Development strategies: commodities matter

Parvindar SinghCommon Fund for Commodities

Challenges

Agricultural productivity and efficient use of productive resources, equitable treatment of commodity producers, governance of mineral resources, as well as volatility of commodity prices all stand prominently amongst the challenges to economic growth and social stability.

Role of Commodities in Development

Commodities remain crucial to individual livelihoods, as well as national economic well-being and development of LLDCs thus also for food security.

The significance 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.

a link to the global market thus a source of foreign exchange and also economic volatility .

Commodity Price Boom – A Myth?

Commodity price boom in early 2000 created a false sense of security for commodity producing countries.

What are the facts?

Average world primary commodity price indices over three-year periods, 1979-81 and 2009-11

Commodities

Average price,

1979-81

Average price, 2009-11

Percentage change in av.

real price, 1979-81 to

2009-11

Actual prices

As per cent of 1979-81,

deflated*Nominal(in U.S. currency)

As per cent of

1979-81

Tropical beverages

Coffee – arabica, c/kg 339 449 132 57 -43

Coffee – robusta, c/kg 304.3 193 63 27 -73

Cocoa, c/kg 265.7 300 113 49 -51

Food

Sugar, c/kg 40.3 48 119 51 -49

Beef, c/kg 270.3 334.3 124 53 -47

Maize, $/mt 124 214.7 173 75 -25

Wheat, $/mt 169.3 254.7 150 65 -35

Rice, $/mt 394.3 529 134 58 -42

Sorghum, $/mt 121 195 161 70 -30

Bananas, $/mt 368 894.3 243 105 +5

Vegetable oilseeds and oil

Soya beans, $/mt 294 476 162 70 -30

Groundnut oil, $/mt 930.3 1,524.4 164 71 -29

Palm oil, $/mt 603 903 150 65 -35

Average world primary commodity price indices over three-year periods, 1979-81 and 2009-11

* Actual prices deflated by the Unit Value of Manufactured Goods. The prices are deflated between the two three-year periods by a factor of 0.4316136.Sources: Thomas Lines calculations, using data from the World Bank and UNCTAD.© Thomas Lines 2012

Agricultural raw materials

Cotton, c/kg 188 233 124 53 -47

Cattle hides, c/lb 53.59 66.263 124 53 -47

Rubber, c/kg 126.7 346.3 273 118 +18

Tropical logs, $/m3 225.7 445 197 85 -15

Minerals, ores and metals

Aluminium, $/mt 1,547 2,079.7 134 58 -42

Phosphate rock, $/mt 43.3 143.3 331 143 +43

Iron ore, c/dry mt unit 26.7 131.3 492 213 +113

Tin, c/kg 1,546 2,001 129 56 -44

Copper, $/mt 1,969.7 7,171 364 157 +57

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 -- -- --

Commodity dependence creates vulnerability to market

A commodity dependent LLDCs faces specific kind of vulnerability – vulnerability to markets (Exports-Imports)

Exposure: higher share of commodity sector means higher exposure to market risks ALSO IN THE CASE OF COMMODITY BOOM!

Capacity to cope: weak economies of LLDCs lack most coping mechanisms which richer countries may use to cope with exposure to volatile commodity markets

Volatility and competitiveness Producer 1,

90 ¢/lb Producer 2,

100 ¢/lb Producer 3 ,

110 ¢/lb

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ICO Other mild arabica (US cent/lb)

Price boom and competitivenessResult:

Producer 1: profitable at 90c/kg

Producer 2: marginal at 100c/kg

Producer 3: out of business at 110 c/kg

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Exposure to volatility: place and relative power in value chain

Source: CFC internal study

Key Commodity Issues

 Need to address vulnerability of LLDCs i.e. (a) exposure to volatility, and (b) mitigate the impact and enhance ability to cope. Known practical measures include Market Development Value-chain Development : Diversification and Value-addition Enhancing Productivity and Food Security Advocacy, Building Partnerships and Dissemination

Commodities in the Global Context

 Shortening of the supply chain and the diminishing role of the State

Restructuring of the global value-chains - increased scale of operations: dominance of transnational corporations

Concerns for health and food safety . Trade led quality standards have proliferated and more stringent sanitary and phyto-sanitary standards.

Shift from product to process certification- requirement for traceability

Commodities in the Global Context

Product differentiation as a key competitiveness strategy. A new geography of international trade in commodities.

Developing countries account for most of the growth in world commodity demand.

Regional economic integration groups have become important players in capturing economies of scale in production and marketing.

These create opportunities and pose challenges.

Creating Opportunities within

the Commodity Sectors

Address the supply constraints by creating opportunities for employment, production and diversification through Entrepreneurial, risk-heavy activities Upgrading production, labour skills Understanding and accessing new markets and new

market structures Diversification of the economy Upgrading cross sectoral policy development capacity Information and knowledge access

Intervention areas

Improving the competitiveness of commodities and enhancing the cost effectiveness of commodity production; for exports and enhance self sufficiency

New technologies, appropriate inputs, higher quality seeds and planting materials, reducing wastage

Expansion of processing of primary products - moving up the value addition chain;

Diversification: horizontal, vertical and geographical diversification of production - increase export earnings and/or reducing the dependency on a few commodities;

risk management; commodity finance.

Solutions

It is important that LLDCs continues to drive toward solutions that will support accelerated growth in investment and trade.

Create domestic conditions to enhance competitiveness – monetary and fiscal policies, physical and supporting infrastructure, capacity building. Encourage FDI and PPP

Single biggest priority over the next decade - acceleration of regional integration in order to create a larger market.

Deeper integration throughout the regions would enable greater levels of trade, providing a further boost to diversification and sustainable growth and would also create larger markets.

Regional Integration

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 effectively 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 different comparative advantages will benefit the region as a whole.

Commodity project

Production of commodity – the foundation but still only one element of value chain.

Value for the commodity producer generated by the product if it meets market demand, so always maintain contact with the end market. Raise awareness and support market information availability

The economic impact of a value chains driven project is generated by the market, rather than by donor financing itself. The magnitude of the impact goes far beyond donor financing

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Uniqueness of CFC

 it has an exclusive focus on commodities; its projects are:

mainly Aid for Trade; identified and implemented without formal governmental

involvement, are proposed, prioritised, formulated and supervised by an 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’;

it aims systematically to cover all commodities that are of importance to least developed countries (LDCs) and to poorer groups within other developing countries.

Solutions are case specific:the case of productivity

CFC investing in rice Food Security programmes in LAC and Africa. The introduction of innovative agronomic practices of irrigated rice cultivation (CFC contribution 974,980 USD) led to imme-diate increase of average rice yields by two tons/ha in the major rice growing areas of Brazil/ Venezuela.

This technology package is now introduced via private sector rice producer associations in all other major rice producing countries in Latin and Central America.

The 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

Sorghum production in West Africa is a subsistence farming activity involving small farmers who produce for their own domestic needs. They have no access to commercial markets

A public private project partnership of CFC (contribution USD 1,527,00) with international breweries (contribution USD 903,000) in West Africa led to the substitution of imported grains with locally produced sorghum

Cassava as industrial raw material

Photo: I. Moreno (ETH Zurich)

• Rootcrop with high yield in tropical conditions and high nutritional value

• Suffers from PPD – perishable within 24 hours• Traditional processing does not retain quality for industrial

use• Technology known for high quality primary processing• Challenge: to facilitate emergence of industrial value chains

using cassava

Mechanised processing of cassava

Village level == USD1,500 Peel Grate Wash and press Primary drying

Secondary processing == USD30,000 Transport to processing centre Flash drying Milling Packaging

High Quality Cassava FlourFORWARD linkages:

• Cost ~70% of wheat• Substitutes:

•10% in bread• 50% in cookies• 100% for in starch industry

BACKWARD linkages:

• much of processing equipment can be manufactured locally• creates demand for high value skills in quality control and production management

Industrialization of storage through warehouse receipts

Reliable storage essential in marketing seasonal crops Expensive – mostly private storage by trading

companies. Farmers sell at low price Farmers face tradeoff – onfarm storage and quality loss,

or sell to trader at harvest and lose because low price Opportunity: income from seasonal price fluctuations Challenge: facilitate creation of regulated public

warehousing as industry separate from trader companies

Common Fund for Commodities © 2002

Warehouse Receipt Cycle1. Grain producer brings grain to the certified warehouse

Grain

TC

PC

PCPC

PC

TC

5. Warehouse unloads grain to the mill.

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3 3. Producer sells grain to the mill

Grain

2. The Bank gives the loan to the Producer under the pledge of Grain.

2LoanLoan + interest

4. The mill repays the loan to the Bank

4

Grainproducer Grain Processor - mill

local bank

TC

What matters first: NOT the scale, but Precise targeting of interventions against constraints:

Production Marketing Capacity and capability

Financing

small and scattered farm units

transportation human and institutional inappropriate funding mechanisms

risk management storage packaging and branding

organizational support and development

reluctance of commercial banks to finance agriculture

quality grades and standards technical and managerial expertise

lack of favourable policy for agricultural financing

consistency of supply   advocacy skills lack of venture capital

access to correct inputs      

support services      

planning and information services

     

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Commodity Sector is interlinked

Linkages across sectors Linkages across industries Linkages across Ministries Need for policy coherence to obtain

maximum leverage from commodities National, regional and international

cooperation

…working together

Common Fund for Commodities 30

Common Fund for Commodities

Thank you