Commodity Prices, Government Policies
and Competition
Steve McCorriston
University of Exeter, UK
WTO/CUTS Symposium on
“Trade in Primary Product Markets and Competition Policy”
WTO, Geneva, 22nd September, 2011
Structure of the Presentation
• Recent events (quickly!)
• Characteristics of world commodity
markets and commodity price behaviour
• Government policies
• Overview of sources of competition
concerns
• Why does competition matter?
• Issues that still need to be addressed
Three broad observations
• Competition issues in commodity and food
markets, and how they impact on the behaviour
of prices, has received comparatively little (but
not no) attention
• Need to make the distinction between
commodity and food markets-this is important in
identifying where competition issues may arise
• Why do departures from competition matter in
the context of commodity and food markets?
Brief Overview of Recent Events
• Recent commodity price spikes
• ….coming against the background of relatively
previously low prices
• ‘Spike’ less significant than the 1972-74
commodity crisis in real terms
• Widespread commentary on the potential
causes of the recent events
Figure 1: Monthly Food Price Index, 1990-2010
Source: FAO
Figure 2: Real (Yellow) and Nominal (Black) Food Price Index: 1961-2008
Source: IMF
What do we know about the behaviour of
commodity prices?
• Long term: Prebisch-Singer hypothesis.
Taken over the long-run, there will be a secular
tendency for the relative prices of primary
commodity prices to decline
• Differences in income elasticities and market
structure
• Evidence? Mixed with the challenge of allowing
for structural breaks.
Volatility
• Prices change (a lot) but the issue here is to do with the
amplitude and frequency of price changes that causes
problems for producers and consumers
• Why? Low demand and supply elasticities
• Commodity prices may be more volatile than other prices
but there is no evidence that over the medium to longrun that commodity price volatility has increased.
Commodity price ‘spikes’
• Related to but distinct from volatility
• Underlying characteristic of many commodities is that
they are storable-there is an inter-temporal aspect to
commodity markets.
• The demand curve is non-linear
• This changes the way in which we think about the impact
of shocks depending where we are on the demand curve
i.e. if stocks are high or low
P
Commercial
Demand
ΔP
Commercial Demand plus Storage
P*
ΔP
Q
ΔQ
ΔQ
Figure 4: Ending Stocks of Calories from Major Grains
Source: Wright (2011)
Implications of this for understanding
commodity price behaviour
• Possibility of stock outs
• Commodity prices characterised by:
….asymmetry (long periods of low prices
punctuated with short lived high prices)
….changing variance
….positive skewness
….excess kurtosis
• Evidence: not overwhelming!
Government Policies
• Agriculture is one of the sectors where markets have and
are highly distorted by government policies.
• Wide range of policy interventions (domestic and trade)
that have impacted on the progress of trade negotiations
• Cuts the link between what happens domestically and
what happens on world markets
• But national policies also impose an externality on world
markets
…low (high) domestic prices raises (lowers) world market
prices
…as government policies seek domestic security, world
markets become more volatile
…the export supply/import supply schedules become more
inelastic.
World commodity and domestic food prices
• Behaviour can be very different
• The impact of world commodity market shocks
not fully transmitted to changes in domestic
market food prices
• Horizontal and vertical price transmission
• Domestic food prices can be more stable than
world market commodity prices
Figure 5: World and Domestic Prices for Selected Developing Countries
Source: IMF
Figure 6: World and UK Domestic Producer Prices and Retail Food Prices, 1998-2010.
Source: Davidson et al. (2011)
Competition Issues
• Largely ignored: concerns about competition in
commodity and food markets can arise locally,
nationally and internationally
• Can involve the state or private firms and can
impact within or across borders
State Manipulation of Market Structure
• International commodity agreements (?)
• State sanctioned cartels
• State trading enterprises…not per se associated
with state ownership but direct manipulation of
markets both domestic and with respect to trade
Competition concerns relating to private
firms
• Cartels, domestic and across borders
• Downstream markets
(i) Export supply chains (Porto et al. (2011) on
coffee, cotton and cocoa sectors)
(ii) vertically-related and imperfectly-competitive
domestic food markets…successive oligopoly
(iii) Market power concerns (buyer and selling)
within and between stages
Competition issues related to commodity markets
Competition and Regulation throughout Food Chain
Domestic
ag.
comms
Processing
Sector
Input
sector
World
Markets
Competition issues in the upstream input sector
Retailing
Sector
Consume
rs
Characteristics of Food Markets
• High levels of concentration at all stages
(processing and retailing)…successive oligopoly
• Tendency towards increasing concentration
• Consolidation and M&As both domestically and
nationally
• Between (not just within) stage issues also
matter
• But note, other inputs will matter too for the final
price of food products at the retail sector
Why does it matter?
•
•
•
•
Potential abuse of market power
Selling and buyer power may matter
Price transmission effects
Behaviour of prices for downstream
products differs from upstream commodity
markets
• Net welfare and distributional effects
associated with price shocks
Producer Surplus Change
Figure 6: Change in Exporters’ Producer Surplus from Trade
Liberalization
0.06
0.04
0.02
0.00
0
0.2
0.4
0.6
0.8
1
Market Power Index
Oligopsony
Oligopsony & Oligopoly
Successive Oligopoly with Oligopsony
Oligopoly
Successive Oligopsony with Oligopoly
Surplus, Consumer Surplus,
Marketers'
ProducerProfits
Figure 7: Change in Producer Surplus, Consumer Surplus
and Marketers' Profits from Trade Liberalization for the case
of Successive Oligopoly with Processor Oligopsony
0.12
0.10
0.08
0.06
0.04
0.02
0.00
0
0.2
Producer surplus
0.4
0.6
Market Power Index
Consumer surplus
0.8
Marketers' profits
1
Observations
• Competition will matter in a variety of contexts
• Commodities are only one part of the food chain and
may represent a small share of the final food product
• So, other issues matter too.
• But small deviations in competition can have large
effects particularly on the distribution of welfare following
shocks
Further issues
• How does competition impact on the volatility of
prices?
• How do departures from the competitive
benchmark impact on risk exposure for farmers
and consumers?
• How do departures from competition in domestic
markets impact on world markets?
• How do departures from competition and its
impact on volatility impact on investment?