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IFAP Commodities Conference
Bruges, Belgium, Tuesday 19 April 2005
Summary Report of the Plenary Session

Opening session

Mr. Jack Wilkinson, IFAP president opened the plenary session, followed by the words of welcome from Mr. Noël Devish, President of Belgian Boerenbond. The two speakers pointed out the fact that the IFAP commodity conference was a good opportunity to discuss the issues of the commodity crisis and its effects on producer revenues.

 

Farm commodity crisis – a priority for IFAP

Mrs. Isabelle Mamaty, IFAP commodities analyst presented a background document that summarises the different tools used to face the commodity market crisis at national as well as international level.  She also highlighted the work done by IFAP in this area.

Thus, market commodity crisis is characterised by a long-term decline in producer prices, accompanied by high levels of short-term price volatility. Different approaches were proposed as responses.

The first one is related to market-management solutions at national as well as international level. i.e policies to better organise markets so that supply and demand are kept in balance. But many of these mechanisms have been dismantled at national level, while at international level, all commodity arrangements put in place in 1970’s have collapsed in late 80’s.

The second approach is related to market-compensation solutions – i.e. policies to compensate for the effects of market instability and unremunerative prices. The two often-quoted schemes were the International Monetary Fund’s Compensatory Finance Facility and the EU’s Stabex  programme under the former Lomé agreements  with African, Caribbean and Pacific Countries. This mechanism was replaced by the FLEX in the new Cotonou Agreement, with broader aims and stringent eligibility criteria.

In addition, other generation of market-oriented instruments is being used focusing  on market-based risk management system. Other alternatives are proposed such as longer contract between producers and buyers and voluntary commodity funds with the contributions of importing countries.

Mrs. Mamaty explained that for IFAP, a major part of the solution of improving the functioning of international commodity markets is to address the problem of market concentration (through strengthening competition policy and through strengthening the organisation of farmers in the market, in other words “empowering producers in the market”). 

IFAP has its own capacity building program through the program of the IFAP development and Cooperation Committee to strengthen farmers’ organisations in developing countries. In addition, IFAP is also involved in discussions on “private sector standards for sustainable agriculture”. It is very important for farmers that such standards for sustainable agriculture include the “economic sustainability of producer” i.e. paying farmers a reasonable price for their products. IFAP is also working with the International Labour organisation (ILO) in order to raise concern that the issue of multinational companies exploiting farm families in the market is an unacceptable as not respecting core labour standards or good environmental practices.

 

Situation and outlook in World Commodity Markets

Mr. Martin Von Lampe from the Markets and Trade Division of the OECD said that the OECD has developed in collaboration with FAO a macroeconomic model to estimate the evolution of prices of agricultural products. Based on this model, the OECD has estimated that the real prices of agricultural products will be flat and declining for 2004-2005.

The main assumptions of this model are based on the current policies that are taking place now at national, regional and international levels i.e. rapid global expansion slowed by oil prices in 2004 – sustained, broad-based growth in the medium to longer term – US dollar to remain weak relative to most other OECD currencies – Inflation to remain relatively low- slowing population growth- Provisions of US 2002 Farm Security and Rural Investment Act (FSRIA) to continue – EU 2003 CAP reform and EBA – enlarged EU of 25 countries- Uruguay Round Agreement on Agriculture (URAA) commitments to continue (no new WTO agreement – no new WTO accessions) – existing regional agreements (i.e. North American Free Trade Agreement (NAFTA)).

Considering few commodities, the main results of the estimations are that for 2004-2005, the nominal price of rice is expected to raise more than the ones of wheat and maize and oilseeds, but the real prices will be flat and declining. Further nominal price decline is expected for sugar. Meat prices are also expected to decline from their relatively high 2004 levels while dairy prices will remain stable after dropping from their 2004 peaks. A higher production growth is expected in “emerging “developing countries particularly in the sector of oilseeds.

In conclusion, Mr. Von Lampe said that the situation described above is dependent on the occurrence and magnitude of several factors including how trade will be affected by changing diets and dietary preferences (e.g. share of cereal imports declines as imports of higher-value products increase) and the growing net flows from OECD countries to developing countries.  

In addition, these factors may be influenced by the difficulty for farmers to interact in the food chain and the policies in OECD and non-OECD countries e.g. subsidies and the change in policy of cereals in China.

 

The functioning of international commodities markets for farmers

Professor Sarris, the Director of the commodities Division of the FAO, like the preceding speaker, explained that the decline of the real agricultural prices occurred over the past 40 years. However, the trend has not been the same for all agricultural commodities. Indeed, prices for meat, dairy and horticultural products have declined less steeply than other commodity prices since 1961 and have risen since the mid-1980s. While other commodity prices continue to fall.

Professor Sarris said that many factors are attributable to this decline including a decline in agricultural terms of trade. Thus, terms of trade between agricultural commodities and manufactured goods have fallen steeply since the late 1970s, especially for developing countries. Both Least Developed Countries (LDCs) and other developing countries have experienced reductions of more than 60 percent in terms of trade. But despite the decline in commodities prices, the purchase power of developed countries has increased while the one of LDCs is declining.

 

Looking at the trend of the world production, Professor Sarris reported  that for most commodities e.g. cereals, meat, milk, oilcrops, sugar, citrus fruit, bananas, tropical beverages and fibre crops, the share of developing countries excluding LDCs in total world production has increased, while this share is maintained stable for LDCs and decreased for developed countries.

 

As far as trade is concerned, the share of exports from developing countries (excluding LDCs) is growing for temperate commodities e.g. cereals, meat and oilcrops, while this share is maintained stable for tropical products. In addition to this trade analysis, Professor Sarris highlighted three points: 1) since the late 1980s, the LDCs have become major net importers of agricultural commodities: other developing countries are gaining at the expense of the LDCs 2) – price volatility has been greatest for commodities traded by developing countries and 3) in addition, developing countries are suffering from the effect of immizerizing of export growth” i.e. they are exporting more and earning less, this is particularly the case of coffee and cotton. 

 

What determines long-term commodity prices?  At this question, Professor Sarris answered that the inelastic demand for agricultural commodities combined with labour intensive technology with labour paid subsistence wages is one of the reason. He also added that  the declining terms of trade for agricultural commodities is due to faster rates of total factor productivity (TFP) growth for agricultural than non-agricultural commodities.

 

Thus, between 1967 and 1992 the average annual growth rate of TFP in manufacturing in developing countries varied between 0.62 and 0.92 percent. In developed countries, the range was between 1.91 and 3.29.  In agriculture, the average rate of growth of TFP in developing countries ranged between 1.76 and 2.62 percent, while for developed countries, the range was between 3.35 and 3.46 percent. For low-income developing countries, the average rate of TFP growth in agriculture was between 1.44 and 1.99, and between 0.22 and 0.93 percent in manufacturing.

 

Moreover, other changes within the structure of the commodity markets do influence the price as well such as: the rising importance of supermarkets; the rising importance of economies of scale and specialization in upstream activities; the increasing monopoly in upstream activities and finally the declining shares of producer value in the final retail price.  This latter factor is well illustrated by the case of coffee where after increasing to more than 20 percent during the 1970s and early 1980s, the growers ‘share of coffee export revenues has fallen by almost half. During the same period, the share of consuming countries has increased to more than 80 percent.

 

Professor Sarris said that the price decline will not stop in one day.  He added that if no action is taken in the future, in particular vis à vis LDCs, the situation will not improve taking into account that the agricultural trade liberalisation by developed countries may not increase export earnings of LDCs by much. Moreover, the attempts to improve market balance through producer-only agreements on production and export control are difficult to implement.

 

However, Professor Sarris explained that some activities such as a commodity demand promotion could be efficient if there is commitment and funds. In addition, diversification may be a possible solution of improvement as well. But, this solution encounters some constraints in terms of product differentiation, vertical diversification into processed forms to capture value-added, constraints of tariff escalation, market barriers to entry and supply conditions.

 

Professor Sarris said that, the main solution consistent with poverty alleviation is to improve agricultural commodity labour productivity in LDCs through the increase of wages and a technological improvement at farm level. This should be accompanied by an increase of the size of the farm, an increase of farmer assets (education, own and borrowed capital), an improvement of non-farm assets (infrastructure) and a better producer organisation.

 

In conclusion, professor Sarris highlighted some actions that can be taken vis à vis of trade.  At international level, he suggested to build capacity to take advantage of trading opportunities and to participate effectively in trade negotiations. He also suggested to deal with the “behind the border” trade agenda to improve tradability of products (packaging and grading, certification, logistics, finance, etc…), to emphasise a better market access at WTO towards the elimination of tariff peaks and tariff escalation, to aim at preserving and expanding trade preferences for low-income economies and possibly compensating them for any loss of these preferences.

 

At national level, Professor Sarris made the suggestion that incentive measures should be put in place to increase productivity and strengthen the farmers’ position within the markets, including among other things – diversification into non–traditional agricultural exports and processed goods – improvement of the flow of information to producers and traders about opportunities for contractual arrangements with supermarkets and large scale processors.

 

Empowering farmers through orderly marketing: experience in Canada

 

Mr Pellerin, Vice president of the Federation of the Canadian Agriculture (FCA) and president of the Union of the agricultural producers of the Quebec (UPA) described the environment faced by the farmers in Canada. He pointed out in particular the consequences of trade liberalisation and the growing concentration that appears at all the levels of food chain. Thus, in the US, four companies control 80% of the bovine slaughtering and 60% of the chicken processing business. In North America, four companies control 69% of the seed-corn market and 90% of Quebec’s 7 million inhabitants buy their food from 3 major distributors. This concentration is becoming international and global. This implies an increase in the imbalance between family agriculture and corporations which revolve around them, both downstream and upstream. 

 

As a consequence, the price of input is becoming more and more expensive while producer prices are stabilised since many years. According to IFAP report, the gap between price at farmer gate and consumer price has increased by 100 percent between 1975 and 1994.  In addition, the net income of farmers around the world stagnates or too often deteriorates, despite an increase in exports. Based on statistics, Mr. Pellerin stated that the net income of farmers in Canada has not improved while the Canadian agricultural exports have increased between 1970 and 2000. In addition, Mr Pellerin stated that trade liberalisation did not create wealth for farmers. 

 

Face to this situation, Mr. Pellerin explained how the existence of a law implemented in 1956 which set up a framework for trade relations between producers and buyers is of great help. Indeed, this law allows the producers to negotiate as a group and forces buyers to negotiate with them. It also includes provisions for dispute settlement process.

 

One encouraging result is that from 1995 to 2003, the share of collectively marketed agricultural products jumped from 3.1 to 4.3 billion Canadian dollars (CDN) per year to reach 80% of the market. However, this situation should not be taken for granted as farmers are dealing with “giant” companies e.g. Wal mart, Nestlé, Cargill and Monsanto.

 

Mr. Pellerin said that the conditions for ensuring a continuing control of farmers are the following: a legislative framework, the management of marketing board left to agricultural producers, a transparent price system, and regular information provided to agricultural producers. In addition, the management should be user-friendly and of course farmers should be tuned in to consumers’ expectations.

 

Mr. Pellerin explained that farmers should prospect local market first before going to the world market. He also said that further liberalisation does not guaranty greater revenues for farmers; actually it might do the opposite. That is why, there is an urgent need to organise agricultural international trade instead of allowing a greater liberalisation of agricultural markets. Farmers and peasants should be more involved in this debate and have a crucial role in marketing their products through farmers’ organisations. It is through such initiative that farmers could build a prosperous and equitable world for all, Mr. Pellerin concluded.  

Bringing order to international commodities markets

Mr. Mchumo, the managing director of the UNCTAD common fund for commodities (CFC) presented the commodity development work of his organisation. The Common fund is an intergovernmental organisation established within the framework of the United Nations. The agreement establishing the Common fund for Commodities was negotiated under the aegis of the United Nations conference on Trade and Development (UNCTAD) and came into force in 1989. Currently 106 countries are members of the Common Fund. In addition, the European community, the African Union (AU) and the Common Market for Eastern and Southern Africa (COMESA)  are part of the institutional members.

 

Mr. Mchumo said that the CFC has undertaken many commodity development projects under two main activities in collaboration with other development institutions, the private sector and civil society.

 

The first set of activities is the commodity development measures aimed at improving the structural conditions in markets and enhancing the long-term competitiveness and prospects of particular commodities. They include research and development; productivity and quality improvements; transfer of technology; diversification and processing; improvement of marketing and market access.  The CFC operates at the level of processing, transformation, and market concentration. The objective is to raise farmers’ income by improving their position in the value chain and adding value to their commodities.

 

The second set of activities is commodity market development activities which assist developing countries and, in particular least developed countries (LDCs), in functioning effectively in a liberalised global economy. Projects in this field include physical market development; enhancement of market infrastructure; facilitation of private sector initiatives; and commodity price risk management.

 

Mr. Mchumo recalled that commodities are the backbone of the economies of the majority of developing countries, in particular the least developed amongst them. Thus, many countries in Latin America and the Caribbean, Asia and, in Africa are dependent on commodities for more than half of their merchandise export earnings. Since the 1970s, the international prices of commodities exported by developing countries have declined, in many cases sharply. This decline is explained by the constant imbalances between supply and demand (e.g. cases of coffee and cocoa), but also by the increasing market concentration.

 

In fact, this latter factor led also to reduce revenues by producing countries and farmers, which have smaller share of the final retail price derived from commodity trade.  e.g. the current value of retail sales of coffee amounts to USD 70 billion, while coffee producing countries  receive only USD 5 Billion of this value.  The share of retail price received by farmers ranked from 4 percent for cotton to 28 percent for cocoa. In the case of bananas, 12 percent of the final retail prices goes to producing countries and only 2 percent to the farmers.

 

According to Mr. Mchumo, one issue of concern for the commodities produced by developing countries is the improvement of market access.  This could be done through the elimination of subsidies, trade barriers, tariff peak and tariff escalation. In the case of this latter, while 90 percent of cocoa beans are grown in developing countries only 29 percent of cocoa powder and 4 percent of chocolate are processed in producing countries.  The reduction of tariff escalation has been identified as one of the most important issues to be addressed within the framework of the WTO negotiations on agriculture. In the case of subsidies, an estimated USD 350 billion, or five times the total official international development assistance in 2000, were provided as support to agriculture in OECD countries.  Mr. Mchumo gave the example of Mali which received USD 37 million in aid but lost USD 43 million from lower export revenues caused by cotton subsidies in developed countries.

 

Mr Mchumo said that technical barriers and Sanitary and Phytosanitary (SPS) measures are also of concern for developing countries. Attention should be paid for them to not represent impediments to trade for developing countries. Thus “their growing complexity and lack of harmonisation could impede trading efforts of developing countries”, said Mr. Mchumo.

 

Indeed Mr. Mchumo highlighted four major strategic policy interventions in which actions should be taken to improve commodity markets for farmers, especially those from developing countries.

 

The first policy intervention is the improvement of marketing chain through improvement of productivity quality and reliability of supply. This should also be combined with promotion to boost the demand. In addition, the bargain power of farmers should increase through a better organisation and a better access to credit and infrastructure.

 

The second policy intervention is the diversification in order to enable developing countries to be less dependent to few commodities and add value to their exports.

 

The third policy intervention is to find a workable solution to limit commodity prices fluctuation (price decline and price fluctuation). Market-based price risk management schemes could help farmers in the short run but farmers in developing countries do not have access to these instruments, Mr. Mchumo argued.  In this regard, the CFC and the World Bank have initiated activities to combine efforts on price risk management in East Africa to explore new market-based approaches to assist these developing countries to better manage their vulnerability to the volatility of commodity prices of coffee and cotton.  But a longer-term solution for commodity price fluctuation would be necessary.  One solution could be compensatory financial arrangements.

 

Finally the fourth policy intervention identified by Mr. Mchumo, is related to supply-demand imbalance. Indeed, there is an oversupply situation for many commodities.  In the 1960s, 1970s and early 1980s, market intervention through the control of supply or expansion of demand for particular commodities were proposed as possible solution through the creation of international Commodity Agreements (ICAs) but these measures of direct market intervention were not successful.  Today existing ICAs focus on measures to improve the functioning of markets. Mr. Mchumo said that more permanent measures need to be developed by the international community and undertaken in co-operation between producers and consumers through co-ordinated action.

 

In conclusion, Mr. Mchumo emphasised that capacity building on trade-related issues and technical assistance on sanitary and phyto-sanitary standards should be provided to developing countries, especially to the least developed countries.

 

At the end of this session, IFAP members raised the following points for IFAP to take on board:

• further analysis is needed in order to present  the advantages and disadvantages  of the different instruments to face the commodity market crisis at national and international levels
• Reinforcement of IFAP involvement of on-going work at international level on market concentration through: strengthening competition policy and strengthening the organisation of farmers in the market.
• Collect and present other examples of success stories of farmers’ empowerment in the market.