Changes to commodity markets will have lasting price effects
18 May 2013
A substantial and broad-ranging analysis of commodity market evolution published by the UNCTAD Secretariat in March has concluded inter alia that there have been ‘structural shifts on both the demand and supply sides of a number of commodity markets which are likely to have a lasting effect on price.’ Further data on the recent performance of commodity markets is provided in the background information provided by UNCTAD for the March 2013 Global Commodities Forum 2103.
Some of the factors identified in the Commodities Report as contributing to structural change are relatively uncontroversial. These include the strong resource-intensive growth in larger developing counties, the drive towards biofuels and “the growing influence of standards in many commodity value chains which”, the report argues, “disadvantage small-scale producers and reinforce the power of leading international firms”. While the existence of some of the other factors identified is quite widely accepted, their relative importance is still controversial. They include what the report calls the “growing asymmetry between more concentrated buyer power and reduced producer power in many agricultural commodities” and changes in corporate strategies.
The conclusion drawn by the report is that, despite the recent booms in world prices, there remains a “commodity problem”, although this differs from earlier accepted definitions. The broad purpose of the report is “to reconsider received policies” in the light of what has been learned from “the commodity boom of 2003–2008” and to explain the persistence, despite these high prices, of “many perennial problems faced by commodity producing economies”.
Failures on the part of some commodity-dependent developing countries (CDDCs) are not glossed over. Many have failed to “make the most of commodities” by not adopting policies that would maximise sectoral linkages, possibly because they were over-influenced by the traditional view that the terms of trade with manufactures would deteriorate over time. Critically, the report argues, CDDCs must “improve the competitiveness of their traditional commodity sectors”, as well as support greater diversification and take steps to mitigate short-term shocks.
The report notes that in the past CDDCs in East and South East Asia “reinvested earnings from exports of oil or agricultural products in industrial and infrastructural products” to support economic diversification. More recently, CDDCs used earnings during the commodity boom “to repay their foreign debt, set up sovereign wealth funds... and build their foreign exchange reserves”.
Potential solutions to “the commodities problem” are proposed at several levels. Among the more controversial are those related to the analysis of the contribution that financial markets make to commodity booms. The report argues that there is “a consensus that the excessive influence on commodity markets of trading motivated by financial and not commercial considerations should be curbed”. The report calls for greater involvement of G77 members in international policy making on curtailing financial speculation on commodity markets. At the national and regional levels it calls for poor countries “to put in place some form of food reserve.”
Editorial comment
The challenge of channelling commodity revenues into broader economic development is a major one for many ACP states. Some old policy prescriptions remain as valid as they ever were: governments of largely agricultural economies that neglect their rural sectors are undermining their own development efforts; agriculture must be made competitive (and if this can be done by boosting smallholder production, so much the better).
If the functioning of world markets for some commodities has changed, the policy prescriptions required also need to evolve. The extent to which the ructions to world markets of recent years represent structural rather than cyclical change is controversial, and the same applies even more to the relative importance of different structural factors.
The UNCTAD commodities report will not be the last word on the subject – but it is a significant contribution to the debate. The analysis of the alleged financialisation of markets (which sees in recent booms the growing role of investors with no interest in physical goods) is especially controversial. But, while the detailed analysis in the UNCTAD report will not be accepted by everyone, it does – at a minimum – raise the bar for the evidence that must be produced by critics who seek to downplay the extent of financialisation and, hence, the need for related policy initiatives.
