This paper provides an analysis of the market developments in 1988 with respect to primary commodities and the outlook for these commodities in the near and medium term. Attention is focused on the major nonfuel primary commodities traded in international markets. Movements in the overall price index and in price indices for the major groups of commodities have been mirrored by an inverse movement in stocks of commodities. Beginning-of-year stocks of all nonfuel commodities—measured in terms of months of consumption—increased during the first half of the 1980s and peaked in 1986. Movements in primary commodity prices convey important information in several ways: they signal changes in the major source of export earnings for most developing countries; they indicate changes in a significant component of the cost of producing many manufactured goods; and they may be a helpful leading indicator of changes in inflation in industrial countries. The negotiating groups established for the Uruguay Round met on a number of occasions throughout the year to discuss a wide range of issues.


A projected increase for 1988 of 9.4 percent in dollar prices for non-fuel primary commodities, for example, was used in the medium-term reference scenario for the IMF discussions in early 1988 (International Monetary Fund, World Economic Outlook: A Survey by the Staff of the International Monetary Fund (Washington, April 1988), Table A53, p. 187). This projection was one of the higher projections of non-fuel primary commodity prices made by market analysts in early 1988.


These countries are Canada, France, the Federal Republic of Germany, Italy, Japan, the United Kingdom, and the United States.


The 13 member countries are Algeria, Ecuador, Gabon, Indonesia, Islamic Republic of Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, and Venezuela.


A more detailed explanation of 1988 oil market developments is provided in Supplementary Note No. 8 of the World Economic Outlook, April 1989: A Survey by the Staff of the International Monetary Fund (Washington, 1989), pp. 107–13.


For a breakdown of the groups of countries used in this report, see International Monetary Fund, World Economic Outlook, April 1989: A Survey by the Staff of the International Monetary Fund (Washington, 1989), pp. 118–20.


James M. Boughton and William H. Branson, “Commodity Prices as a Leading Indicator of Inflation,” National Bureau of Economic Research Working Paper No. 2750 (October 1988); forthcoming in Kajal Lahiri and Geoffrey Moore, eds., Leading Economic indicators (Cambridge University Press).


The use of generic certificates is described in the discussion on maize below.


The loan rate for the 1988 crop was raised to $81.20 a ton in December 1987.


Base acreage is the average of individual acreage planted in the previous five seasons, including land set aside under mandatory acreage reduction. Land set aside under the voluntary Conservation Reserve Program, under which producers bid on the compensation they would receive for putting land under conservation use for ten years, is deducted from base acreage.


Initial payments for Canadian western red spring wheat under the Western Grains Stabilization Act (WGSA) for 1987/88 were Can$20 a ton lower than in 1986/87. The WGSA guarantees producers’ net returns to equal at least the average realized over the last five years. In April 1988 (well after the 1987 harvest), payments were revised upward by Can$10 a ton in view of the higher-than-expected prices.


Planting decisions in Australia are also influenced by the Guaranteed Minimum Price (GMP), which is the level of government price support. 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. The initial GMP for crop year 1987/88 announced in September 1987, at the time planting decisions could be affected, was $A 4.73 a ton below the final GMP for 1986/87. Subsequently, the final GMP for crop year 1987/88 was raised by $ A 9.19 a ton to reflect the upswing in international prices. Owing to the sharp drop in actual prices below estimated prices in 1986/87, the government was required to subsidize farmers for the first time since the early 1970s, but no subsidy was required for 1987/88.


Other major EEP agreements in the last quarter of 1987 consisted of two with China and one each, for 1 million tons, with Iraq, Egypt, and Poland.


Other features of the 1988 crop program for wheat included a 3 percent reduction in both the target price and loan rate to $155.43 a ton and $81.20 a ton, respectively. Both wheat and feed grains were also eligible for an optional “0/92” program, whereby producers could place all or part of their permitted acreage (after the mandatory reduction) in the conservation reserve—a ten-year set-aside—and receive deficiency payments on up to 92 percent of their permitted acreage. Deficiency payments are the difference between the target price and the loan rate or average market price. Estimated wheat deficiency payments for wheat harvested in 1988 were $56.22 a ton, of which, 40 percent was received in advance. The participation rate in the wheat price support program with its mandatory set-aside declined in 1988 under the influence of high wheat prices, but the impact on total area planted was almost exactly offset by increased participation by other producers in the Conservation Reserve Program.


Farm incomes in the United States were supported in 1988 by official drought relief; if yield fell by 35 percent or more, the farmer was subsidized at a rate equal to 65 percent of the target price.


The area planted was positively influenced by the announcement in April 1988 of initial payments under the WGSA for crop year 1988/89 of Can$10 a ton higher than those set a year earlier. With the further strengthening of world prices and the onset of drought, these payments were raised by another Can$30 a ton in July.


Lower planted area in the EC partly reflected the introduction of a “guaranteed minimum quantity,” or threshold level of production, for all grains combined of 160 million tons, which, if exceeded, would trigger a 3 percent reduction in intervention prices for the next season. Although initial intervention prices for crop year 1988/89 remained unchanged, the monthly increment to intervention prices was reduced—by 25 percent compared with the 1987/88 level. In addition, a set-aside scheme was introduced. This scheme is compulsory for member states but voluntary for producers, who have the option to idle at least 20 percent of arable land for five years for an annual payment of between ECU 100 and ECU 600 a hectare, depending on the quality of the land. The impact of this scheme was limited in 1988, as four member states failed to implement the scheme by the end of the year, and as less than 240 thousand hectares were set aside in other states.


“Intensive technology” is defined as the application of better farm management techniques, permitting more decision making at the farm level, and providing incentives for improved performance.


The initial GMP for Australian white standard wheat for crop year 1988/89 was raised to $A 147.60 a ton, which is $A 3.31 a ton above the GMP for 1987/88.


Total EC grain output in 1988/89 is estimated at 162.5 million tons, or 1.6 percent above the ceiling. In addition to the mandatory cut in intervention prices, only 1.4 percent (as opposed to 3 percent) of the supplementary co-responsibility levy for 1988/89 will be reimbursed to farmers.


The U.S. Government has set the acreage reduction requirement for the 1989 crop at 10 percent of base acreage, the midpoint of the statutory range, down from 27.5 percent for 1988. The loan rate and target price for the 1989 crop have also been reduced to the statutory minimums, by 7 percent and 3 percent, respectively. The Canadian Government is expected to provide strong incentives for the 1989 crop, since initial payments for the 1988 crop were raised by another Can$20 a ton in November 1988 to Can$170 a ton, or Can$50 a ton higher than the rate of payment set a year earlier.


In 1987, the United States accounted for 40 percent of world maize production and about 60 percent of world exports.


Generic certificates have been issued by the U.S. Government since April 1986 as part of deficiency payments and paid land diversion payments to producers. They are generic because they can be exchanged for any commodity the individual farmer has placed in government storage. Since their face value is fixed in terms of dollars, their greatest value is in respect of the commodity whose price is at the greatest discount to the loan rate. In 1986–87, this commodity was maize; producers could repay their loans at less than face value and also avoid the interest charges that would accrue if a loan was repaid in cash. If the maize so acquired was immediately sold, storage charges would also be avoided.


Farm gate prices in the summer of 1987 ranged between $63 and $67 a ton, well below the loan rate for the 1987 crop of $71.65 a ton. In these circumstances, the government adjusted posted country prices to encourage producers to use generic certificates to redeem old-crop loans and replace them with new-crop loans—a procedure known as “PIK (payment in kind) and roll”—or to place the new crop under loan and redeem it immediately—a “quick PIK.”


EC intervention prices were effectively reduced by 6 percent in ECUs for the 1987/88 crop. Although green rate adjustments meant that the reductions were moderated significantly in some countries, the overall area planted in the EC fell by 5 percent.


Although the loan rate for the 1988 crop was raised in December 1987 from the level originally announced in September 1987 by $1.18 a ton to $69.68 a ton, this represented a 3 percent decline from the 1987 loan rate. In addition, the target price for 1988 also 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 reduction requirement of 20 percent of base acreage remained in effect, but the optional paid land diversion (at $78.74 a ton) was reduced from 15 percent to 10 percent. Finally, a “0/92” provision replaced the “50/92” provision in effect in 1987 whereby diversion payments are made even if no land is planted; this provision applied also to wheat and other feed grains.


Producers may place grain in the farmer-owned reserve under a three-year loan at the expiration of the regular nine-month loan without incurring storage payments. If the producer price reaches the trigger price (equivalent to the target price), grain in the farmer-owned reserve is placed in release status for the following month, and the producers incur the storage charges that otherwise are covered by the Government.


The agreement calls for the U.S.S.R to purchase a minimum of 9 million tons of wheat and maize annually, including 4 million tons each of wheat and maize and another 1 million tons of either. The final 1 million tons may also be satisfied by a purchase of 520 thousand tons of soybeans or soybean meal. Purchases of up to 12 million tons annually are permitted without further consultation.


Other features of the EC support program for 1988/89, which apply to all grains, were the reduction in monthly increments of the intervention price by 25 percent, the introduction of an optional set-aside program, and the introduction of a supplementary 3 percent co-responsibility levy, which is reimbursed if total EC grain output does not exceed 160 million tons and reimbursed in part if this limit is not exceeded by more than 3 percent. These measures were insufficient, however, to prevent a rise in planted area.


The mandatory acreage reduction for participation in the 1989 maize program has been set at 10 percent of base acreage, down from 20 percent for 1988, and the optional paid land diversion has been eliminated. Moreover, the incentive to participate in the program has been reduced somewhat by lowering the target price by 4 percent to $111.80 a ton, and the loan rate by 7 percent to $64.96 a ton, both prices are the statutory minimums. As a result, the area planted may increase by about 14 percent, and with favorable weather, the area harvested may increase by 22 percent.


The United States has also used EEP sales to a limited extent to counter subsidized EC exports to Jordan and Turkey.


Crop years refer to rice harvested over a nine-month period beginning in the Northern Hemisphere with the U.S. harvest in August and ending in April with the last of the Southern Hemisphere harvest.


Under the U.S. support program for rice in 1987, the loan rate (average of all types, unmilled) was reduced by 5 percent to $150.80 a ton and the target price was lowered by 2 percent to $257.02 a ton. The acreage reduction requirement remained at 35 percent of base acreage.


The acreage reduction requirement for the 1988 crop was reduced to 25 percent of base acreage; the target price (average, all types) was lowered by 4 percent to $245.82 a ton, and the loan rate was lowered by 3 percent to $146.17 a ton.


In the United States, the acreage reduction requirement for the 1989 crop will remain unchanged from 1988 at 25 percent, but the target price has been reduced by 3 percent to $328.10 a ton and the loan rate by 2 percent to $143 a ton; these reductions are smaller than in 1988.


Under the EEP, up to $15 billion was to be used to subsidize U.S. exports, mainly to markets in which the United States has lost market shares to leading competitors. The EEP was mandated by the U.S. Congress through fiscal 1988, but Congress extended the program for an additional two years, that is, through fiscal 1990, and funding was raised to a maximum of $2.5 billion. The EEP has helped lower U.S. export prices for soybean oil and other commodities through payment of a bonus, comprised of commodities from inventories of the Commodity Credit Corporation (CCC) to the exporter, which enables a reduction in export prices.


A loan issued with only the commodity as security.


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


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


The budgeting costs of the deficiency payments have increased from ECU 268 million in 1977 to ECU 1.7 billion in 1984 and well over ECU 4 billion in 1987.


For Spain and Portugal, the threshold is 2.0 million tons each.


The DTP was in effect from April 1986 through September 1987. With the objective of eliminating excess milk production capacity, the government purchased whole dairy herds, of which 95 percent were slaughtered and 5 percent exported as live animals. In order to avoid disruption of the domestic market, half of the 180 thousand tons of meat produced from the animals slaughtered was exported to Brazil at a price approximately one third of the U.S. import price, and the remainder was used for domestic food aid or consumed by the U.S. military forces in Europe.


The United States sets a country-specific import quota for meat at the beginning of each year, and if it appears that a trigger level of 110 percent of quota will be exceeded, a voluntary export restraint agreement is negotiated to limit U.S. imports to the trigger level.


Although the number of cattle slaughtered in the United States in the first nine months of 1988 was smaller than in the corresponding period of 1987 when the DTP had been in effect, meat production was higher than in 1987 because of higher carcass weights.


In September, Australia and New Zealand agreed to voluntarily restrain their exports to the United States in 1988 to 363 thousand tons and 202 thousand tons, respectively.


Tariffs on Japan’s beef imports will also be adjusted. The current rate of 25 percent will remain unchanged in 1989–90 but will be temporarily increased to 70 percent in 1991–92 and then reduced by 10 percentage points in each of the two succeeding years to 50 percent. An additional 25 percent tariff may also be imposed if imports reach 120 percent of the previous year’s level. The 50 percent rate of tariff will be subject to negotiation in the Uruguay Round of the GATT.


Although purchases of beef into intervention stores declined from 578 thousand tons in 1986 to about 450 thousand tons in 1988, EC beef stocks at the end of 1988 were still about 500 thousand tons. In 1989 a notional intervention ceiling of 200 thousand tons has been established, but intervention may still take place if market prices in at least three member states fall below 80 percent of the intervention price. Also, effective intervention prices on purchases within the ceiling will be cut by 3 percent, and per head premiums will be modified.


Under voluntary export restraint (VER) agreements, Australia and New Zealand have agreed to limit exports to the United Kingdom to 245 thousand tons (carcass weight) and 17,500 tons, respectively, in 1988. These imports attract a discretionary rate of duty of 10 percent compared with the normal 20 percent in the EC. The United Kingdom is the EC’s largest producer, consumer, importer, and exporter of sheepmeat.


The guide, or minimum support, price is reduced by 1 percent for every 1 percent increase in the breeding flock. This has resulted in a 3 percent cut in the U.K. guide price and a 2 percent cut for other EC members in 1988. For 1989, the cuts will be 7 percent and 3 percent, respectively.


Published forecasting models for the free market price of sugar also have incorporated a variety of other independent variables in the price equation, including world production, consumption in the United States, and a time trend variable. See, for example, Joachim Frohn, An Econometric Model for the World Market Price of Sugar (Frankfurt: Haag and Herchen Verlag, 1984), and John D. Schwager, A Complete Guide to the Futures Markets (New York: John Wiley and Sons, 1984).


The loan rate for the 1988/89 crop has been set at 18 cents a pound for raw cane sugar. The market stabilization price, which represents the price at or above which producers would market their sugar rather than forfeit it to the CCC, was set at 21.80 cents a pound for 1988/89, compared with 21.76 cents a pound for 1987/88. To maintain spot market prices at, or near, the market stabilization price in order to prevent forfeitures, the supply of sugar has been limited, and since the United States is a net sugar importer, this has been achieved by limiting imports with quotas. The U.S. sugar import quota for calendar year 1989 has been set at 1,125 thousands tons, or over 17 percent higher than in 1988. In December 1987, the U.S. Government enacted legislation creating a special additional import quota and subsidized re-export programs for fiscal year 1988 for the Caribbean countries (263 thousand tons) and the Philippines (110 thousand short tons), but the program was not implemented because of funding difficulties.


Every five years, the EC sugar regime is subject to review. Production quotas, which have remained effectively unchanged since 1981, consist of two types. The A quota extends full price guarantees and is roughly equivalent to the EC’s sugar consumption; the B quota provides a lower level of support. The latter quota amounts to 21 percent of A quota sugar and is largely exported. Sugar also is produced in excess of quotas (known as C sugar) and this sugar is not entitled to support and must either be exported or stored to become the first tranche of A quota sugar in the following year. In April 1986, the sugar regime, which has been in operation since 1981/82, was extended through 1991; production quotas are to remain at present levels through this period.


All sugar produced under quotas is subject to a levy of 2 percent of the intervention price. Sugar produced under the B quota is also subject to a levy of up to 37.5 percent of the intervention price. Between 1981/82 and 1985/86, however, the EC incurred a deficit of about ECU 400 million because these levies were insufficient to cover the cost of export refunds. In order to reduce the existing deficit over the next five years, an additional levy, known as the “elimination levy,” was introduced in December 1985; the levy, which yields about ECU 80 million a year, varies from country to country to reflect the magnitude of production levies paid by producers over the five-year period ended 1985/86. In 1986/87, export refunds rose substantially and a special levy, known as the “special elimination” levy, was introduced to eliminate additional financing gaps as they occurred.


The Brazilian crop year is April–March and therefore differs from the international coffee year (October–September) on which most of the discussion in this section and the data in Table 40 are based.


The ICO’s 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.


Owing to the many species of hardwood logs traded, no one price series is fully representative of trade in hardwood. The price series used in this discussion is the price of a major species of hardwood logs, Malaysian meranti, in the largest importing country, Japan.


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


The market indicator price is defined in the 1979 International Natural Rubber Agreement as the average official price for RSS1 RSS3, and TSR20 quality rubber on the Kuala Lumpur, London, New York, and Singapore markets, expressed in equally weighted Malaysian and Singapore cents a kilogram.


See IMF Survey (Washington), Vol. 13 (December 10, 1984), pp. 370–71 for an outline of the operation of the INRA.


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


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


In September 1988, the International Tin Council (ITC) terminated its remaining activities. A new international body to provide statistical information and market studies for the industry is currently being discussed under the auspices of the United Nations Conference on Trade and Development (UNCTAD). A general agreement to establish a Tin Study Group was announced in December 1988 and a final decision is expected at the third Negotiating Conference to be held in the spring of 1989.


The ATPC member countries are Australia, Bolivia, Indonesia, Malaysia, Nigeria, Thailand, and Zaire. Brazil and China participate as observers in the meetings of this association.


These data must be treated with caution, however, because of lack of precise figures on stocks remaining in the hands of banks formerly held under warrants as collateral for their loans to the International Tin Council.


Nickel is traded on the LME on the same basis as aluminum except that the contract is for 6 metric tons.


Lead is traded on the LME on roughly the same basis as copper, aluminum, and zinc. The contract is for 25 metric tons.


An index of phosphate fertilizer prices, weighted by share of fertilizers in world trade: phosphate rock, 35.6; phosphoric acid, 20.5; diammonium phosphate (DAP), 33.5; and triple superphosphate (TSP), 10.4 percent.


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