EC’s production is expected to be cushioned, however, by record-high stocks at the end of 1987/88 emanating from that year’s bumper crop.

In response to incentives offered under the EC’s oilseeds policy, oilseed production—mainly rapeseed and sunflowerseed and to a lesser extent soybeans—has expanded rapidly and, until this year, has generated escalating costs for the EC’s budget. The system for supporting the oilseed sector, unlike the regimes for other commodities, such as grains and dairy products, does not rely on heavy import tariffs to protect domestic producers but rather on deficiency payments that compensate for the differences between world market prices and the EC target price, which is negotiated annually.39 The deficiency payments are made to oilseed crushers in the EC, thereby enabling them to pay oilseed growers more favorable prices and encouraging the crushers to use supplies grown in the EC rather than imports.

In February 1988, at the summit meeting in Brussels, it was agreed to set annual production thresholds or a maximum guaranteed quantity of 4.5 million tons for rapeseed, 3.4 million tons for sunflowerseed,40 and 1.3 million tons for soybeans for the years 1988/89–1990/91. A “stabilizer” was adopted that provided for an automatic 0.45 percent reduction in the EC target price for every 1 percent of production above the maximum guaranteed quantity in 1988/89 and an 0.5 percent reduction in the EC target price for every 1 percent of production above the maximum guaranteed quantity in subsequent marketing years. The stabilizer has no upper limit and is directly proportional to overproduction. This mechanism was activated in 1988 and resulted in price reductions of 7.65 percent for rapeseed, based on production of 5.3 million tons, or 0.8 million tons over the maximum guaranteed quantity. In the case of sunflowerseed, Spain and Portugal did not exceed their maximum guaranteed quantities of 1.3 million tons and 0.06 million tons, respectively, but production in the remaining (ten) member countries of the EC is estimated at 2.9 million tons; this resulted in a substantial price reduction of about 20 percent for sunflowerseed. As soybean production is estimated at 1.6 million tons or 0.3 million tons above the maximum guaranteed quantity, the institutional support price was reduced by 10.35 percent. Because of these sharp cuts in the EC’s target prices and, more important, the rise in world prices of oilseeds caused by drought in the United States, the cost of the oilseeds regime reportedly remained well within budgetary limits in 1988.

The reductions in target prices that are automatically triggered by this mechanism are expected to limit future overproduction in the EC and could result in a reduction in areas planted with oilseeds in 1989/90. Producers in France and the United Kingdom have reportedly been sharply reducing their rapeseed plantings this autumn.

The average annual price of rapeseed oil declined steeply during 1985–87; however, in 1988, prices strengthened sharply in line with other vegetable oil prices on account of the supply shortage that was expected to result from the U.S. drought. After reaching $687 a ton in 1984, the average annual price of rapeseed oil declined to $305 a ton in 1987 and an average of $427 a ton in 1988. In 1987, rapeseed oil traded at an average discount of $38 a ton and $29 a ton to palm oil and soybean oil, respectively, and continued to trade at an average discount to these oils during the first half of 1988. With the expected tightening of world rapeseed supplies in 1988/89, the price of rapeseed oil is projected to strengthen relative to competing vegetable oils.

Sunflowerseed Oil

The main physical, or cash, markets for sunflowerseed and sunflowerseed products are located in Rotterdam, Buenos Aires, Minneapolis, and a number of ports in the United States on the Gulf of Mexico and the Great Lakes. There is also a futures market for sunflowerseed, but not for sunflowerseed products, in Buenos Aires.

World production of sunflowerseed is expected to virtually stagnate in 1988/89 at 21 million tons, or 2 percent higher than the record 1987/88 level (Tables 3032). The world’s three main producers of sunflowerseed and their shares in world production in 1987/88 are the U.S.S.R. (30 percent), the EC (19 percent, of which France and Spain are the main producers), and Argentina (14 percent). The world’s leading exporter of sunflowerseed oil and meal is Argentina; the United States is the leading net exporter of sunflowerseed. The EC is a large net importer of sunflowerseed meal and imports a small quantity of sunflowerseed but is a net exporter of sunflowerseed oil.

Table 30.Sunflowerseed: World Commodity Balance, 1982/83–88/89(In millions of tons)
October–September Crop Year
European Community1.
United States2.
Other countries3.
European Community2.
United States0.
Other countries3.
Noncrush use2.
Closing stocks0.
European Community0.
Other countries0.
Stocks/utilization ratio (in percent)
Sources: United States, Department of Agriculture, Foreign Agriculture Circular: Oilseeds and Products (Washington), various issues.
Table 31.Sunflowerseed Oil: World Commodity Balance, 1982/83–88/89(In millions of tons)
October–September Crop Year
European Community0.
Other countries2.
European Community1.
Other countries2.
Closing stocks0.
Stocks/consumption ratio (in percent)
Sources: United States, Department of Agriculture, Foreign Agriculture Circular: Oilseeds and Products (Washington), various issues.
Table 32.Sunflowerseed Meal: World Commodity Balance, 1982/83–88/89(In millions of tons)
October–September Crop Year
European Community1.
Other countries2.
European Community2.
Other countries2.
Closing stocks0.
Stocks/consumption ratio (in percent)
Sources: United States, Department of Agriculture, Foreign Agriculture Circular: Oilseeds and Products (Washington), various issues.

World output of sunflowerseed has expanded rapidly from 15.5 million tons in 1983/84 to an average of 19.5 million tons in 1985/86 and 1986/87. In 1987/88 world production increased by over 6 percent to 20.5 million tons. Production increases in the U.S.S.R. (15 percent), the EC (18 percent), Argentina (12 percent), and other countries more than offset production declines in China, Romania, and other countries. In the EC, average yield increased from 1.53 tons a hectare in 1986/87 to 1.70 tons a hectare in 1987/88, and area harvested increased from 2.14 million hectares in 1986/87 to 2.32 million hectares in 1987/88. Between 1983/84 and 1987/88, the EC’s production of sunflowerseed has increased by 117 percent, or from 1.8 million tons to 3.9 million tons, and has accounted for over 40 percent of the expansion in world sunflowerseed output. In the U.S.S.R., the substantial production increase in 1987/88 is attributable to a 7 percent rise in average yield a hectare and an 8 percent rise in area harvested.

Meanwhile, there has been a declining trend in U.S. sunflowerseed production in recent years mainly on account of the steep reduction in area harvested—from 1.5 million hectares in 1984/85 to 0.72 million hectares in 1987/88. As U.S. Government programs have provided more attractive returns for alternative crops, such as wheat and barley, and as government set-aside acreage requirements for program crops have increased, sunflowerseed acreage has declined. In addition to competition from crops in the United States benefiting from government programs, competition from expanding world oilseed supplies has also increased. Various government programs assist U.S. exports of sunflowerseed oil. In addition to sunflowerseed oil exports under the EEP, the U.S. Government enacted in 1987 an export assistance program for sunflowerseed oil exporters called the Sunflower Oil Assistance Program (SOAP). Up to $10 million of sunflowerseed oil is to be purchased by the U.S. Department of Agriculture under SOAP, which is to be awarded as bonuses to exporters. Implementation of the SOAP began in the fall of 1988 and is scheduled to remain available through fiscal 1989. An additional $20 million has been provided to assist exports of sunflowerseed oil and cottonseed oil under the Agricultural Appropriation Act of 1989.

In 1988/89, world production of sunflowerseed is forecast to increase by over 2 percent to a new record level of 21 million tons. In the EC, sunflowerseed production is expected to increase by 5 percent in 1988/89, compared with 18 percent in the previous year, as the area planted with sunflowerseeds is forecast to decline by 10 percent. As EC production at 4.1 million tons in 1988/89 is expected to sharply exceed the combined maximum guaranteed quantity of 3.4 million tons, the target price has been substantially reduced by 20 percent. The U.S. sunflowerseed crop is forecast to decline to the lowest level since 1976, as a result of drought in the main sunflowerseed growing areas of Minnesota and North and South Dakota.

Reflecting an 8 percent increase in world crushings of sunflowerseed, world production of sunflowerseed oil increased by 9 percent in 1987/88. Although world consumption also increased sharply, closing stocks of sunflowerseed oil rose by 20 percent, or from the equivalent of 8 percent of consumption in 1986/87 to 9 percent in 1987/88. Reflecting this and the increase in the stocks/utilization ratio for sunflowerseed, the average annual price of sunflowerseed oil weakened substantially in 1986 and declined further in 1987. In 1988, however, the price of sunflowerseed oil increased by 32 percent in line with the strong upward movement in other vegetable oil prices in response to supply concerns related to the U.S. drought.

In 1988, sunflowerseed oil traded at an average premium of $17 a ton to soybean oil, $43 a ton to palm oil, $53 a ton to rapeseed oil, and at an average discount of $111 a ton to groundnut oil. During the first quarter of 1989, sunflowerseed oil’s competitive position over groundnut oil and rapeseed oil improved, reflecting the forecast declines in supplies available for export of these commodities. Sunflowerseed oil’s average discount to groundnut oil widened to $210 a ton and its premium over rapeseed oil fell to $35 a ton but increased over soybean and palm oil.

Prospects for an increase in the average price of sunflowerseed oil above the 1988 level appear to be limited as world stocks of vegetable oils remain at high levels. Should production problems develop in a major oilseed producing country, prices might well rise.

Fish Meal

The main physical markets for fish meal are located in Chile, Peru, Japan, Denmark, and Norway, as well as in Rotterdam and Hamburg. Regularly published price quotations indicate the “lowest representative asking price” for fish meal from any origin, basis c & f Hamburg.

Fish meal is an additive to feeds for poultry, swine, and other animals; it is also used as feed in aquaculture. The price of fish meal has risen steadily in recent years, in line with the recent trend of prices for other protein meals; in 1986 and 1987 the price increased by 15 percent and 19 percent, respectively. In 1988, it rose by 42 percent, to an average price for the year of $544 a ton, which is the highest price for the commodity since 1973.

After increasing by 5 percent to a record level of 6.3 million tons in 1985/86 (October–September year), mainly because of large production increases in Chile, the world’s leading producer, and Peru, world production of fish meal declined by 5 percent in 1986/87 to about the 1984/85 level. The decline is attributable to poor fishing conditions in Chile and Peru resulting from El Niño weather disturbances.

In 1987/88 world production of fish meal increased by 6 percent to 6.4 million tons. Over 60 percent of the increase is attributable to Peru, where favorable fishing conditions for anchovies and sardines led to a 28 percent increase in production. Production also increased in Japan (6 percent) and Denmark (25 percent) but virtually stagnated in Chile where fish resources are closely managed by using fishing bans to protect the fish population during the spawning season. Reflecting the rise in production and a slight decline in consumption, world stocks of fish meal increased by 52 percent to the level prevailing at the end of 1985/86.

In 1988/89 world production of fish meal is forecast to remain at about the same high level as in 1987/88. Reflecting this and the high level of world fish meal stocks, prices are expected to weaken in 1989.

The average quarterly price of fish meal, after declining by 6 percent in the fourth quarter of 1988, fell by 17 percent in the first quarter of 1989. Fish meal’s average premium over soybean oil declined from $268 a ton in the fourth quarter of 1988 to $183 a ton in the first quarter of 1989. The price reduction reflects a large increase in fish meal output in major producing countries in the final months of 1988, generally poor import demand, especially in China and the European Community, and a sharp increase in stocks.



A shift in demand toward lighter meats, especially poultry and pork, because of consumer health concerns in industrial countries, has been an important influence on beef prices in recent years. The trend away from beef, however, may have weakened in 1987–88, as evidenced by unexpectedly strong retail demand for beef in the face of rising prices in some industrial countries. In the United States, per capita consumption of beef fell by 7 percent in 1987 to 73.4 pounds (retail weight) but declined by just 1 percent in 1988 to 72.4 pounds. Per capita consumption of poultry is expected to continue to increase in 1989, but at the expense of pork, rather than beef consumption. In Australia, per capita consumption of beef rose by 1 percent in 1987/88 to 87.5 pounds, while poultry consumption fell 3 percent to 50 pounds.

Strict health regulations are applied to imports of livestock and uncooked meat by Canada, the United States, some northern European countries, Australia, New Zealand, Japan, Korea, Taiwan Province of China, and some Central American countries. Trade within this group of countries generally commands higher prices than elsewhere. The EC permits some imports of boneless uncooked beef only from specified packing plants in countries where disease is still endemic. With effect from January 1, 1989, the EC has banned the import of beef raised with growth hormones, a measure affecting mainly U.S. exports. Price quotations in this section refer to frozen boneless beef, 85 percent lean, imported into the United States from Australia and New Zealand, and f.o.b. at U.S. ports. This is manufacturing grade beef generally used in hamburgers and sausages.

Under the influence of the Dairy Termination Program (DTP) in the United States,41 the price of beef fell from 98 cents a pound in 1985 to 95 cents a pound in 1986 (Table 33). Prices rose strongly, however, in 1987 on account of lower domestic supplies, especially of manufacturing grade beef owing to the winding down of the DTP. Adding to the upward price pressure were a temporary ban in August–September 1987 on imports of processed beef from Australia because of high pesticide residues and the announcement in August of a 21 percent rise in the Japanese import quota for 1987/88 (year ended March) indicating improved export opportunities in that market. In the final quarter of 1987, strong retail demand and the limitation of exports to the United States from Australia and New Zealand under voluntary export restraint agreements boosted prices to 115 cents a pound.42

Table 33.Prices of Beef and Lamb, 1979–First Quarter 1989
(In SDRs a pound)(In U.S. dollars a pound)
Source: Commodities Division, IMF Research Department.

With the seasonal increase in the slaughter rate in the second quarter of 1988, augmented by herd reduction in response to drought in most U.S. beef producing areas, prices for imported beef fell to an average of 111 cents a pound.43 Also contributing to the price weakness were record supplies of competing meats and large supplies of imported beef. The drop in world prices was not reflected, however, in consumer prices in the United States because retailers took advantage of strong demand to widen profit margins. Lower world prices and the appreciation of the Australian dollar against the U.S. dollar slowed the rate of beef imports from Australia in July and August; in August, the United States moved to further limit imports by imposing import quotas on exports from Australia and New Zealand.44 A ban by Mexico in July on exports of feeder cattle and the reduced profitability of U.S. feedlot operations, owing to high feedgrain prices, also strengthened the expectation of tighter beef supplies through the remainder of 1988. Market liberalization by a number of importing countries also strengthened demand for beef imports. At the end of June, Japan announced that the beef import quota would be raised, from a base of 214 thousand tons, by 60 thousand tons each year for the three years ending March 1991.45 In July 1988, Korea lifted a three-year ban on beef imports, permitting 14,500 tons to be imported in 1988 to assure supplies for the Olympic games. Prices in the third quarter rose to 113 cents a pound, and, with sufficient rainfall for good pasture development in the United States, restocking led prices to increase further to 116 cents a pound in the last quarter of the year, which was the highest price recorded since early 1981.

World production of beef and veal increased by 1 percent in 1987 but is estimated to have declined by nearly the same amount in 1988 (Table 34). The increase in production in 1987 stemmed mainly from a reduction in the cattle inventory in India caused by drought and a return of Brazilian production to normal levels after the lifting of price controls imposed in 1986. Higher production was also recorded in the EC in 1987, despite a cut of 10–15 percent in intervention prices, as tighter controls on milk output led to increased slaughter. Lower cattle numbers and a slower rate of slaughter of dairy cattle were associated with an estimated 5 percent reduction in EC beef production in 1988.46 Increased investment in the livestock sector in the U.S.S.R. improved carcass weights to some extent. A higher rate of slaughter and some reduction in livestock numbers also contributed to increases in beef output, of 1 percent in 1987 and 1½ percent in 1988. Under the waning influence of the DTP, the rate of reduction of the cattle inventory in the United States decelerated in 1987, and beef output fell by over 3 percent. Despite the drought-induced increase in slaughter and higher carcass weights, U.S. production declined marginally in 1988 because of low herd size.

Table 34.Beef and Veal: World Production, 1985–89(In millions of tons carcass weight equivalent)
European Community7.
Eastern Europe2.
United States11.011.310.910.810.1
Other countries9.
Sources: United States, Department of Agriculture, World Agricultural Production (Washington, October 1988); and Australian Meat and Livestock Corporation, Australian Cattle and Sheep Industry Projections (December 1988).

After rising sharply in 1986 because of drought, Australian beef production increased further in 1987, as producers took advantage of strong export demand and higher prices; in 1988, herd rebuilding began and production is estimated at about the same level as in 1987. In Argentina, the liquidation phase of the cattle cycle, which began in 1984, continued at a slower rate in 1987 so that beef output in that year declined by 5 percent. Some herd rebuilding is estimated to have occurred in 1988, and beef output is estimated to have fallen by a further 5 percent. Additional impetus for herd rebuilding in 1989 will be provided by the planned resumption of limited exports of Argentine beef to the U.S.S.R. for the first time since 1984.

World beef production is projected to fall by a further 1 percent in 1989. The rebuilding phase of the cattle cycle and lower carcass weights (reflecting higher feed costs) is likely to result in a sharp decline in output in the United States (projected at 6 percent) and a smaller decline in Argentine output. Beef production in the EC is also expected to decline (by 1.5 percent) reflecting a slower rate of liquidation of the dairy herd and the implementation of additional measures to limit the cost of intervention purchases. These declines are expected to be partly offset by higher output in the U.S.S.R., reflecting both increased carcass weights and higher rates of slaughter, and in Brazil where slaughtering may increase because profitability in cattle raising has been reduced by high interest rates. Production in Australia is likely to increase by 1 percent, consistent with a slow rate of herd rebuilding at about 2–3 percent a year into the early 1990s.

Beef prices weakened during the first half of 1989, reflecting a sharp increase in beef production in the United States, as low forage supplies increased early spring slaughtering. Assuming that economic growth in the industrial countries remains reasonably strong, consumer demand together with the small reduction in world supplies may support a modest rise in beef prices in the second half of the year. Global production of pork and poultry, however, is projected to increase by 1 percent and 3 percent, respectively, compared with 1988 levels, and consumer demand is likely to switch at least partly to these cheaper meats.


In the mid-1980s, the world market for lamb and mutton was depressed by a number of factors, including increased production in the EC following the implementation of a sheepmeat regime under the Common Agricultural Policy in 1980, higher output in New Zealand supported, until 1985, by government subsidies, and competition from other meats, especially poultry and manufacturing grade beef. Demand for frozen lamb by Middle Eastern countries also weakened but this was offset to some extent by higher imports of live sheep. Although remaining below the level reached in 1980–81, an upward trend in the price of lamb was re-established beginning in 1986. The quotations for the price of lamb in this section refer to frozen New Zealand lamb, grade PL, that is, lean meat, at the Smithfield market, London. Prices for frozen meat are lower than for chilled or fresh meat, but frozen meat is still the major component of world trade.

Australia and New Zealand together supply about 85 percent of world exports. Reduced supply from these two countries contributed to the upward trend of prices beginning in 1986. In New Zealand, the number of sheep fell by 4 percent, partly reflecting a low lambing rate owing to bad weather, and meat production declined by 5 percent in 1987 (year ended June). In 1988, sheep numbers and meat production declined by a further 1 percent and 2 percent, respectively. Underlying these developments were the ongoing adjustment of the industry to the removal of protection and reduced profitability arising from the appreciation of the New Zealand dollar. The rate of slaughter in 1988 was also reduced by some withholding of stock to take advantage of high wool prices. The reduced availability of lamb for export meant that New Zealand supplied only about 80 percent of its permitted level of exports to the United Kingdom.47 In Australia, the surge in fine wool prices in 1987–88 led to an increase of 4 percent a year in sheep numbers to a record 171 thousand head. Meat production rose by 1 percent in 1987 but declined slightly in 1988, as withholding from slaughter increased.

Other factors influencing prices in 1987–88 were higher consumption in the United Kingdom, reflecting improved packaging and marketing of boneless lamb, and increased imports by Middle Eastern countries as a result of stricter adherence by suppliers to religious requirements in slaughtering. Sheepmeat consumption per capita in the United States also increased from 1.3 pounds in 1987 to 1.4 pounds in 1988, in response to growing consumer demand for premium cuts, which could be supplied by Australia and New Zealand at a lower cost than domestic lamb.

Prices in 1989 are expected to be the same on average as in 1988, with a seasonal peak around the second quarter. Two offsetting influences are likely to occur. The availability of imported lamb is expected to decline further. As recent trends in the New Zealand sheep industry continue, meat output in New Zealand is projected to fall by 6 percent. This decrease would offset a projected 6 percent rise in meat production in Australia resulting from a higher rate of slaughter as the maximum carrying capacity of pastures is approached. The domestic production of lamb in the United Kingdom and the United States, however, is expected to increase on account of the growth in flock size in recent years.

Over the longer term, prospective changes in the common policy for sheepmeat are likely to lead to a lower volume of imports by the EC. At present, U.K. producers receive a variable premium (a deficiency payment) paid weekly on lamb ready for slaughter if the market price falls below a specified guide price. The guide price, and therefore the variable premium, is reduced when sheep numbers exceed a specified ceiling in order to limit the budgetary cost of the support scheme.48 U.K. exports to other EC members are subject, however, to a countervailing tax, or “clawback.” The EC Commission has proposed phasing out the variable premium by 1993 and replacing it with an annual premium on ewes (as is currently applicable in the rest of the EC). Although the guide price would continue to be reduced if sheep numbers exceed a “guarantee threshold” and a limit on the number of ewes eligible for the premium is proposed, these actions may not constrain the growth of the U.K. flock because the clawback would also be phased out, thereby leaving the United Kingdom as the lowest cost producer within the EC. The competitiveness of U.K. exports with other EC members would be improved, which would tend to accelerate the growth of U.K. sheep numbers and lower the U.K. import requirement. The EC Commission has proposed reducing New Zealand’s quota under the voluntary export restraint agreement to 205 thousand tons in 1989.


World sugar trade takes place in two markets, the free market and the controlled market; in the latter trade is regulated by special arrangements and bilateral transactions between governments of the trading countries. These special arrangements provide a guaranteed market for fixed quantities of sugar, often at specified prices that may or may not fluctuate with free market prices. Examples of exports under special arrangements are those by Cuba to the U.S.S.R. and other centrally planned countries in Eastern Europe, and those under the Sugar Protocol of the Lomé Convention.

The principal international prices for sugar are the New York Coffee, Sugar and Cocoa Exchange contract No. 11 spot price, and the London Sugar Market daily price for f.o.b. raw sugar. While South American producers trade raw sugar mainly on the New York exchange, African and Far Eastern suppliers trade raw sugar mainly on the London exchange. The New York spot price is established, on each trading day, on the basis of the opinions of five experts in the United States in world raw sugar trading; each expert provides a figure representing his opinion of the prevailing price differential (discount or premium) of futures quotations for the nearest delivery month for immediate delivery, that is, within 60 days. To establish the spot price, an average differential is computed by an arithmetic formula and added to (or deducted from) the average weighted price of all transactions of the world sugar futures contract for the nearest delivery month on that trading day. In London, the spot price is also determined by five experts who are knowledgeable of world trade in raw sugar. The price is published in the morning of each trading day.

In forecasting the level of free market prices, an important variable is the ratio of end-of-period world stocks to world consumption. This variable indicates the degree of tightness of supply in a given period or how long sugar consumption is assured on the basis of stocks. Over the long term, there has been a clear inverse relationship between this ratio and prices; however, substantial movements in prices have been observed, even though end-of-period stock/consumption ratios were only moderately different.49 In 1974 and in 1980, in particular, the magnitude of price increases exceeded the amount that would have been expected on the basis of changes in the stock/consumption ratio. This overshooting was the result of such factors as inventory accumulation by buyers at high prices because of increased supply concerns, hoarding by consumers, and speculative transactions.

After a lengthy period when sugar prices on the free market were low, strong demand and deteriorating supply prospects boosted prices in the second half of 1988 to the highest level in over six years (Table 35). The long period of depressed prices reflected continued high levels of world production and the sharp buildup in stocks early in the decade. Despite low prices, world sugar production followed a rising trend, from 101 million tons in 1982/83 to a record 104 million tons in 1987/88 (Table 36). World sugar consumption, however, has expanded more rapidly than production, increasing from an average of 94 million tons in 1982/83 to 106 million tons in 1987/88—about 2.5 percent a year on average, compared with an annual growth rate of less than 1 percent for production. Reflecting this disparity, the level of end-of-period stocks, which peaked at 32 million tons (equivalent to 34 percent of world consumption) in 1982/83, declined to 21 million tons in 1987/88 (equivalent to slightly less than 20 percent of world consumption).

Table 35.Prices of Sugar, 1979–First Quarter 1989
YearIndex of Sugar Prices1Free Market2European Community3United States4Index of Sugar Prices1Free Market2European Community3United States4
(In SDR 0.01 a pound)(In U.S. cents a pound)
Source: Commodities Division, IMF Research Department.
Table 36.Sugar: World Commodity Balance, 1982/83–88/89(In millions of tons, raw value, unless otherwise indicated)
September–August Crop Year
European Community16.013.314.414.515.014.015.0
United States5.
Other countries38.937.339.438.338.939.239.7
European Community11.711.511.611.611.811.911.9
United States8.
Other countries42.443.043.445.847.647.948.7
Losses, discrepancy–1.9–3.4–2.7–2.2–
Reported closing stocks31.628.829.926.123.821.221.1
Change from previous year (in percent)21.5–8.93.8–12.7–8.8–10.9–0.5
Stocks/consumption ratio (in percent)34303126232020
Sources: Commodities Division, IMF Research Department for prices. Data for world commodity balance from United States, Department of Agriculture, Foreign Agriculture Circular: Sugar, Molasses, and Honey (Washington), various issues and Sugar and Sweetener: Situation and Outlook Report (Washington), various issues.

World production increased slightly in 1987/88. In China, production declined by 17 percent, or 1 million tons, because prices received by farmers for sugar were less favorable than those for alternative crops. This was almost offset, however, by a 10 percent increase in production in the U.S.S.R., the world’s largest producer, where favorable growing conditions helped raise the average yield per hectare by 14 percent. Production in the United States increased by 10 percent to a record level of 6.7 million tons in 1987/88, the highest level since 1975/76, as a result of increases in area harvested and in yield. Production in India has been rising rapidly since 1985/86, and in 1987/88 output rose by 5 percent to a record level of 10 million tons, as the adverse effect on production of a drought-related decline in average yield was more than offset by an increase in area harvested.

In 1988/89, world production is forecast to increase by 3 percent to a record level of 106 million tons, partly reflecting favorable growing conditions in major producing countries, including the EC, India, and the U.S.S.R. World sugar stocks are expected to decline slightly, as production again is forecast to fall short of consumption, which is estimated to increase by 1 percent. As a result, the stock/consumption ratio is expected to decline further, and a modest strengthening of prices is anticipated.

World sugar output has responded little to the steep reductions in free market prices since 1980–81, mainly because of support prices in most major industrial producing countries, and, to a lesser extent, developing producing countries. Domestic sugar production is generally supported through government-administered prices, direct government financial assistance and other production incentives, and by preferential trade arrangements. The margin of sugar prices in the United States and the EC over free market prices indicates the degree of protection provided to domestic producers. In 1988, the free market price averaged about 10 cents a pound, while domestic prices averaged 22 cents a pound in the United States and 24 cents a pound in the EC.

In the United States, domestic prices have been supported through nonrecourse loans and restrictive import quotas. The Food Security Act of 1985 mandates that the price of domestically grown raw sugar be supported at not less than 18 cents a pound for the 1986–90 crop years and that sugar beets be supported at a fair and reasonable price level in relation to sugarcane. Under the Act, the U.S. Department of Agriculture’s Commodity Credit Corporation (CCC) makes nonrecourse commodity loans available to sugar processors. Processors can pledge sugar as collateral for loans and, if market prices are not high enough to recover the loan principal, accrued interest charges, and miscellaneous costs, such as insurance and transportation, processors can forfeit the sugar pledged as collateral to the CCC without penalty.50

The relatively high price of sugar in the United States has resulted in a long period of increased substitution in favor of high fructose corn syrup for sugar in processed foods. U.S. sugar consumption has fallen from 10 million tons in 1977 to 7 million tons in 1986, reflecting the displacement of sugar by high fructose corn syrup and other caloric and non-caloric sweeteners. In 1986, sugar represented 47 percent of U.S. consumption of caloric sweeteners, down from 74 percent in 1977. The long period of declining sugar consumption was arrested in 1987, when consumption showed a slight increase. Partly because of a projected further increase in 1988, U.S. import quotas for raw sugar were raised by 272 thousand tons in July (Table 37). Reflecting the relatively greater profitability of sugar production over production of alternative crops, the recent growth in consumption has been accompanied by a much more rapid expansion in U.S. sugar production. Consequently, U.S. imports have contracted in recent years; however, this trend was interrupted in 1988 because of a drought-related reduction in production and a further increase in consumption.

Table 37.U.S. Sugar Quota Allocations, 1982/83–First Quarter 19891(In thousands of tons; raw value)
Oct. 1, 1982–Sept.

30, 19832
Sept. 26,


Sept. 30, 19843
Oct. 1, 1984–

Nov. 30, 1985

(14 months)
Dec. 1, 1985–

Dec. 31, 1986

(13 months)


Costa Rica38.156.647.431.515.917.820.8
Côte d’Ivoire15.015.211.311.
Dominican Republic447.1485.7405.5274.0145.3160.3185.3
El Salvador66.080.967.645.423.626.130.4
Papua New Guinea0.00.011.311.
St. Kitts and Nevis15.015.211.311.
South Africa58.463.553.
Taiwan Province of China30.533.127.718.79.910.912.6
Trinidad and Tobago17.819.316.
Total prorated to 12 months2,6222,8792,0791,5469089571,123
Percentage change9.8–27.8–25.6–41.35.417.7
Source: U.S. Department of Agriculture. Converted at 1 short ton = .907 metric tons.

In the EC sugar market, domestic prices have been supported through a system of administrative mechanisms, including national quotas on domestic production and quotas on imports. In addition to guaranteed prices, expressed in terms of ECUs, there are intervention purchases of domestic sugar, variable import levies that effectively eliminate imports (with the exception of imports free of levies from the African, Caribbean, and Pacific (ACP) countries at a guaranteed price) and a system of export refunds or restitutions. The system of export refunds provides for refunds to be paid to exporters whenever export prices for quota sugar are lower than the guaranteed domestic prices.51 As a result of the expansion in production stimulated by the sugar regime, the EC has been transformed from a net sugar importer in the 1970s to the second largest net exporter of sugar in the world, after Cuba, in the late 1980s.

The EC sugar regime’s arrangements for sugar exports are largely self-financing. Export refunds, known as “restitutions,” on the 1.4 million tons of ACP sugar (Table 38) are the main direct cost to the EC budget. Restitutions paid on EC exports of sugar produced within production quotas are financed by levies on production.52 In recent years, these levies have been insufficient to reimburse the heavy cost of restitutions attributable to the large gap between domestic and low world prices; however, additional levies were introduced in 1985 and in 1987 in order to render the system self-financing.

Table 38.European Community: Sugar Quota Allocations, 1982/83–88/89

(In thousands of tons; raw value)1

July–June Quota Year
Côte d’Ivoire0.02.210.910.911.111.111.1
St. Kitts and Nevis16.116.116.716.716.916.916.9
Trinidad and Tobago75.075.047.347.347.647.647.6
Sources: Regulation 3225/80 (Protocol No. 7) giving the text of the Second Lomé Convention. Regulation 1255/82 on Zimbabwe’s accession to the Lomé 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. Kitts 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 C112 (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.

In Japan, the world’s second largest importer of sugar, import and excise duties and a system of variable sugar import charges have raised the price of sugar substantially above the free market price. Reflecting these relatively high prices, sugar production has been rising in Japan, and this has been accompanied by generally declining consumption, partly because of the displacement of sugar by the more competitive corn syrup industry, and reduced imports. The volume of sugar imports into Japan has declined from 2.3 million tons in 1980 to less than 1.8 million tons in 1987.

As a consequence of the policies pursued in many countries, the volume of internationally traded sugar has generally contracted during the 1980s. Reflecting the insulation of producers and consumers from free market prices, the volume of net exports at competitive free market prices declined from 21.7 million tons in 1982 to 18.2 million tons in 1986, but rose slightly above that level to 18.5 million tons in 1987. In 1987, only 27 percent of world sugar production entered international trade, compared with over 31 percent in 1980–81; the free market accounted for less than 18 percent of world production in 1987.

As about one third of world sugar trade is conducted under special long-term bilateral and multilateral arrangements on terms typically providing for higher prices than those quoted on the free market, the average unit value of sugar exports has substantially exceeded prices on the free market. In U.S. dollar terms, the value of sugar exports, which had fallen from $14.7 billion in 1980 to $8.9 billion in 1985, has been recovering in recent years, and this is almost entirely attributable to the rise in average unit values (Table 39). In 1987, export volume is estimated to have increased slightly, reflecting higher exports from industrial countries, especially Australia and the EC, and also increased exports from developing countries, including the Dominican Republic, Mauritius, Mexico, and South Africa. On the import side, a large increase in the volume of sugar imported by China more than offset a large decline in U.S. imports. In 1988, despite a 2 percent decline in export volume, sharply rising prices are estimated to have further boosted export earnings from sugar.

Table 39.Sugar: World Trade, 1985–88
(In SDRs)(In U.S. dollars)
Earnings (in billions)
Industrial countries1.
Developing countries6.
U.S.S.R. and Eastern European countries0.
Unit values (a ton)310285273284315335353381
Industrial countries213198200206216232258277
Developing countries359339318333365397412448
Excluding Cuba(182)(184)(179)(200)(185)(216)(231)(270)
U.S.S.R. and Eastern European countries167188170164170220220220
(In millions of tons)
Industrial countries8.
Developing countries19.217.918.317.419.217.918.317.4
U.S.S.R. and Eastern European countries1.
(In SDRs)(In U.S. dollars)
Earnings (in billions)
Industrial countries2.
Developing countries2.
U.S.S.R and Eastern European countries4.
Unit values (a ton)330322299304335378386409
Industrial countries260251256275264295331370
Developing countries187183174195190215225262
U.S.S.R. and Eastern European countries768665615592779780795795
Market prices (a ton)
Free market28811411516789133149225
European Community3350350366391355410473525
United States4442394372363449462481488
(In millions of tons)
Industrial countries8.
United States2.
United Kingdom1.
Developing countries13.112.414.
U.S.S.R and Eastern European counties5.
Sources: United Nations, Food and Agriculture Organization, 1986 FAO Trade Yearbook (Rome), for exports and imports; Commodities Division, IMF Research Department, for market prices.

Although free market prices are expected to strengthen further in 1989, prospects for a sustained rise in prices are small. The average response time of producers to higher prices has been reduced since the mid-1970s. Since then, the EC has emerged as a major producer of beet sugar, the output of which can be increased substantially in less than a year. Brazil also has sharply increased cane production, and if only a small share of the large volume (60 percent of cane production) currently used to produce ethanol were shifted to sugar production, this could greatly augment world sugar supply. Furthermore, other producing countries, which have reduced production in recent years in response to low world prices, could respond by re-expanding output.

Whereas industrial countries accounted for the major share of import demand in the mid-1970s, import demand has subsequently shifted toward developing countries, with relatively higher price and income elasticities of demand. Higher world prices could reduce demand growth in developing countries as well as stimulate further displacement of sugar by more competitively priced alternative sweeteners in industrial countries. Furthermore, much of the forecast rise in production in 1988/89 is expected to be in sugar importing countries, including India and Pakistan, with output in the U.S.S.R. also expected to remain high; this is expected to lead to a further shrinkage in the volume of sugar traded internationally.


World supplies of bananas available for export in 1988 continued to rise despite a deterioration of export prospects for the Caribbean countries on account of Hurricane Gilbert, which halted shipments from Jamaica to the United Kingdom. World trade in bananas expanded for the fifth consecutive year. Exports from Ecuador, the largest supplier, rose from 1.4 million tons in 1987 to more than 1.5 million tons in 1988. In 1987, world trade had grown by 2.8 percent reaching a volume of 7.5 million tons. Substantial increases in export volume were registered in some of the member countries of the Unión de Países Exportadores de Banano (UPEB) and by Ecuador, which had its best export performance in ten years. Among the Asian banana producers, exports from the Philippines in 1987 declined by 9 percent. Import volume increased by nearly 4 percent in the EC. Per capita imports of the Federal Republic of Germany rose to 11.1 kilograms, the highest level in the EC and only 0.3 kilogram below that of the United States.

The export-import matrix for trade in bananas for 1987 confirms the traditional close links of certain exporting regions with certain importing regions: Central and South America are the predominant suppliers for North America; Africa and the Caribbean countries, mainly for Europe; and the Philippines, for Japan. Trade within the EC has increased following the entry of Portugal and Spain.

The divergences in movements in banana prices in different parts of the world in 1988 mainly reflected developments limited to individual markets (Table 40); compared with previous years, exchange rate movements were of less importance. Prices in the United States surged considerably in early spring when weather damaged production in Costa Rica and Panama and rejection of a shipment from Central America caused some tightening of supply. Prices remained above the 1987 level for the rest of the year owing to supply problems in a number of producing countries as a result of bad weather and labor disputes. Prices in German ports in 1988 on average were 8 percent lower than 1987; owing to an inadequate supply of competing fruit, prices for bananas stabilized in the first half of 1988, but in the second half of the year dropped well below the previous year’s level. French import prices, in contrast, were above the 1987 level by nearly 3 percent, but as with the case of the Federal Republic of Germany, there was also a decline in the second half of the year. In Japan, prices were on average 3 percent higher than in 1987 owing to a slow recovery of production and exports of the Philippines. In the first quarter of 1989, prices in the Federal Republic of Germany were substantially lower than in the corresponding period of 1988; in Japan and the United States, minor increases were registered, while in France prices were marginally higher in terms of francs but lower in terms of dollars. When the United States and Japan introduced a ban on fruit imports from Chile in March, prices for bananas rose substantially in these markets; prices in the Federal Republic of Germany were also affected.

Table 40.Bananas: Prices in Selected Markets, 1985–March 1989(A ton)
New York1985378376443454484457380321422362278275285
In U.S.1986382329386500578387345331321424375294311
In deutsche19861.2101.1851.3231.4471.6851.5231.5408791.0661.0541.002855947
In U.S.1985455406454567652579493400394431311361377
French ports19854.9704.5004.8905.7505,7905.4904,9404.6104,6104.7604,9204.7104.660
In French19865,0604,7605,0805,6005,4905,2105,3004,7104,8205,0205,0204,8704,820
In U.S.1985553464486569615580529519541550610597605
Japanese ports19851058889951221311331161071181077973
In thousands of19868473808796991141088477646165
Japanese yen198769586274857976686572725861
In U.S.1985439346342367486519536480450500497388358
Sources: United Nations, Food and Agriculture Organization. Monthly Bulletin of Statistics (Rome): and Commodities Division. IMF Research Department.

The Intergovernmental Group on Bananas of the FAO projects an average yearly growth of 0.6 percent to 0.9 percent for the worldwide export volume and of 0.9 percent for import volume for the period 1990–91. Within this global framework, the largest growth in the supply of bananas for export is projected for Costa Rica, Honduras, and Panama among the UPEB countries; among Caribbean countries, in St. Lucia and Jamaica; and in Africa, for Cameroon and Somalia. Exports from the Philippines are projected to remain unchanged. The projections with respect to demand growth may prove optimistic. They were made in the wake of a period of especially favorable conditions for banana exports on account of a severe winter in Europe, which reduced supplies of competing fruit and led to increased demand for bananas both in Western European countries and the U.S.S.R. Indeed, some analysts believe that per capita imports in the main importing countries have reached an upper level, and the growth of total imports may therefore be limited. This pattern would reflect not only a decreasing and then negative income elasticity of demand but also the increasing availability of competing fruits at competitive prices. It would require substantial increases of demand in other import areas where volumes are comparatively small to compensate for these developments in the major markets. With reference to supply, it should be noted that supply shortfalls from individual countries can easily occur because of bad weather, labor disputes, transportation difficulties, and other problems. As a result of these shortfalls, large short-term price swings may occur in particular markets for bananas.

Prospects for the world banana market depend not only on these supply and demand developments, but also on national and international trade policies. Japan’s lowering of applicable rates in its Generalized System of Preferences helped to increase import volumes during 1986–87. The international banana market will be influenced by the outcome of the negotiations on tropical products within the Uruguay Round of the GATT. It may also be affected by the planned unification of the EC market in 1992. In the EC, a common external tariff of 20 percent is applied, but no duties exist for imports from the ACP countries under Protocol 4 of the Lomé Convention. Imports into France, Italy, and the United Kingdom are limited by license to an amount assessed as required to satisfy demand, after account has been taken of ACP imports. The Federal Republic of Germany has a duty free quota that has so far been large enough to cover all imports that originate mainly in the UPEB countries and Ecuador. In addition, preferential arrangements apply to the EC’s own banana growers.

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