Agricultural Markets
Globalization, and Agricultural
Development.
Alexander Sarris
January 2015
Agricultural Markets and Agricultural Trade (AS)
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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
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.
3
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.)
4
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.
5
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
P*
pw
a
b
c
d
6
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= P
• Where PPd is domestic price, Pb is border
price
• Nominal rate of protection is NPC-1
• Effective protection coefficient
• NEPC= VA P   a P

VA
P  a P
• Effective protection rate=NEPC-1
d
b
d
d
i
ij
d
j
ij
b
j
j
b
b
i
j

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 nonagricultural 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)
350
300
250
200
150
100
50
0
2008
2007
2006
OILS
2005
2004
2003
CEREALS
2002
2001
2000
1999
DAIRY
1998
1997
1996
1995
1994
1993
1992
1991
1990
MEAT
SUGAR
But prices for tropical export crops have
lagged behind
Prices for selected cereals and tropical export products
450
400
350
300
250
200
150
100
50
Wheat
Rice
Cocoa
Coffee
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
0
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)
1400
1200
Wheat
Rice
1000
Maize
Soybeans
800
600
400
200
2008
2005
2002
1999
1996
1993
1990
1987
1984
1981
1978
1975
1972
1969
1966
1963
1960
1957
0
Real prices of vegetable oils have tended to decrease
but since mid 1980s tendency seems to have stopped
Real Prices: Vegetable Oils (1957-2008)
2500
2000
1500
1000
500
2008
2005
2002
1999
1996
1993
Rapeseed Oil
1990
1987
1984
1978
1975
1972
1969
1966
1963
1960
1957
0
1981
Palm Oil
Soybean Oil
Real prices of livestock commodities have tended to
decrease albeit at slowing pace since mid 1980s
Real Prices: Livestock Commodities (1957-2008)
300
Butter
Pigmeat
250
Beef
Poultry
200
150
100
50
2008
2005
2002
1999
1996
1993
1990
1987
1984
1981
1978
1975
1972
1969
1966
1963
1960
1957
0
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)
1800
Coffee
Sugar
1600
Tea
Cocoa
1400
1200
1000
800
600
400
200
2008
2005
2002
1999
1996
1993
1990
1987
1984
1981
1978
1975
1972
1969
1966
1963
1960
1957
0
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
Eritrea
Burundi
Comoros
Tajikistan
Sierra Leone
Liberia
Zimbabwe
Ethiopia
Haiti
Zambia
Central African Republic
Mozambique
Tanzania
Guinea-Bissau
Madagascar
Malawi
Cambodia
Korea, DPR
Rwanda
Botswana
Niger
Kenya
Petroleum
% imported
100
100
100
99
100
100
100
100
100
100
100
100
100
100
100
100
100
98
100
100
100
100
Major grains
% imported
88
12
80
43
53
62
2
22
72
4
25
20
14
55
14
7
5
45
29
76
82
20
% undernourishment
75
66
60
56
51
50
47
46
46
46
44
44
44
39
38
35
33
33
33
32
32
31
Estimated import bills of total food and major food
commodities (US$ million)
World
Developing
2006
2007
2006
Total Food
630 135
812 743
190 975
Cereals
186 794
268 300
Vegetable Oils
70 822
Dairy
2007
LDC
LIFDC
2006
2007
2006
2007
253 626
13 822
17 699
88 577
119 207
74 615
100 441
6 101
8 031
31 363
41 709
114 077
34 831
55 658
1 948
3 188
22 919
38 330
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
Estimated Change
in Cereals Import
Bill(% of GDP):
Large deficit
5-10%
>10%
Moderate
Deficit
Surplus
0-5%
Total
Number of
Countries
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
Commodities
Proportion of 45 reporting
countries indicating increases
in consumer prices of 0-75%
Proportion of 45 countries
indicating decreases in
consumer prices
01/2006 01/2007 01/2008 01/2006 01/2007 01/2008
to
to
to
to
to
to
01/2007 01/2008 03/2008 01/2007 01/2008 03/2008
67
72
65
27
15
29
57
69
57
36
18
40
60
71
52
26
16
37
43
65
52
39
28
42
Rice
Wheat
Maize
Root crops
Vegetable
oils
72
75
63
23
Pulses
67
59
70
20
Milk
70
90
49
26
Meat
69
76
49
29
Eggs
58
70
49
33
Fish
62
62
43
26
Source: Survey of countries where FAO has a representative
2
32
3
17
25
28
24
23
46
46
43
51
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.
World
Oceania
Developed
North
America
Latin
America
and
Carabbean
Europe
Asia and
Pacific
Africa
Slow down population growth
2.5
2.0
1.5
1.0
1998 - 2007
2008 - 2017
0.5
0.0
0
Russia
EU15
USA
Japan
Korea
Australia
Brazil
China
India
Vietnam
Thailand
Philippines
Malaysia
Indonesia
Lower GDP Growth
expected to grow fast in Asia
12
10
8
6
4
2
2005-2007
2008-2011
2008-2017
World demand growth slows:
income sensitive products grow most
Average annual growth
7.0%
6.0%
5.0%
4.0%
1998-2007
2008-2017
3.0%
2.0%
1.0%
0.0%
-1.0%
ic
R
e
y
ls
at
at
at
ns
r
i
e
i
e
t
e
o
l
a
m
m
u
r
m
e
l
e
W
ig
G
b
Po
ne
n
a
P
i
i
e
t
v
v
e
rs
o
g
O
a
e
B
o
V
C
at
e
h
Growth in food demand in 2008-17 much
higher in developing countries
Annual average growth
4.0%
3.0%
2.0%
1.0%
0.0%
-1.0%
at ice ains eat eat eat ltry ese tter der der eds oils eal oils
e
h R r m m m ou he u ow ow lse le ilm le
W
e G vine vine Pig P C Bilk p lk P Oi etab O etab
s
i
ar Bo O
m
eg
eg
M
o
e
V
V
C
l
ho Skim
W
Developed
Developing
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…
Annual average growth %
3.0%
2.0%
Production
Trade
1.0%
0.0%
Wheat
Rice
Coarse
Grains
Meat, Total
Oilseeds
Nominal commodity prices have risen to
record highs and will likely stay high
1200
1000
800
600
400
200
19
85
19
89
19
93
19
97
20
01
20
05
20
09
20
13
20
17
0
Wheat
Rice
Maize
Oilseed
Veg Oil
Oilmeal
Real international prices:
expected to decline (2005-07 average=1)
1.6
1.4
Wheat
Rice
Sugar
Beef
Veg. Oil
Dairy
1.2
1.0
0.8
0.6
0.4
0.2
2016
2013
2010
2007
2004
2001
1998
1995
0.0
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 (nonLDC, non-BRIC) (Base 1999-2001 =1)
Net grain imports other than rice have increased in
Asia and Pacific
50
40
Wheat
Rice
Coarse Grains
20
10
0
-10
2016
2013
2010
2007
2004
2001
1998
1995
1992
1989
-20
1986
million MT
30
Net imports of basic foods to grow over 3.6 %
annually in LDCs
$US billion (at 2005 prices)
1 2 0
Net imports by commodity
1 0 0
Dairy products
Meat
Oilseeds
vegetable Oil
Coarse Grains
Rice
Wheat
Total Net Imports
8 0
6 0
4 0
2 0
0
1995
-20
1998
2001
2004
2007
2010
2013
2016
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.
9
200
8
180
LDCs
Industrialized countries
160
7
140
$US Bil - LDCs
6
120
5
100
4
80
3
60
Other developing countries
2
40
1
20
0
0
1961
1966
1971
1976
1981
1986
1991
1996
2001
$US Bil Other developing and Industrialized
Income terms of trade for agriculture
Productivity growth has been different in developed
and developing countries: Cereals
Cereals - weighted average yields: 1985 - 2004
4 .5
Dev'ed
4 .0
LDCs
ODCs
3 .5
3 .0
2 .5
2 .0
1.5
1.0
0 .5
0 .0
19 8 5
19 9 0
19 9 5
2000
2005
Productivity growth has been different in developed
and developing countries: Oilcrops
Oilcrops - weighted average yields: 1985 - 2004
0 .7
Dev'ed
LDCs
0 .6
ODCs
0 .5
0 .4
0 .3
0 .2
0 .1
0 .0
19 8 5
19 9 0
19 9 5
2000
2005
Productivity growth has been different in developed
and developing countries: Fiber crops
Fiber crops - weighted average yields: 1985 - 2004
1.0
Dev'ed
LDCs
0 .9
ODCs
0 .8
0 .7
0 .6
0 .5
0 .4
19 8 5
19 9 0
19 9 5
2000
2005
Productivity growth has been different in developed
and developing countries: Fruits
Fruits - weighted average yields: 1985 - 2004
14 .0
Dev'ed
13 .0
LDCs
ODCs
12 .0
11.0
10 .0
9 .0
8 .0
7.0
6 .0
5.0
4 .0
19 8 5
19 9 0
19 9 5
2000
2005
Productivity growth has been different in developed
and developing countries: Vegetables
Vegetables - weighted average yields: 1985 -2004 2004
2 5.0
Dev'ed
LDCs
ODCs
2 0 .0
15.0
10 .0
5.0
19 8 5
19 9 0
19 9 5
2000
2005
Pattern of trade in all agricultural products.
Export shares to various destinations (2001)
USA
USA
BRAZIL
EU25
CHI-IND
ROECD
LDCs
ODCs
ROW
0.0
8.5
3.1
11.5
29.4
6.5
15.8
5.0
BRAZIL
0.3
0.0
0.2
0.3
0.2
0.7
4.8
0.4
EU25
13.8
49.1
76.7
19.9
11.5
50.5
30.4
42.7
CHI-IND ROECD
8.0
11.1
1.0
2.0
11.3
7.9
7.3
2.7
45.0
11.4
4.6
25.6
17.0
5.8
11.5
5.5
LDCs
1.7
0.3
1.2
3.8
2.5
6.6
1.4
1.7
ODCs
29.2
16.1
8.9
32.3
27.3
18.5
25.4
17.5
ROW
2.1
3.6
4.2
4.5
0.9
3.5
3.5
24.5
TOTAL
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
Total exports
(million $)
29982.8
7042.1
44867.5
9894.7
24509.5
7954.8
37189.1
6933.7
Pattern of trade in all agricultural products.
Import shares from various sources (2001)
USA
USA
BRAZIL
EU25
CHI-IND
ROECD
LDCs
ODCs
ROW
TOTAL
Total imports
(million $)
BRAZIL
EU25
CHI-IND
ROECD
LDCs
ODCs
ROW
0.0
3.5
8.3
6.7
42.2
3.0
34.3
2.0
100.0
3.7
0.0
4.5
1.4
2.0
2.7
84.3
1.3
100.0
6.4
5.3
52.9
3.0
4.3
6.2
17.4
4.6
100.0
23.6
7.8
4.6
1.9
27.3
6.2
26.8
1.8
100.0
47.8
2.8
7.3
9.0
14.8
1.6
15.2
1.3
100.0
15.7
0.6
17.1
11.6
18.8
16.2
16.4
3.6
100.0
24.4
3.2
11.1
8.9
18.6
4.1
26.3
3.4
100.0
9.6
3.8
27.8
6.7
3.2
4.1
19.6
25.4
100.0
17080.6
2097.1
65074.0
10121.0
28182.0
3233.2
35880.8
6705.5
Structure of agricultural exports of LDCs by product
and destinations (2001)
USA
Cereals and rice
Oilseeds
Vegetable oils
Fruits and vegetables
Sugar
Plant based fibers
Animals and meat
Dairy products
Beverages and tobacco
Other primary products
Other food products
Total
5.6
3.7
5.8
1.1
7.5
0.1
5.3
2.8
9.6
9.8
6.7
6.6
BRAZIL EU25
0.2
0.0
0.1
0.0
0.1
3.3
0.1
0.3
0.3
0.4
0.1
0.5
15.6
24.7
53.4
56.4
70.8
28.1
30.7
26.2
24.3
57.8
63.0
53.6
CHIIND
1.2
0.5
0.2
28.2
1.2
14.5
6.1
0.8
1.3
0.9
1.3
5.6
ROECD
5.3
24.5
4.1
2.3
1.2
3.1
4.2
3.1
7.6
6.4
9.1
6.4
LDCs
50.2
2.9
32.3
3.4
15.5
7.8
17.2
50.7
43.6
5.9
9.2
9.3
ODCs
15.6
41.8
3.8
8.1
3.5
40.6
34.9
15.6
11.6
14.1
8.9
15.2
ROW
6.2
1.9
0.2
0.5
0.1
2.5
1.5
0.6
1.8
4.6
1.8
2.8
Value of Share of
TOTAL exports ($
total
million)
exports
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
218.8
284.9
163.9
1408.3
474.5
1086.9
403.5
35.9
216.3
4721.0
3099.3
12113.3
1.8
2.4
1.4
11.6
3.9
9.0
3.3
0.3
1.8
39.0
25.6
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
USA
BRAZIL
EU25
CHI-IND
ROECD
LDCs
ODCs
ROW
0.0
5.6
1.8
1.1
0.2
2.5
1.4
6.3
BRAZIL
5.9
0.0
7.3
8.7
5.5
10.1
1.5
10.3
EU25
5.1
3.5
0.9
12.7
3.2
3.0
12.3
2.9
CHI-IND
62.2
95.8
22.1
20.0
20.3
26.7
53.4
14.6
ROECD
36.3
99.3
16.3
86.8
32.1
32.3
20.1
10.0
LDCs
7.3
8.5
9.5
11.8
8.2
8.7
10.3
3.0
ODCs
8.9
9.8
12.8
6.8
5.5
6.3
9.1
16.3
ROW
11.1
29.7
16.3
7.9
11.2
5.9
16.7
4.5
Considerable binding overhang in agricultural
tariffs exists for both developed and
developing countries (2000-2002)
Countries
Industrial countries
European Union
Japan
United States
All developing countries
High income: non OECD
Upper middle income
Lower middle income
Low income
World
Value of
imports
Weighted average
Million Applied
US
%
Dollars
143,669
14.1
49,381
17.4
31,556
20.9
41,304
5
87,896
24.4
13,996
61.8
23,209
23.1
36,091
14.4
14,600
15.5
231,564
18
Binding Lines
overhang bound at
zero
Bound
% of
%
%
bound
rate
24.9
43.4
29.0
21.3
18.3
25.2
51.6
59.5
29.2
6.6
24.2
28.5
60
59.3
1.2
79.6
22.4
1.1
54.1
57.3
2.8
41.8
65.6
1.2
95.6
83.8
0.3
38.2
52.9
3.6
OECD support falling slowly in
real terms
400
$US billion
350
Real Producer Support Estimate
300
250
Nominal PSE
200
Source: OECD, FAO calculation
20
04
20
02
20
00
19
98
19
96
19
94
19
92
19
90
19
88
19
86
150
SPS notifications to WTO reflect increasing
standards affecting trade
1200
1000
Annual notifications to
WTO SPS Committee
800
600
400
200
0
1995
Source: WTO
1996
1997
1998
1999
2000
2001
2002
2003
2004
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
P
a
a
p
p’
d
S’
S
p
c
S
S’
p’
b
b
D
D
Q
Q
Panel A. Agricultural Commodity Sector
Panel B. Non-agricultural sector
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 nonagriculture
• 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
Developing
countries
Developed
countries
USSR &
Eastern Europe
World
Source: Fuglie, 2008
1970–1979
1980–1989
1990–1999
2000–2006
0.55
1.67
2.31
2.08
1.62
1.48
2.25
1.76
-0.46
0.27
1.59
2.10
0.60
0.94
1.60
1.55
Agricultural productivity developments for the world
Source: Fuglie (2008)
Average annual growth rate by period
(%)
1970–1989
1990–2006
Output index
Input index
TFP index
Output per worker
Output per hectare
2.24
2.06
1.36
0.50
0.87
1.56
1.25
1.51
1.96
1.95
Grain yield
(t/ha)
2.29
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 nonagricultural 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
Percent
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 exports
33.7
23.6
19.1
Despite the commodity dependence
of LDCs, the export performance of
agriculture has been weak
World
All developing
LDCs
Agricultural exports
relative to agricult. GDP 2002-4
Percent
37.6
20.8
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