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DEVELOPMENT STRATEGIES TO IMPROVE TRADE:
COMMODITIES MATTER
By Mr. Parvindar Singh, Chief, Policy, Programme Management and Evaluation Unit, Common Fund for Commodities
Th e Role of Commodities in Development
Commodities are crucial to individual livelihoods, as well as national economic well-being and economic development of LLDCs. Th e signifi cance of commodities is more widely recognised today in addressing food security and poverty alleviation. Commodity sector can deliver the key Millennium Development Goals (MDGs) by increasing basic food supplies, enhancing incomes and creating employment in the rural areas, improving terms of trade leading to better living standards, and greater gender equality contributing to women’s empowerment. Commodities are a link to the global market thus a source of foreign exchange and also economic volatility.
Challenges
Agricultural commodities are aff ected by the limited growth in agricultural productivity and effi cient use of productive resources. Production of mineral resources besides economic and technical factors is also aff ected by governance. Th ere is also the challenge of equitable distribution of benefi ts amongst commodity producers (agricultural or mineral resources).
Th e volatility of commodity prices and limited value addition are also leading challenges.
A commodity dependent LLDC faces specifi c kind of vulnerability – vulnerability to markets (Exports-Imports). Higher share of commodity sector in economy means higher exposure to market risks and the same applies even periods of commodity boom. Unfortunately LLDCs lack most coping mechanisms which more developed countries may use to cope with exposure to volatile commodity markets.
Commodity Prices
Commodity price boom in early 2000 created a false sense of security amongst commodity producing countries. As shown in the table below, percentage change in average real price for the 2009-11 period when compared to 1979-81 period is negative. Producers in LLDCs incur higher production costs because of higher transit costs and during a commodity price slump they have very marginal profi ts or are driven out of business or get indebted for long periods.
Average world primary commodity price indices over three-year periods 1979-81 and 2009-11
Commodities Average price,
Nominal (in U.S. currency) As per cent of 1979-81
Wheat, $/mt 169.3 254.7 150 65 -35
Gold, c/troy ounce 458.3 1,255.3 274 118 +18
Crude oil, $/barrel 34 81.7 240 104 +4
Unit value of manufactured goods (base = 2005)
47.97 111.13 – – –
*Actual prices defl ated by the Unit Value of Manufactured Goods. Th e prices are defl ated between the two three-year periods by a factor of 0.4316136.
Sources: Th omas Lines calculations, using data from the World Bank and UNCTAD. © Th omas Lines 2012
Key Commodity Issues for LLDCs
Th ere is a need to address vulnerability of LLDCs i.e. (a) exposure to volatility, and (b) mitigate the impact and enhance their ability to cope. Known practical measures that can be used include: diversifi cation and value-addition; market development; value-chain development; enhancing productivity; and advocacy, building partnerships and dissemination At the global level the key issues include: shortening of the supply chain and the diminishing role of the State;
restructuring of the global value-chains has increased the scale of operations of transnational corporations and their dominance in markets; concerns for health and food safety has led to the proliferation and more stringent sanitary and phyto-sanitary standards; shift from product to process certifi cation has imposed requirement for traceability. Product diff erentiation is a key competitiveness strategy. Regional economic integration groups have become important players in capturing economies of scale in production and marketing and these create opportunities and pose challenges also.
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Addressing commodity dependence in LLDCs
It is important that LLDCs continues to drive toward solutions that will support accelerated growth in investment and trade. Th ey should create domestic conditions to enhance competitiveness – monetary and fi scal policies, physical and supporting infrastructure, capacity building. Encourage FDI and PPP. Address the supply constraints by creating opportunities for employment, production and diversifi cation through: entrepreneurial, risk free activities; upgrading production, labour skills; understanding and accessing new markets and new market structures; upgrading cross sectoral policy development capacity; and information and knowledge access.
New technologies, appropriate inputs, higher quality seeds and planting materials, and reducing wastage can increase agricultural productivity and competitiveness. Expansion of processing of primary products – moving up the value addition chain is important. Promotion of diversifi cation – horizontal, vertical and geographical diversifi cation of production – increased export earnings and/or reducing the dependency on a few commodities; risk management;
and commodity fi nance reduces vulnerability of producers. Reliable storage is essential in marketing seasonal crops.
Governments need to facilitate creation of regulated public warehousing as industry separate from trader companies.
Regional Integration
Regional integration is the single biggest priority over the next decade in order to create a larger market. Deeper integration throughout the regions would enable greater levels of trade, providing a further boost to diversifi cation and sustainable growth and would also create larger markets. Regional integration is critical to accelerated and sustainable growth. Creating larger markets with greater critical mass will not only enhance investment propositions, it is also the only way for LLDCs to compete eff ectively in the global economy. Bridging the infrastructure gap will be a key enabler of regional integration, growth and development. It also remains a key challenge and opportunity for investors.
In addition pooling human, capital and natural resources and leveraging diff erent comparative advantages will benefi t the region as a whole.
Uniqueness of CFC
CFC has an exclusive focus on commodities. Its projects are mainly: Aid for Trade; identifi ed and implemented without formal governmental involvement; are proposed, prioritised, formulated and supervised by an (International Commodity Body) ICB; normally involve a counterpart contribution (in cash and/or kind) by the ICB, the project implementation authority or any other entity with a direct interest in the project (inter alia to foster ‘ownership’ and ‘sustainability’;
and it aims systematically to cover all commodities that are of importance to least developed countries (LDCs) and to poorer groups within other developing countries.
CFC’s solutions are case specifi c. CFC is investing in rice food security programmes in Latin America and the Caribbean (LAC) and Africa. Th e introduction of innovative agronomic practices of irrigated rice cultivation (CFC contribution 974,980 USD) led to immediate increase of average rice yields by two tons/ha in the major rice growing areas of Brazil/
Venezuela. Th is technology package is now introduced via private sector rice producer associations in all other major rice producing countries in Latin and Central America. Th e FAO rice outlook report on the results of the 2009 paddy season validated this success in the LAC region.
When market access is the problem, for example sorghum production in West Africa is a subsistence farming activity involving small farmers who produce for their own domestic needs and they have no access to commercial markets.
A public private project partnership of CFC (contribution USD1,527,00) with international breweries (contribution USD 903,000) in West Africa led to the substitution of imported grains with locally produced sorghum.
Another project involves cassava which is a root crop with high yield in tropical conditions and high nutritional value but is highly perishable within 24 hours. Traditional processing does not retain quality for industrial use. Technology for high quality primary processing of cassava into fl our creates forward and backward linkages. Th e forward linkages include: cassava fl our cost only 70% of wheat fl our, and it can also be used as substitute in bread, cookies and starch industry. Th e backward linkages include the fact that much of the processing equipment can be manufactured locally and creates demand for high value skills in quality control and production management.
What is important with agricultural commodities is devising precise targeting of interventions against constraints. Th e table below shows the possible entry points.
Targeting of interventions
Production Marketing Capacity and capability Financing
Small and scattered farm units
Transportation Human and institutional Inappropriate funding mechanisms
Risk management Storage packaging and branding
Organisational support and development
Reluctance of commercial banks to fi nance agriculture Quality Grades and standards Technical and managerial
expertise
Lack of favourable policy for agricultural fi nancing
Consistency in supply Advocacy skills Lack of venture capital
In conclusion, the commodity sector is interlinked across sectors, industries and Ministries. It is important for countries to achieve policy coherence and coordination so as to obtain maximum leverage from commodities. In addition it is important to foster national, regional and international cooperation for optimal results.
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