II. Food Commodities
Author: International Monetary Fund
Language:
English
Keywords:
WEFS; food commodity; price movement; indicator price; price differential; soybean oil; spot price; free market; coconut oil; groundnut oil; Agricultural commodities; Exports; Agricultural sector; Australia and New Zealand; North America; South America
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Abstract

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.

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.
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)

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Sources: Commodities Division and Current Studies Division. IMF Research Department.

Refers to IMF world index of food commodities. These percentages differ from those reported in International Monetary Fund. World Economic Outlook, April 1988: A Survery by the Staff of the International Monetary Fund. World Economic and Financial Surveys (Washington, 1989), which refer to the index of commodities exported by developing countries.

Index of dollar prices of food commodities deflated by the index of dollar unit values of manufactured exports.

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

Overall indices constructed using the same weights for the indices of individual commodities as in overall (world) price index. Crop year data for agricultural commodities are given under the earlier calendar year, for example, crop year 1980/81 under 1980. The commodity coverage of the indices of consumption and stocks is less comprehensive than the coverage of indices of production and supply.

Supply is defined as production plus beginning-of-year stocks.

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.

Cereals

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

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Source: United States, Department of Agriculture, World Grain Situation and Outlook (Washington, April 1989).

For countries where stocks data are not available, utilization estimates represent “apparent” utilization; that is, they include annual stock level adjustments.

Stocks data are based on an aggregate of differing local marketing years and should not be construed as representing world stock levels at a fixed point in time. World stock levels have been adjusted for estimated year-to-year changes in the U.S.S.R. grain stocks, but do not purport to include the absolute level of U.S.S.R. grain stocks. Data do not include stocks in some countries in Eastern Europe and in some other countries for which stocks data are not available.

Ratio of marketing year ending stocks to utilization.

U.S. Department of Agriculture estimates.

Table 9.

Prices of Cereals, 1979–First Quarter 1989

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Source: Commodities Division, IMF Research Department.

The weights in the index are as follows: wheat, 48 percent; maize, 36 percent; rice, 16 percent.

U.S. No. 1 hard winter wheat, ordinary protein, f.o.b. Gulf of Mexico ports.

U.S. No. 2 yellow corn, f.o.b. Gulf of Mexico ports.

Thai white milled rice, 5 percent broken, f.o.b. Bangkok; Board of Trade posted price.

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.

Wheat

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)

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Source: United States, Department of Agriculture, Foreign Agriculture Circular: World Grain Situation and Outlook (Washington, April 1989).

U.S. Department of Agriculture estimates.

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

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Sources: United Nations, Food and Agriculture Organization, 1987 FAO Trade Yearbook (Rome), for exports; and Commodities Division, IMF Research Department, for market prices.

Data on exports are estimates of the Commodities Division, IMF Research Department.

U.S. No. 1 hard red winter wheat, ordinary protein, f.o.b. Gulf of Mexico ports.

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.

Maize

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)

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Source: United States, Department of Agriculture, Foreign Agriculture Circular: World Grain Situation and Outlook (Washington, April 1989).

U.S. Department of Agriculture estimates.

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

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Sources: United Nations, Food and Agriculture Organization, 1987 FAO Trade Yearbook (Rome), for exports; and Commodities Division, IMF Research Department, for market prices.

Data on exports are estimates of the Commodities Division, IMF Research Department.

U.S. No. 2 yellow corn, f.o.b. Gulf of Mexico ports.

Rice

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)

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Source: United States, Department of Agriculture, World Grain Situation and Outlook (Washington, January 1989).

Rice is harvested over a nine-month period; thus crop year 1982/83 represents crops harvested in late 1982 and early 1983 in the Northern Hemisphere and in early 1983 in the Southern Hemisphere.

U.S. Department of Agriculture estimates.

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

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Sources: United Nations, Food and Agriculture Organization, 1987 FAO Trade Yearbook (Rome), for exports; and Commodities Division, IMF Research Department, for market prices.

Data on exports are estimates of the Commodities Division, IMF Research Department.

Thai milled white rice, 5 percent broken, f.o.b. Bangkok; Board of Trade posted price.

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

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Source: Commodities Division, IMF Research Department.

The weights in the index are as follows: soybeans, 41 percent; soybean meal, 24 percent; soybean oil, 11 percent; palm oil, 10 percent; coconut oil, 6 percent; fish meal, 5 percent; groundnut oil, 2 percent; groundnut meal, 1 percent; sunflowerseed oil and rapeseed oil are not included in the index.

Dutch, f.o.b. ex-mill Rotterdam.

Sumatra/Malaysian oil, c.i.f. northwest European ports.

Any origin, ex-tank Rotterdam.

Dutch, f.o.b. ex-mill.

Philippine/Indonesian oil, in bulk, c.i.f. Rotterdam.

Any origin, c.i.f. Rotterdam.

U.S. origin, c.i.f. Rotterdam.

Argentine meal, in bulk, c.i.f. Rotterdam.

Any origin, c.i.f. Hamburg.

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

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Source: United States, Department of Agriculture, Foreign Agriculture Survey: Oilseeds and Products (Washington), various issues.

Preliminary.

U.S. Department of Agriculture forecasts.

Derived from oilseed data using standard conversion factors.

Change in oilseed stocks equals production less noncrush use less crushings.

Change in oil stocks equals oil production less oil consumption.

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

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Source: United States, Department of Agriculture, Foreign Agriculture Survey: Oilseeds and Products (Washington), various issues.

Preliminary.

U.S. Department of Agriculture forecasts.

Derived from oilseed data using standard conversion factors.

Change in oilseed stocks equals production less noncrush use less crushings.

Change in meal stocks equals meal production less meal consumption.