This paper provides an analysis of recent developments relating to the major nonfuel primary commodities traded in international markets. Particular attention is given to market price movements and the factors underlying these movements. A number of adjustments in the international trading environment in which commodity prices are determined occurred in 1987, and even more significant changes are expected in the years ahead. Some of the adjustments in the past year affected only bilateral trading arrangements, while others, such as certain initiatives undertaken in the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) negotiations and those relating to some international commodity agreements were of a multilateral nature. The present round, the eighth in a series of GATT negotiations held since 1947, involves two elements that are of particular relevance to international trade in commodities. Although only small changes were made in 1987 in the various multilateral schemes that exist to compensate countries for export earnings shortfalls, a significant increase in such financing in 1987 had the effect of stabilizing many developing countries’ export earnings, thereby maintaining their capacity to import and buoying world trade.

World Economic and Financial Surveys

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In this discussion the measurement of prices is given in terms of SDRs unless indicated otherwise. The SDR provides a more stable measure of value than the more commonly used measure, the U.S. dollar, particularly during periods such as the 1980s in which there have been large movements in the exchange value of the dollar. The SDR valuation basket consists of the currencies of the five members having the largest exports of goods and services during the period 1980–84, that is, the U.S. dollar, deutsche mark, French franc, Japanese yen, and pound sterling. The weights of the five currencies broadly reflect the relative importance of these currencies in international trade and finance. They are based on the value of the exports of goods and services of the members issuing the currencies and the balances of the five currencies officially held by Fund members over the five-year period 1980–84.


Chart 2 shows the relationship in terms of “real prices.” A similar but weaker relationship can be shown in terms of nominal prices.


Based on export shares in 1980.


Thomas K. Morrison and Michael Wattleworth, “The 1984–86 Commodity Recession: An Analysis of the Underlying Causes,” Staff Papers, International Monetary Fund (Washington), Vol. 35 (June 1988).


Year-on-year changes mask a considerable part of the movement of commodity prices. In this case, commodity prices fell during 1986 and rose during 1987 (see Table 1). During 1988 the prices of most commodities are expected to remain close to their end-1987 levels, although some are expected to fall. This outcome, however, implies an increase of some 5 percent over the average for 1987.


The U.S.S.R. and Japan are the world’s largest cereal importers, each accounting for about 15 percent of global grain imports. Japanese imports (mainly of coarse grains) are fairly stable, so prospects for U.S.S.R. grain output and utilization have a major impact on short-term fluctuations in world wheat and coarse grain prices.


The cost of farm programs (for all commodities including grains) rose from $4 billion in fiscal year 1981 (year ending September) to over $15 billion a year in 1983–85.


Programs under the 1985 farm bill were originally expected to cost $17.5 billion in fiscal 1986, but a higher-than-expected producer participation rate and weaker-than-expected export sales raised expenditure to $25.8 billion. Expenditure declined to $23.1 billion in fiscal 1987, partly because of increased use of generic certificates, and because a cap was imposed on payments to individual producers.


Other provisions of the 1985 farm bill designed to increase cereal exports include short-term export credit guarantees, direct export credits (in cash or in-kind), and intermediate loan guarantees.


The EC Commission estimates that the cost of supporting grain within the EC increased from ECU 1.7 billion in 1984 to ECU 5 billion in 1987 and may rise to ECU 6 billion in 1988. This reflects both increased export subsidies needed to bridge the gap between high domestic prices and declining world market prices, and the appreciation of the ECU against the U.S. dollar since March 1985 which further reduced world market prices in ECU terms.


The proposed set-aside would apply to cereals, oilseeds, sugar beet, and potatoes.


Price quotations refer to U.S. No. 1 hard red winter wheat, ordinary protein, f.o.b. Gulf of Mexico ports. They exceed spot prices in midwest markets by about $10 a ton.


Net prices paid by importers under the EEP ranged from $25 to $30 a ton below U.S. export prices, the difference being paid by subsidies in-kind.


The loan rate for the 1988 crop was raised subsequently to $81.20 a ton under the budget agreement between the President and Congress in December 1987 (the Omnibus Budget Reconciliation Act).


To be eligible for price support loans and deficiency payments in 1987, farmers were required to reduce their area planted to wheat by 27.5 percent of their base acreage (the average of individual acreage in the five previous seasons), compared with a 25 percent reduction in 1986. A 27.5 percent average reduction is again in effect for 1988.


Under the Western Grains Stabilization Scheme, net cash flow to producers is guaranteed to at least equal the average realized in the last five years.


The main importers of U.S. wheat in 1986/87 were Algeria, Egypt, Iraq, Japan, and Morocco. China and the U.S.S.R. were not offered equivalent subsidized prices under export enhancement until late in the year; they are expected to become the largest purchasers of U.S. wheat in 1987/88.


The target price determines the gross remuneration to producers because deficiency payments make up the difference between the loan rate and the target price.


Some relief from low prices will be afforded by the elimination of a 5 percent export tax in July 1987.


The GMP is the level at which the government will support wheat prices. It is determined as 95 percent of the estimated average of net returns to farmers in the current crop year and the two lowest returns of the previous three years. Actual prices fell so far below estimated prices in the 1986/87 crop year that the government was required to subsidize growers for the first time.


Price quotations refer to U.S. No. 2 yellow corn, f.o.b. Gulf of Mexico ports. They exceed spot prices in midwest markets by about $8 a ton.


The provisions of the 1986 program for maize, in addition to the sharp cut in the loan rate to $75.59 a ton, were an unchanged target price of $119.29 a ton (resulting in a deficiency payment of $43.70 a ton); a mandatory acreage reduction of 17.5 percent of base acreage; and an optional paid (in-kind) land diversion of 2.5 percent. Maize, along with wheat, other feed grains, cotton, and rice, was also subject to an optional “50/92” provision, whereby producers could plant between 50 and 92 percent of their permitted acreage (after the mandatory reduction) and still receive deficiency payments on 92 percent of total permitted acreage.


Under the 1987 maize program, the target price was unchanged at $119.29 a ton so that the deficiency payment increased (by the amount by which the loan rate was lowered) to $47.64 a ton. The acreage reduction requirement and the paid land diversion were raised to 20 percent and 15 percent of base acreage, respectively, and the “50/92” provision remained in effect.


The loan rate for 1988 was raised subsequently to $69.68 a ton under the December 1987 Omnibus Budget Reconciliation Act. In addition, the target price was reduced by 3 percent to $115.35 a ton, and deficiency payments were lowered by 9 percent to $43.31 a ton. The acreage reaction requirement of 20 percent of base acreage remained in effect, but the optional paid land diversion was reduced to 10 percent. There will also be a “0/92” provision which is similar to the “50/92” provision in effect in 1987 except that diversion payment will still be made even if no land is planted.


In addition to repaying loans at less than face value, producers benefit because interest charges which accrue when a loan is repaid in cash are foregone, and storage charges are eliminated if the maize so acquired is sold immediately.


The United States produces less than 2 percent of world output, but is the second largest exporter after Thailand, accounting for about 18 percent of the volume of global exports.


Price quotations refer to Thai milled white rice, 5 percent broken, f.o.b. Bangkok.


For 1986, the loan rate (average of all types, unmilled) was reduced by 10 percent to $158.73 a ton, while the target price remained unchanged from 1985 at $262.35 a ton. A mandatory acreage reduction of 35 percent of base acreage was also in effect. For 1987, the loan rate was reduced by 5 percent to $150.80 a ton, and the target price was lowered by 2 percent to $257.06 a ton. The required acreage reduction remained at 35 percent.


The crop year covers rice harvested over a 6–8 month period from the first Northern Hemisphere harvest in October to the last Southern Hemisphere harvest in April.


These consisted of the marked reduction in the U.S. soybean crop as a result of the payment-in-kind program as well as unfavorable weather conditions; the decline in Malaysian palm oil production as a result of tree stress following introduction of biological pollination, reduced fertilizer use in response to low 1982 prices for palm oil, and drought in 1983; and lower copra production in the Philippines as a result of drought conditions and typhoon damage.


For example, the economic life span of an oil palm tree is about 30 years. The first crop is produced in about the third year after planting and output peaks between the eighth and tenth years.


For example, between 1969 and 1973 the price of soybeans increased by 182 percent, the price of soybean oil by 121 percent, and the price of soybean meal by 219 percent.


The decline in acreage was substantially smaller than had been expected, and this appears to have been prompted by a rise in soybean prices during the second quarter of 1987.


Almost all of the U.S. exports of soybean oil involve government assistance, including various export credit programs and the EEP. The EEP, which was mandated by Congress through fiscal 1988, provided for $1 to $1.5 billion to be used to subsidize U.S. exports, especially to countries in which the United States feels that it has lost market share to leading competitors. A provision in pending trade legislation before the U.S. Congress would extend the EEP for an additional two years and raise funding to a maximum of $2.5 billion. The EEP has substantially lowered U.S. export prices for wheat and other commodities, including soybean oil, through the payment of a bonus to the exporter, in the form of commodities from CCC inventories, which permits the exporter to reduce export prices.


A loan issued with the commodity only as security.


The CCC soybean release price for September was set at 105 percent of the county loan rate plus carrying charges of 13 cents a bushel. Based on the national average loan rate of $4.77 a bushel, the implied resale price for September 1977 would be $5.14. The CCC soybean release level increased to about $5.20 a bushel ($190.90 a ton) in October, with carrying charges set at nearly 19 cents a bushel, about the same level as in the previous year. In November and December, the soybean release price was increased to $5.25 a bushel ($193 a ton) and $5.31 a bushel ($195 a ton), respectively.


Indonesia has a total palm oil acreage of 620,000 hectares, of which an estimated 79 percent is mature. In Malaysia, palm oil acreage is 1.3 million hectares, with maturity estimated at 90 percent.


Coconut oil is high in lauric and myristic acids which, when used in soap, shampoo, and shaving cream, give good lathering properties.


World copra production usually declines every third year following two years of higher yields. Prevailing drought conditions may prolong the decline in output beyond one year.


India and Senegal account for about 40 percent and 20 percent, respectively, of world exports of groundnut meal. Since 1983, the EC, which accounts for about 48 percent of world imports, has ceased importing groundnut meal from India because of aflatoxin problems. Most of India’s groundnut meal is traded on the basis of bilateral agreements with the U.S.S.R. and Eastern European countries.


Groundnut oil enjoys a strong technical advantage to other vegetable oils in culinary use.


With the full integration of Spain and Portugal into the support systems of the Common Agricultural Policy (CAP) in 1991, the cost of the oils and fats sector could increase by an additional ECU 2 billion to ECU 6 billion.


The threshold system for controlling production in the EC was introduced in 1982 for rapeseed and in 1984 for sunflowerseed. Total maximum production figures have been set each year. Formerly subsidies could be reduced, but by no more than 5 percent if producers exceeded the limit.


Price quotations refer to imported frozen boneless beef, separate, 85 percent lean, from Australia and New Zealand, f.o.b. U.S. ports. This is manufacturing grade beef generally used in hamburgers and sausages.


The dairy termination program was a voluntary scheme in effect for 18 months from April 1986 whereby milk producers agree to sell for export or slaughter their herd in return for a cash payment. To alleviate the adverse impact of the program on domestic beef prices, the government agreed to purchase 180,000 tons of beef and to dispose of it about equally in export markets and in domestic food aid.


A 9.5 percent reduction in milk quotas is to take effect gradually in the period to mid-1989, and the levy on deliveries in excess of quotas was raised to 100 percent.


Brazil purchased 90,000 tons of beef from the United States and 200,000 tons from the EC in 1986 at prices well below those prevailing in other markets. Shipments of U.S. beef were made about equally in 1986 and 1987.


Intervention stocks of beef in the EC amounted to 741,000 tons at the end of 1985 and declined by about 200,000 tons during 1986, largely reflecting sales to Brazil. By the end of 1987, stocks again exceeded 700,000 tons.


In the 12 months to May 1987, U.S. imports of lamb and mutton were 14 percent higher than in the preceding 12-month period. Between these two periods, imports from New Zealand were 62 percent lower, while imports from Australia were 55 percent higher.


Price quotations refer to frozen New Zealand lamb, grade PL, Smithfield market, London (in U.S. cents).


For the 1987/88 crop, the loan rate has been set at 18 cents a pound for raw cane sugar and 21.16 cents a pound for refined beet sugar. The market stabilization price (MSP) has been set at 21.76 cents a pound, and import quotas were reduced to keep the spot market price at, or near, the MSP in order to prevent forfeitures. The prorated annual U.S. global sugar import quota has been reduced from 2,879,000 tons in 1983/84 to 685,000 tons in 1988. In December 1987, however, the United States government passed a spending bill which includes a provision permitting the Caribbean countries and the Philippines to export 290,000 short tons (263,000 metric tons) and 110,000 short tons (99,770 metric tons) of raw sugar, respectively, to the United States, over and above their 1988 quotas. This sugar would be refined and re-exported during fiscal year 1988. Sugar traders and refiners would receive generic certificates to bridge the gap between U.S. sugar prices and lower world sugar prices for refined sugar.


In 1985 the U.S. global import quota for sugar was not sufficiently restrictive, and processors defaulted on $107.6 million in nonrecourse loans, with the CCC assuming title to the forfeited sugar and the responsibility for its storage and disposal. The CCC sold 150,000 tons of sugar, which had been acquired at 18 cents a pound, to China at 4.75 cents a pound and also sold some sugar domestically at 3 cents a pound for ethanol refining.


The EC sugar regime is reviewed every five years. Production quotas have, however, remained effectively the same since 1981. There are two types of quotas, one which provides full price guarantees (known as A quota) and corresponds roughly to the Community’s sugar consumption and the other (known as B quota), which provides a lower level of support for sugar that is largely exported. In addition, sugar is produced outside of quotas (known as C sugar), and this sugar does not attract support; it must either be exported or stored to become the first tranche of A quota sugar in the following year. In December 1985 the EC Farm Ministers agreed to extend the current sugar regime, which has been in operation since 1981/82, for an additional two years (1986/87 and 1987/88); production quotas were left unchanged at current levels.


A levy of 2 percent of the intervention price is made on all sugar produced under quota. In addition, a levy of up to 37.5 percent can be made on sugar produced under the B quota. However, revenue generated by these levies has been insufficient to cover the heavy cost of export refunds as a result of depressed world market prices, and a cumulative deficit of about ECU 400 million was reached by the end of the 1986 budget period. In 1985, an additional levy, known as the elimination levy, was agreed upon to reduce the outstanding cumulative deficit over the five years to 1990/91. In February 1988, a supplementary levy was approved to ensure coverage of the deficit in each year, if the proceeds from the two production lines are insufficient. It was also agreed to maintain quotas at their present level through 1990/91.


A. C. Hannah, “The Sugar Cycle, Structural Change and International Sugar Agreements,” F. O. Licht’s International Sugar Report, Vol. 119, No. 14 (May 21, 1987), pp. 213-17.


Cocoa is included in this group because of its traditional association with coffee and tea as a beverage and because it shares with them certain characteristics with respect to supply. It should be noted, however, that the beverage use of cocoa is secondary to its use in chocolate confectionery.


The International Coffee Organization’s (ICO) composite indicator is an average of the ICO indicator prices for robusta and “other milds.” Both are physical prices for specific grades of coffee. The robusta indicator is an average of prices ex-dock New York (Angola Ambriz 2BB, Côte d’Ivoire Grade II, and Uganda Standard) and ex-dock Le Havre/Marseille (Côte d’Ivoire Superior Grade II, Cameroon Superior Grade I, Central African Superior, and Madagascar Superior Grade II). The “other milds” indicator is an average of prices of arabica coffee ex-dock New York (El Salvador Central Standard, Guatemala Prime Washed, Mexico Prime Washed), and ex-dock Bremen/Hamburg (El Salvador High Grown, Guatemala Hard Bean, and Nicaragua Strict High Grown).


Price quotations refer to the London auction price, average all teas.


Estimates of the short-run price elasticity of cocoa supply vary between 0.10 and 0.26.


Estimates of the long-run price elasticity of cocoa supply range between 0.13 and 0.59.


Price quotations refer to the ICCO daily price, which is the average of the nearest three active future trading months on the New York Cocoa Exchange at noon and on the London Cocoa Terminal market at closing time.


For a description of the main economic provisions of the 1986 Agreement see International Monetary Fund, Primary Commodities: Market Developments and Outlook, World Economic and Financial Surveys (Washington), May 1987, p. 71.


At its meeting in September 1987 the Council decided to reduce the cocoa export levy from $45 a ton to $30 a ton effective January 1988.


Ghana and Nigeria were the world’s largest and second largest cocoa producers, respectively, during the 1960s and the early 1970s. However, high domestic rates of inflation during the late 1970s and early 1980s rapidly eroded the purchasing power of relatively low nominal producer prices for cocoa in these countries. The resulting fall in real producer prices for cocoa caused production in these countries to decline sharply during this period. Ghana’s share in total world production declined from 24 percent in 1973/74 to 11 percent in 1983/84. Ghanaian production, however, recovered sharply in 1985/86 and 1986/87, largely because of substantial increases in real producer prices.


Cocoa products are obtained by “grinding” cocoa beans. They consist of cocoa butter, cocoa powder and cake, and cocoa paste, all of which are derived entirely from cocoa beans (apart from small amounts of other vegetable fats which some countries permit to be included in cocoa butter). Roughly 80 percent of a cocoa bean is used to make these products, the remaining 20 percent is waste or a low-valued by-product.


The short-run world price elasticity has been estimated at about -0.20 while the long-run price elasticity of demand has been estimated to be about -0.30.


The world income elasticity of demand for cocoa has been estimated to be about 0.3.


No comprehensive price data for hardwood logs are available owing to the many species traded. The price of a major species of hardwood logs, Malaysian meranti, in the largest importing country, Japan, is assumed to be representative of log export prices industrywide.


Malaysian meranti, select and better quality, c.i.f. French ports.


A seasonal reduction in the latex output of rubber trees which normally occurs in the second quarter of the year.


The MIP is defined in the 1979 International Natural Rubber Agreement (INRA) as the average official price for RSS1, RSS3, and TSR 20 rubber on the Kuala Lumpur, London, New York, and Singapore markets, expressed in equally weighted Malaysian and Singapore cents per kilogram.


Unless specified otherwise, “cotton prices” refer to medium-staple cotton. Price quotations for medium-staple cotton refer to the Liverpool Index “A,” 1332 inch staple, average of the cheapest five of ten styles, c.i.f., Liverpool. There was virtually no change in the price of long-staple cotton because of an adequate crop in Egypt, the principal supplier of long-staple cotton. The price differential between these two types of cotton in September 1987 was around 85 U.S. cents a pound compared with over 100 cents in 1985–86. The price of long-staple cotton, however, increased in December 1987, and the differential widened to over 125 cents a pound.


Price quotations for fine wool refer to the United Kingdom, Dominion, 64’s clean, dry combed basis.


Price quotations refer to raw Bangladesh jute, BWD, f.o.b. Chittagong or Chalna.


The price refers to East African sisal, ungraded, c.i.f. European ports.


Price quotations refer to the U.S. wholesale price for hides of packer’s heavy native steers, over 53 pounds, f.o.b. shipping point Chicago.


See the discussion on beef in Section II.


Price quotations refer to prices on the London Metal Exchange (LME), cash for delivery on the following business day, higher grade cathodes, minimum purity 99.9 percent, c.i.f. U.K. ports.


After falling by 18 percent in 1982, U.S. copper consumption grew by 9 percent in 1983 and by another 17 percent in 1984, only to decline by 10 percent in 1985, and then rise by approximately 9 percent in 1986. These variations can only partly be explained by movements in production in the copper-consuming sectors. The decline in consumption in 1982 was over twice the decline in output of copper consuming sectors. In 1983, with activity in the copper consuming sectors increasing by an average of almost 20 percent, reflecting in large part an increase in housing construction and automotive sales, copper consumption increased by only 9 percent. In 1984, however, consumption increased by 17 percent in response to an activity increase of only 10 percent in the copper consuming sectors. The decline in consumption of 10 percent in 1985 was associated with a 2.5 percent increase in activity, whereas in 1986 an increase in overall economic activity in the copper-consuming sectors of only 1 percent was associated with a 9 percent increase in consumption.


Price quotations refer to aluminum sold in the LME, cash for delivery on the following business day, 99.5 percent minimum aluminum content, in the form of T-bars or ingots, c.i.f. European ports.


The production of bauxite is more concentrated than that of the other major base metals because bauxite tends to occur in a relatively small number of large high grade deposits. Two thirds of world production occurs in four countries: Australia, Brazil, Guinea, and Jamaica.


Price quotations refer to “spot” deliveries (c.i.f. at German ports) of Brazilian ore (with 65 percent iron content).


Price quotations refer to prices on the LME, cash for delivery on the following business day, minimum purity 99.75 percent, c.i.f. European ports.


The number of active mines in Malaysia which had fallen from 710 in 1981 to 444 in September 1985, plummeted to 185 by October 1986.


ATPC export quotas for 1987/88 were as follows: Malaysia 28,526 tons, Indonesia 24,516 tons, Thailand 19,000 tons, Bolivia 13,761 tons, Australia 7,000 tons, Nigeria 1,461 tons, and Zaire 1,736 tons.


Price quotations refer to prices on the LME, cash for delivery on the following business day, minimum 99.8 percent purity, in the form of cathodes, pellets, or briquettes, c.i.f. northwest European ports.


Price quotations refer to prices on the LME, cash for delivery on the following business day, zinc produced by distillation or electrolysis, minimum purity 98 percent (standard), c.i.f. U.K. ports.


Price quotations refer to prices on the LME, cash for delivery on the following business day, refined pig, minimum purity 99.97 percent, c.i.f. U. K. ports.


Moroccan rock, 70 percent BPL (bone phosphate of lime), f.a.s. Casablanca.