Agricultural Markets Globalization, and Agricultural

Development.

Alexander SarrisJanuary 2015

Agricultural Markets and Agricultural Trade (AS)

• The basic agricultural trade partial equilibrium model• Measures of agricultural policy interventions• Evolution of support in agriculture• World trends and prospects for agricultural trade• Differential performance of developed and developing countries in international

markets• Current pattern of protection in agricultural products• Vulnerability of commodity dependent developing countries to trade shocks• Developments in DC and LDC trade related agricultural indicators• Making sense of the declining terms of trade for agricultural commodities• Structural changes in global agricultural markets• Evolution of agricultural trade negotiations• The World Bank “Distortions” study• Speculation and price transmission• Agricultural risk management

2

3

Why is a section on Agriculture trade part of this course?

• Agriculture is one of the main “sticking points” in the current WTO trade negotiations (the “Doha Round”), and it was important to the formation of the WTO.

• Agriculture is important for the EU and all other countries• Policies, particularly those in developed countries,

strongly influence agricultural sectors in those countries, and (via international markets) also influence agriculture in developing countries.

4

Background of Uruguay Round Agriculture Agreement (URAA)

• Uruguay Round Agreement on Agriculture sought to bring Ag into GATT. (History, ag exemption, examples of accidental developments, e.g. Europeans had low import restrictions on soybeans when soybeans were not an important crop in the 60s and 70s. Imports increased drastically and Europe sought to impose restrictions, which were resisted by the US)

• Trade restrictions cause welfare losses; countries gain by reducing their trade restrictions even if partners maintain their restrictions. Ag policies inflict costs on domestic economies and also on trade partners.

• A given level of producer support is more costly to achieve with tariff than with producer subsidy. Production and consumption distortions.

• Trade and domestic policies are linked; for example, maintaining a producer price higher than world price requires import barriers or export subsidies, or for govt to hold large stocks. (History of EU's lakes and mountains.)

5

Background, continued

• Trade restrictions may be a cheap way -- in terms of government revenue, not of social welfare -- to provide producer protection. Reduction of trade restrictions increases the fiscal costs of protecting producers. Therefore, a reduction of trade restrictions may put downward pressure on domestic (non-trade) policies.

• If an importing country imposes a production subsidy, without a trade restriction, the government has to either buy surplus or make “deficiency payments” – the subsidy.

• Payments under farm programs are capitalized into land value. This means that the farmer who is receiving current government payments may already have "paid" for them in paying a higher price for land.

6

Suppose that the world price is pw. Under free trade, country shown in this diagram is an importer. Government wants to support producers by increasing producer price to p* > pw. (i) Show that tariff and import quota (where quota licenses are auctioned) are “equivalent”. (ii) Show that under either policy, deadweight loss is b+d. (iii) Show that if govt switches from tariff to a producer subsidy, producer price remains at p* and consumer price falls to pw. Consumers gain a+b+c+d and taxpayers lose a+b+c. The net gain is d, the amount by which deadweight loss falls. Producer subsidy is more efficient than trade policy (tariff or quota) but producer subsidy requires higher govt expenditures

pw

P* ab c d

Basic agricultural trade model

• Gains from trade• Comparative advantage• Small country case effects of tariffs and quotas • Large country case effects of tariffs and quotas• Effects of producer subsidies and export

subsidies• Effects of tariffs in general equilibrium• Trade policy

Measures of agricultural policy interventions

• Nominal protection coefficient (NPC)• NPC=• Where Pd is domestic price, Pb is border

price• Nominal rate of protection is NPC-1• Effective protection coefficient• NEPC=

• Effective protection rate=NEPC-1

€

P d

P b

€

VA d

VA b=

Pid − aij

j

∑ Pjd

Pib − aij

j

∑ Pjb

Measures of agricultural policy interventions (2)

• Distortion =gap between marginal social cost to seller and the marginal social cost to buyer. In absence of externalities this is the gap between the price paid and the price received irrespective of whether the level of these prices is affected by distortions

• Total effect of distortions will depend not only on the size of direct agricultural policy measures but also on policy measure altering incentives in non-agricultural sectors. It is relative prices and hence relative rates of assistance that affect producer incentives

Direct agricultural distortions

• In small open perfectly competitive economy with many firms producing a homogeneous farm product, in the absence of externalities, processing and marketing margins, exchange rate distortions, and domestic and international trading costs, maximum welfare is achieved when domestic farm product price and consumer price is equal to E*P where E is the domestic currency value of foreign exchange and P is the foreign currency price of the product in the international market.

Trade measures at national border

Trade measures at national border (2)

Exchange rate distortions (overvaluation or undervaluation)

• Figure 1 supply and demand of foreign exchange. If exchange rate to exporters is E0, while for importers is Em, then the price of importables is raised by Em-E=em*E, while the price of exportables is lowered by E-E0 =ex*E. If Em is much different than E0 then a black market in foreign exchange may emerge. So exchange rate to use in the calculations of the NRA is Em if the product is importable or E0 if the product is exportable.

• If taxes or subsidies are applied to intermediate products then they must be considered in computing an effective rate of assistance

Almost all basic food commodities have seen their international prices rise significantly over the past few

years(Commodity price indices: 1998-2000=100)

0

50

100

150

200

250

300

350

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

MEAT DAIRY CEREALS OILS SUGAR

But prices for tropical export crops have

lagged behind

Prices for selected cereals and tropical export products

0

50

100

150

200

250

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350

400

450

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Wheat Rice Cocoa Coffee

Real prices of bulk food commodities have tended to decrease but since mid 1980s tendency seems to have

stopped

Real Prices: Bulk Commodities (1957-2008)

0

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1200

1400

1957

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

Wheat MaizeRice Soybeans

Real prices of vegetable oils have tended to decrease but since mid 1980s tendency seems to have stopped

Real Prices: Vegetable Oils (1957-2008)

0

500

1000

1500

2000

2500

1957

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

Palm Oil Rapeseed OilSoybean Oil

Real prices of livestock commodities have tended to decrease albeit at slowing pace since mid 1980s

Real Prices: Livestock Commodities (1957-2008)

0

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100

150

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250

300

1957

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

Butter BeefPigmeat Poultry

Real prices of sugar and beverages have tended to decrease but since mid 1980s tendency seems to have

stopped

Real Prices: Sugar & Beverages (1957-2008)

0

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1200

1400

1600

1800

1957

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

Coffee TeaSugar Cocoa

Global food commodity price volatility has been unusually high between 2006-2011.

World food commodity price index 1990-2011 (FAO)

Recent year wheat prices

Wheat futures prices

Recent year maize prices

Maize future prices

Rice prices

Oilseed prices

Soybean futures prices

Sugar prices

Dairy product prices

Causes of high commodity prices

• Strong growth in demand– sustained historically high economic growth world wide– bio-fuel feedstock demand,

• particularly for maize and vegetable oils– stronger currencies/ weak USD

• Constrained supply– high energy related input costs... crude oil up since 2000– repeated yield shortfalls in key areas – climate change?

• Low commodity stocks– increased speculation/ demand to rebuild

• Increased activity on commodity exchange– higher volatility

• Policies and policy changes– tariff liberalization by importers– decoupling of subsidies, reduction in export subsidies, lower public

stocks– increased use of export taxes/ bans– biofuel subsidies/tariffs/tax credits etc, changing mandates etc

Impact of high prices and global volatility on developing countries • Increase in world agricultural commodity prices

may “double squeeze” low-income importers of food and oil, but may benefit agricultural exporters

• How do recent price developments affect poor agriculture based economies in the aggregate and at the household levels?

• Developing countries have structural features quite different from those of developed economies. How do these affect the impact of world price developments?

• What is the role of trade and other structural policies in adjusting to global price developments?

• Is domestic risk likely to increase in developing countries?

Net importers of petroleum products and major grains as a percent of domestic apparent consumption - ranked by prevalence of

undernourishment Countries

Petroleum % imported

Major grains % imported

% under-nourishment

Eritrea 100 88 75 Burundi 100 12 66 Comoros 100 80 60 Tajikistan 99 43 56 Sierra Leone 100 53 51 Liberia 100 62 50 Zimbabwe 100 2 47 Ethiopia 100 22 46 Haiti 100 72 46 Zambia 100 4 46 Central African Republic 100 25 44 Mozambique 100 20 44 Tanzania 100 14 44 Guinea-Bissau 100 55 39 Madagascar 100 14 38 Malawi 100 7 35 Cambodia 100 5 33 Korea, DPR 98 45 33 Rwanda 100 29 33 Botswana 100 76 32 Niger 100 82 32 Kenya 100 20 31

Estimated import bills of total food and major food commodities (US$ million)

World Developing LDC LIFDC

2006 2007 2006 2007 2006 2007 2006 2007

Total Food 630 135 812 743 190 975 253 626 13 822 17 699 88 577 119 207

Cereals 186 794 268 300 74 615 100 441 6 101 8 031 31 363 41 709

Vegetable Oils 70 822 114 077 34 831 55 658 1 948 3 188 22 919 38 330

Dairy 45 572 86 393 13 593 25 691 824 1 516 5 079 9 586

Meat 78 704 89 712 17 064 20 119 872 1 079 6 295 8 241

Sugar 33 024 22 993 13 892 11 904 1 755 1 320 7 598 4 782

Distribution of Low-Income and Lower-Middle-Income Countries

according to their Current Account Position and the Estimated Increase in Cereals Import Bill

Current account balance (% of GDP)

Averages (2004-2007)

Very Large deficit

>10%

Large deficit

5-10%

Moderate Deficit

0-5%

Surplus Total Number of Countries

Estimated Change in Cereals Import Bill(% of GDP): Number of Countries

<1% 5 6 20 22 53

1-2% 4 8 3 4 19

2-3% 2 1 2 2 7

>3% 2 2 3 0 7

Total Countries 13 17 28 28 86

Average Change in the Cereals Import Bill (% of GDP):

1.5% 2.2% 1.1% 0.4% 1.1%

Summary of changes in domestic prices of main basic food commodities

observed in 45 developing countries

Proportion of 45 reporting countries indicating increases in consumer prices of 0-75%

Proportion of 45 countries indicating decreases in

consumer prices

Commodities

01/ 2006 to 01/ 2007

01/ 2007 to 01/ 2008

01/ 2008 to 03/ 2008

01/ 2006 to 01/ 2007

01/ 2007 to 01/ 2008

01/ 2008 to 03/ 2008

Rice 67 72 65 27 15 29 Wheat 57 69 57 36 18 40 Maize 60 71 52 26 16 37 Root crops 43 65 52 39 28 42

Vegetable oils 72 75 63 23 2 24

Pulses 67 59 70 20 32 23 Milk 70 90 49 26 3 46 Meat 69 76 49 29 17 46 Eggs 58 70 49 33 25 43 Fish 62 62 43 26 28 51 Source: Survey of countries where FAO has a representative

Proportion of Net Staple Food Seller Households (percent)

Share of Households b

Urban Rural All

Bangladesh, 2000 3.3 18.9 15.7

Pakistan 2001 2.8 27.5 20.3

Vietnam, 1998 7.1 50.6 40.1

Guatemala, 2000 3.5 15.2 10.1

Ghana, 1998 13.8 43.5 32.6

Malawi, 2004 7.8 12.4 11.8

Madagascar, 2001 14.4 59.2 50.8

Ethiopia, 2000 c 6.3 27.3 23.1

Zambia, 1998 c 2.8 29.6 19.1

Cambodia, 1999 c 15.1 43.8 39.6

Bolivia, 2002 c 1.2 24.6 10.0

Peru, 2003 c 2.9 15.5 6.7

Max 15.1 59.2 50.8

Min. 1.2 12.4 6.7

Unweighted average 6.8 30.7 23.3

Structural features that are important in an impact and

policy analysis context– backward technologies hence low productivity– poor infrastructural endowments – imperfect price transmission – wide marketing margins– inadequate production of tradables and low

substitutability between tradables and domestically produced goods

– Need framework to capture these features in an analysis

Global food demand: growth is slowing and shifting composition

• Population growth slowing• Income growth helps offset slower

population growth• Products more sensitive to income

growth growing more rapidly • Consumer preferences also shifting• Greatest demand growth in developing

countries, particularly Asia.

Slow down population growth

0.0

0.5

1.0

1.5

2.0

2.5

Afr

ica

As

ia a

nd

Pa

cif

ic

Eu

rop

e

La

tin

Am

eri

ca

an

dC

ara

bb

ea

n

No

rth

Am

eri

ca

Oc

ea

nia

De

ve

lop

ed

Wo

rld

1998 - 2007

2008 - 2017

Lower GDP Growthexpected to grow fast in Asia

0

2

4

6

8

10

12In

do

ne

sia

Ma

lay

sia

Ph

ilip

pin

es

Th

aila

nd

Vie

tna

m

Ind

ia

Ch

ina

Bra

zil

Au

str

alia

Ko

rea

Ja

pa

n

US

A

EU

15

Ru

ss

ia

2005-2007

2008-2011

2008-2017

World demand growth slows: income sensitive products grow most

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

Rice

Whea

t

Coars

e Gra

ins

Bovin

e mea

t

Pigmea

t

Poultr

y

Ovin

e mea

t

Veget

able

oils

Ave

rage

ann

ual g

row

th

1998-20072008-2017

Growth in food demand in 2008-17 much higher in developing countries

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

Whea

tRice

Coarse Grains

Bovine meat

Ovine meat

Pigmeat

Poultry

CheeseButte

r

Whole

milk powder

Skim M

ilk Powder

Oilseeds

Vegetable oils

Oilmeal

Vegetable oils

Ann

ual a

vera

ge g

row

th

DevelopedDeveloping

Supply: Moderate rate of growth

• Real prices firmness continue over medium term – Moderate level of technical progress (crop yield growth

continues, livestock revolution)– Further trade liberalization unlikely to reverse the price

trend

• Competition in export-supply is increasing– Low cost, low policy support countries increase supply

most– South America, especially Brazil has great potential

• Uncertain: energy prices, demand for biofuel

In the next ten years trade will continue to grow faster than

production…

0.0%

1.0%

2.0%

3.0%

Wheat Rice CoarseGrains

Meat, Total Oilseeds

Ann

ual a

vera

ge g

row

th %

ProductionTrade

Nominal commodity prices have risen to record highs and will likely stay high

0

200

400

600

800

1000

1200

Wheat

Rice

Maize

Oilseed

Veg Oil

Oilmeal

Real international prices:expected to decline (2005-07 average=1)

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.61995

1998

2001

2004

2007

2010

2013

2016

Wheat

Rice

Sugar

Beef

Veg. Oil

Dairy

Cereal commodity prices in long term perspective (current prices)

Cereal commodity prices in long term perspective (real prices)

Volatility matters for developing countries because of increasing exposure.

Medium term OECD-FAO projections of agricultural production and trade LDC Countries (Base 1999-2001 =1)

Medium term OECD-FAO projections of agricultural production and trade for other developing countries (non-

LDC, non-BRIC) (Base 1999-2001 =1)

Net grain imports other than rice have increased in Asia and Pacific

-20

-10

0

10

20

30

40

5019

86

1989

1992

1995

1998

2001

2004

2007

2010

2013

2016

mil

lio

n M

T

Wheat

Rice

Coarse Grains

Net imports of basic foods to grow over 3.6 % annually in LDCs

-20

0

20

40

60

80

100

120

1995 1998 2001 2004 2007 2010 2013 2016$US billion (at 2005 prices)

Dairy products

Meat

Oilseeds

vegetable Oil

Coarse Grains

Rice

Wheat

Total Net Imports

Net imports by commodity

In summary, over the next ten years….• Global demand growth will slow. Per capita

consumption continues to increase, with more growth in higher valued products.

• Supply potential continues to meet demand growth, at prices that decline in real terms

• Excess supply growth is coming more from low cost suppliers.

• Trade continues to grow, with developing country and least developed countries balance of trade in basic foods deteriorating.

• Asian economies becoming larger net importers of food products.

• Increased potential for inter-Asia and Pacific Trade

The income terms of trade for agriculture have evolved differently for developing and developed

countries.

Income terms of trade for agriculture

0

1

2

3

4

5

6

7

8

9

1961 1966 1971 1976 1981 1986 1991 1996 2001

$US

Bil

- LD

Cs

0

20

40

60

80

100

120

140

160

180

200

$US

Bil

Oth

er d

evel

opin

g an

d In

dust

rializ

ed

LDCs

Other developing countries

Industrialized countries

Productivity growth has been different in developed and developing countries: Cereals

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

1985 1990 1995 2000 2005

Dev'ed

LDCs

ODCs

Cereals - weighted average yields: 1985 - 2004

Productivity growth has been different in developed and developing countries: Oilcrops

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

1985 1990 1995 2000 2005

Dev'ed

LDCs

ODCs

Oilcrops - weighted average yields: 1985 - 2004

Productivity growth has been different in developed and developing countries: Fiber crops

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1985 1990 1995 2000 2005

Dev'ed

LDCs

ODCs

Fiber crops - weighted average yields: 1985 - 2004

Productivity growth has been different in developed and developing countries: Fruits

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

12.0

13.0

14.0

1985 1990 1995 2000 2005

Dev'ed

LDCs

ODCs

Fruits - weighted average yields: 1985 - 2004

Productivity growth has been different in developed and developing countries: Vegetables

5.0

10.0

15.0

20.0

25.0

1985 1990 1995 2000 2005

Dev'ed

LDCs

ODCs

Vegetables - weighted average yields: 1985 -2004 2004

Pattern of trade in all agricultural products.Export shares to various destinations (2001)

USA BRAZIL EU25 CHI-IND ROECD LDCs ODCs ROW TOTALTotal exports

(million $)USA 0.0 0.3 13.8 8.0 45.0 1.7 29.2 2.1 100.0 29982.8BRAZIL 8.5 0.0 49.1 11.1 11.4 0.3 16.1 3.6 100.0 7042.1EU25 3.1 0.2 76.7 1.0 4.6 1.2 8.9 4.2 100.0 44867.5CHI-IND 11.5 0.3 19.9 2.0 25.6 3.8 32.3 4.5 100.0 9894.7ROECD 29.4 0.2 11.5 11.3 17.0 2.5 27.3 0.9 100.0 24509.5LDCs 6.5 0.7 50.5 7.9 5.8 6.6 18.5 3.5 100.0 7954.8ODCs 15.8 4.8 30.4 7.3 11.5 1.4 25.4 3.5 100.0 37189.1ROW 5.0 0.4 42.7 2.7 5.5 1.7 17.5 24.5 100.0 6933.7

Pattern of trade in all agricultural products.Import shares from various sources (2001)

USA BRAZIL EU25 CHI-IND ROECD LDCs ODCs ROW

USA 0.0 3.7 6.4 23.6 47.8 15.7 24.4 9.6BRAZIL 3.5 0.0 5.3 7.8 2.8 0.6 3.2 3.8EU25 8.3 4.5 52.9 4.6 7.3 17.1 11.1 27.8CHI-IND 6.7 1.4 3.0 1.9 9.0 11.6 8.9 6.7ROECD 42.2 2.0 4.3 27.3 14.8 18.8 18.6 3.2LDCs 3.0 2.7 6.2 6.2 1.6 16.2 4.1 4.1ODCs 34.3 84.3 17.4 26.8 15.2 16.4 26.3 19.6ROW 2.0 1.3 4.6 1.8 1.3 3.6 3.4 25.4TOTAL 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Total imports (million $) 17080.6 2097.1 65074.0 10121.0 28182.0 3233.2 35880.8 6705.5

Structure of agricultural exports of LDCs by product and destinations (2001)

USA BRAZIL EU25CHI-IND

ROECD LDCs ODCs ROW TOTALValue of

exports ($ million)

Share of total

exports

Cereals and rice 5.6 0.2 15.6 1.2 5.3 50.2 15.6 6.2 100.0 218.8 1.8Oilseeds 3.7 0.0 24.7 0.5 24.5 2.9 41.8 1.9 100.0 284.9 2.4Vegetable oils 5.8 0.1 53.4 0.2 4.1 32.3 3.8 0.2 100.0 163.9 1.4Fruits and vegetables 1.1 0.0 56.4 28.2 2.3 3.4 8.1 0.5 100.0 1408.3 11.6Sugar 7.5 0.1 70.8 1.2 1.2 15.5 3.5 0.1 100.0 474.5 3.9Plant based fibers 0.1 3.3 28.1 14.5 3.1 7.8 40.6 2.5 100.0 1086.9 9.0Animals and meat 5.3 0.1 30.7 6.1 4.2 17.2 34.9 1.5 100.0 403.5 3.3Dairy products 2.8 0.3 26.2 0.8 3.1 50.7 15.6 0.6 100.0 35.9 0.3Beverages and tobacco 9.6 0.3 24.3 1.3 7.6 43.6 11.6 1.8 100.0 216.3 1.8Other primary products 9.8 0.4 57.8 0.9 6.4 5.9 14.1 4.6 100.0 4721.0 39.0Other food products 6.7 0.1 63.0 1.3 9.1 9.2 8.9 1.8 100.0 3099.3 25.6Total 6.6 0.5 53.6 5.6 6.4 9.3 15.2 2.8 100.0 12113.3 100.0

Protection in agricultural products is high in both developed and developing countries (ad valorem tariff equivalent of country in column for

agricultural products imported from country in row in 2001)

USA BRAZIL EU25 CHI-IND ROECD LDCs ODCs ROW

USA 0.0 5.9 5.1 62.2 36.3 7.3 8.9 11.1BRAZIL 5.6 0.0 3.5 95.8 99.3 8.5 9.8 29.7EU25 1.8 7.3 0.9 22.1 16.3 9.5 12.8 16.3CHI-IND 1.1 8.7 12.7 20.0 86.8 11.8 6.8 7.9ROECD 0.2 5.5 3.2 20.3 32.1 8.2 5.5 11.2LDCs 2.5 10.1 3.0 26.7 32.3 8.7 6.3 5.9ODCs 1.4 1.5 12.3 53.4 20.1 10.3 9.1 16.7ROW 6.3 10.3 2.9 14.6 10.0 3.0 16.3 4.5

Considerable binding overhang in agricultural tariffs exists for both developed and

developing countries (2000-2002)

Countries Value of imports

Weighted average Binding overhang

Lines bound at

zero Million

US Dollars

Applied %

Bound %

% of bound

rate

%

Industrial countries 143,669 14.1 24.9 43.4 29.0 European Union 49,381 17.4 21.3 18.3 25.2 Japan 31,556 20.9 51.6 59.5 29.2 United States 41,304 5 6.6 24.2 28.5 All developing countries 87,896 24.4 60 59.3 1.2 High income: non OECD 13,996 61.8 79.6 22.4 1.1 Upper middle income 23,209 23.1 54.1 57.3 2.8 Lower middle income 36,091 14.4 41.8 65.6 1.2 Low income 14,600 15.5 95.6 83.8 0.3 World 231,564 18 38.2 52.9 3.6

OECD support falling slowly in real terms

150

200

250

300

350

400

$US

billi

on

Source: OECD, FAO calculation

Real Producer Support Estimate

Nominal PSE

SPS notifications to WTO reflect increasing standards affecting trade

0

200

400

600

800

1000

1200

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Source: WTO

Annual notifications to WTO SPS Committee

What determines long term commodity prices?

• Cost of production of marginal producer• Marginal producers still in developing countries using

labour intensive technology with labour paid subsistence wages

• Supply of agricultural commodities highly elastic at low wages

• Demand for agricultural commodities quite inelastic• Opposite case for non-agriculture• Implication: Differential productivity gains can alter terms

of trade between agriculture and non-agriculture

How do productivity gains affect agriculture and non-agriculture?

• Productivity affects agriculture differently than non-agriculture

P

Q

p

c

p’

d

Q

P

S

S’

a

b

Panel A. Agricultural Commodity Sector Panel B. Non-agricultural sector

p

p’

a

S S’

b

D

D

Declining terms of trade for agricultural commodities due to faster rates of total factor productivity growth for agricultural

than non-agricultural products• Rate of growth of TFP has been faster in agriculture than in non-

agriculture• Between 1967-92 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 to 1.99, while in manufacturing it was between 0.22 to 0.93 percent.

• The rate of growth of TFP in agriculture seems to be higher than that of manufacturing.

• “Globalization” of agricultural research, has contributed to faster TFP growth in agriculture,

• Incidence of productivity advances largely on consumers (through lower prices) and little to producers.

Annual TFP growth in agriculture does not appear to have slowed down for the world.

Hence most likely reason for real price leveling must be lower inputs and faster demand growth

1970–1979 1980–1989 1990–1999 2000–2006

Developing countries

0.55 1.67 2.31 2.08

Developed countries

1.62 1.48 2.25 1.76

USSR & Eastern Europe

-0.46 0.27 1.59 2.10

World 0.60 0.94 1.60 1.55

Source: Fuglie, 2008

Agricultural productivity developments for the worldSource: Fuglie (2008)

Average annual growth rate by period (%)

Output index Input index TFP index Output per worker Output per hectare Grain yield (t/ha)

1970–1989 2.24 1.36 0.87 1.25 1.96 2.29 1990–2006 2.06 0.50 1.56 1.51 1.95 1.35

Issues concerning secular declines in prices

• Agricultural trade liberalization by developed countries may not increase export earnings by LDCs by much. Most benefits to more developed among developing countries

• Attempts to improve market balance through producer-only agreements on production and export control difficult to implement

• Commodity demand promotion can work if there is commitment and funds

• Diversification a possible solution

Constraints to diversification

• Horizontal diversification the only long-run solution to market imbalance?

• Product differentiation • Vertical diversification into processed forms to

capture value-added – trade in processed forms growing fastest, but developing country participation limited

• Constraints of tariff escalation, market barriers to entry and supply conditions

Agriculture in LDCs has remained largely

underdeveloped, despite its importance • Agricultural is the backbone of the LDCs• Accounts for between 30-60% of GDP and employs as

much as 70% of labour force• Yet, after growing at 2.8% in the 1990s, virtually no

increase in output or even a slight decline in 2000-05. More than half of the yield growth has been due to area expansion.

• Per caput staple food production has stagnated• As a result, and not being able to import foods as

required, between 1995-97 and 2002-04 the proportion of undernourished increased from 34% to 41%, and absolute number undernourished increased from 116 to 169 million.

• A strong and vibrant food and agricultural system should form a primary pillar in the strategy of overall economic growth and development.

Can agricultural growth lead to growth and poverty reduction in LDCs?

• Most of the LDCs have large rural and agriculture based sectors. Cannot have fast overall growth without growth in agriculture

• Most late developing countries faster growth episodes has been spurred by increased agricultural growth (recent successes China, India, Indonesia, Vietnam).

• Agricultural growth has been shown to be more conducive to poverty reduction than non-agricultural growth

• LDCs have the resource potential (land, labour) to expand agriculture. In about half of the LDCs the land in agricultural use is less than 50% of the potentially arable land.

LDCs continue to be commodity dependent

1982/84 1992/94 2002/04

LDC avg share of agriculture in total exports of goods and services

41.6 27.2 22.5

LDC avg share of 4 most important commodities in agricultural exports

72.8 77.4 76.2

LDC avg share of 4 most important commodities in merchandise exports

37.4 31.9 23.8

LDC avg share of 4 most important commodities in merchandise and

service exports33.7 23.6 19.1

Percent

Despite the commodity dependence of LDCs, the export performance of

agriculture has been weak

Agricultural exportsrelative to agricult. GDP 2002-4

Percent

World 37.6All developing 20.8LDCs 13.8

Main solution consistent with poverty alleviation: Agricultural commodity labour

productivity must be improved in LDCs

• Increase of wages through general development• Technological improvement at the farm level• Increase farm size?• Increase farmer assets (education, own and

borrowed capital)• Improve non-farm assets (infrastructure)• Better producer organizations

Producer support estimates