Agriculture Commodity Prices Continue Long-Term Decline

Trend has negative and positive impacts on food security in poorest developing countries. Compiled by staff

Published on: Feb 16, 2005

The long-term downward trend in agricultural commodity prices threatens the food security of hundreds of millions of people in some of the world's poorest developing countries where the sale of commodities is often the only source of cash, says a new report released today by the UN Food and Agriculture Organization (FAO).

According to The State of Agricultural Commodity Markets 2004 (SOCO 2004), many farmers and exporting countries still find themselves trapped by their dependency -- producing and exporting more, but earning less than they did in the past.

SOCO 2004 also says that lower prices for basic foods enable many poor food importing countries and their consumers, especially in urban areas, to meet their food needs at lower cost and to gain access to nutritious diets.

Declines in agricultural commodity prices slow

While the overall trend in commodity prices has been downward from the late 1990s through 2001, the report shows that prices on world markets have rebounded, or at least leveled off, over the past two years. However, not all commodities have performed the same. There have been rebounds in cereals, oil crops, dairy products, fibres and raw materials, while horticultural product prices remained more sensitive to market balance and meat prices were disrupted by animal disease outbreaks.

Price recovery has been far more fragile for tropical beverages, sugar and bananas, according to the report, which points out that these are some of the very commodities on which the poorest countries are most dependent for their export earnings.

Some developing countries manage to diversify

Commenting on SOCO 2004, Hartwig de Haen, FAO Assistant Director-General, Economic and Social Department, says, "The long-term downward trend in commodity prices along with increased productivity and production of major agricultural export commodities have divided developing countries into two distinct groups. On the one hand, we have the developing countries that have managed to become less dependent on one or two agricultural commodities, some shifting production into high value export crops.

"On the other hand," de Haen adds, "the Least Developed Countries, or LDCs, where usually small producers account for the bulk of agricultural production and exports, have been unable to mobilize the investment and training required to shift to new crops. They also have difficulties meeting the high quality standards and strict delivery deadlines of the major supermarket chains in the developed countries."

The dangers of depending on a few agricultural commodities

Many developing countries rely on exports of a small number of agricultural commodities, even a single commodity, for a large share of their export revenues. This concentration leaves them exposed to unfavourable market or climatic conditions. A drought or a drop in prices on the international markets can quickly drain their foreign exchange reserves, stifle their ability to pay for essential imports and plunge them into debt, the report warns.

As many as 43 developing countries depend on a single commodity for more than 20 percent of their total revenues from merchandise exports. Most of these countries are in sub-Saharan Africa or Latin America and the Caribbean and depend on exports of sugar, coffee, cotton and bananas. Most suffer from widespread poverty.

Commodity dependence made worse by market distortions

Because many of these countries depend on agricultural commodity exports to finance food imports, a decline in the prices of exports relative to the prices of imports can threaten food security. However, the report acknowledges that the same downward pressure on commodity prices may also reduce the food import bills of developing countries.

The report warns that "these problems are exacerbated by market distortions, arising from tariffs and subsidies in developed countries, tariffs in developing countries and the market power in some commodity supply chains of large transnational corporations."

The report urges the elimination of market distortions, and warns that high agricultural tariffs and producer subsidies in developed countries limit market access and depress commodity prices.

While markets for agricultural products in developing countries are the fastest growing, the report warns that they are also generally heavily protected.

FAO's Agenda for Action to combat commodity oversupply

SOCO 2004 lays out an agenda for action to combat the growing problems caused by oversupply and market distortions. It urges World Trade Organization negotiations to give priority to reducing agricultural tariffs, producer support and export subsidies in developed countries. It calls for the elimination of tariff escalation that penalizes exports of processed goods from developing countries. At the same time, it urges developing countries to reduce their tariffs in order to encourage trade among themselves and to allow their consumers to benefit from lower world prices. It also highlights the need for developing countries to improve their capacity to take advantage of opportunities opened by trade liberalization.

The report calls for measures that would help LDCs improve their capacity to take advantage of trading opportunities and to participate more effectively in trade negotiations. It suggests compensating low-income economies for any loss of trade preferences that result from the on-going WTO trade negotiations.

Increased investment to improve productivity of domestic food production in developing countries is also recommended by the FAO report, along with mobilizing resources to support generic promotion campaigns and diversification into non-traditional agricultural exports and the export of value added processed goods.