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«Conspiracy of silence: old and new directions on commodities DUNCAN GREEN1 Head of Research Oxfam GB There is, on this subject of commodities, a sort ...»

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Conference paper presented to

Strategic Dialogue on Commodities, Trade,

Poverty and Sustainable Development

Faculty of Law, Barcelona

13-15 June 2005

Organisers: ICTSD (International Centre for Trade and Sustainable Development)

and IIED (International Institute for Environment and Development)

Conspiracy of silence:

old and new directions on

commodities

DUNCAN GREEN1

Head of Research Oxfam GB There is, on this subject of commodities, a sort of conspiracy of silence. There are no simple solutions.

Many of the remedies introduced in the past - especially the major commodity agreements - have failed and we do not want to repeat these experiences. Yet there is no justification for the current indifference.2 1 Acknowledgements: The following people gave invaluable advice and comments on this paper.

Samuel Asfaha; Constantino Casas-Buenas; Ian Gillson; Maryanne Grieg-Gran; Bill Vorley. The final draft also benefits from the discussion on the draft paper at the Strategic Dialogue on Commodities, Trade, Poverty and Sustainable Development in Barcelona in Jule 2005, organized by ICTSD and IIED. The responsibility for the final content, however, rests with the author.

2 Speech by President Jacques Chirac to the 22nd summit of the heads of state of Africa and France, Paris, February 2003 Executive Summary

This paper explores five main approaches to the commodities issue:

1. ‘Mainstream’: includes both macro level issues such as WTO agriculture negotiations, compensation and aid schemes, as well as micro strategies such as diversification; market-based price risk management 2. ‘Sustainable commodities’: improved environmental management; fair trade;

organics; corporate social responsibility 3. ‘National coordination’: state marketing boards; producer organisations; increased attention to quality and product differentiation 4. ‘International coordination’: supply management; harmonisation of standards 5. ‘Market Power’: national and international competition law; increased monitoring and transparency The Problem: The ‘commodity problem’ is often described as a combination of declining terms of trade and price volatility. More recently, Market Power in commodity supply chains has been widely discussed, since it is held to be driving down prices, especially those received by farmers.

There is some evidence that this traditional commodities story may be changing, following a distinct breakpoint in the mid-1980s. Prior to that time, prices fluctuated widely while the overall trend declined steeply. Since then, however, both the fluctuations and the trend have flattened out considerably. Moreover, since 2001, prices have recovered sharply since the low points of the 1990s, driven partly by booming demand in China. However, price bubbles and booms are invariably accompanied by predictions that this time, things are different, and the good times will never end. History suggests circumspection is in order.

These problems face all countries that produce commodities, but are more serious for agricultural commodity-dependent developing countries (ACDDCs) that are more dependent on agricultural commodity exports and specialise in producing one or a few crops. Over time, more successful developing countries have diversified either into more dynamic sectors within commodities, or out of agriculture altogether. But in the Least Developed Countries (LDCs), dependence on these products for agricultural export earnings actually increased from 59% to 72% over the last 40 years. The ACDDC category can thus be seen as a residual group of those countries that have failed to find an exit from commodity dependence through conventional policy prescriptions.

Such dependence is exacerbated by the difficulties LDCs and others face in capturing a larger slice of the value added on their commodities. Price volatility also leads to uncertainty of foreign exchange earnings, which in turn undermines debt sustainability. Out of 42 Heavily Indebted Poor Countries (HIPCs), 37 rely on primary commodities for more than half of their merchandise export earnings.

In many ACDDCs the producers and workers directly affected by agricultural commodity exports are among the poorest of the population. Cocoa, for example, provides livelihoods for 14 million rural workers on big plantations and for a further

2.5 million small producers. Coffee provides income for 25 million producers.

Intensification in commodity production can lead to increased soil erosion and exhaustion, reduced biodiversity, increased pollution and can divert scarce water supplies. At a global level, there are concerns over the use of fossil fuels (e.g. in fertilisers) and the impact on climate change of intensive soil use.

Mainstream Approaches Within the mainstream paradigm, commodity dependence is seen as a problem, especially when countries are seen as uncompetitive. The solution generally lies in diversification, either horizontally into other products, preferably non-agricultural, or vertically into higher value-added links in the supply chain. Short-term improvements in productivity and quality are seen as ways to fund diversification.

The nature of the debate varies greatly between so-called ‘competing commodities’, produced in both developed and developing countries (e.g. cotton, sugar, rice) and non-competing, or tropical commodities such as coffee and cocoa.





For competing commodities, the crucible of discussion is the Doha round of WTO negotiations and to a lesser extent in regional trade negotiations. Here, issues such as northern subsidies, and market access for commodities in both North and South are seen as central to improving the lot of ACDDCs.

Within mainstream organizations such as the World Bank and the more economically liberal northern governments, the generally accepted view is that through a combination of subsidies and restrictions on market access, government intervention in the North has disrupted the natural order of economic development. Whereas developed countries should largely move out of agriculture into manufacturing and services, allowing poor countries to benefit from their comparative advantage in natural resources, the opposite has in fact occurred. Subsidies also come under attack for their environmental impact.

The issue of preference regimes and their erosion by multilateral liberalisation is becoming increasingly important. Within the WTO, northern negotiators are concerned that preference erosion is turning a group of ACP countries into blockers who stand to gain more from defending their preference margins by preventing further multilateral liberalization, than from a successful conclusion to the Doha round. Such fears are driving renewed interest in increasing financial flows to preference-receiving ACDDCs to compensate them for preference erosion.

Compared to the WTO debates on competing commodities, the mainstream policy discussion on tropical commodities is remarkably threadbare, mainly consisting of condemnations of past remedies such as supply management, exhortations to diversify, and largely unsuccessful attempts to harness market-based mechanisms in order to smooth price volatility.

Sustainable Commodities Environmental and Development NGOs and others trying to influence the social and environmental impact of commodity production have largely focussed on progressive versions of process and production methods (PPMs). Although schemes such as the fairtrade mark remain small (currently turning over $500mn per annum) in terms of world trade, they are growing fast. Fairtrade and other approaches channel a premium to poor producers and good environmental practices from socially conscious consumers, through a variety of labelling schemes.

In recent years, a number of corporate-driven schemes have followed suit, introducing social and environmental schemes that both hold out the possibility of influencing much greater volumes of production, and the threat of significantly watering down the standards involved. Moreover, concerns have been raised about the potential for both niche and mainstream labelling schemes on small scale producers, for example as large supermarkets move into organics and demand levels of scale and traceability that exclude small farmers.

National Coordination: the state and producer organizations The structural adjustment programmes (SAPs) of the 1980s and 90s dismembered many state-led coordination and support structures in developing countries, through the abolition of state marketing boards, cut-backs in sources of finance and sharp reductions in technical assistance programmes.

The records of marketing boards were mixed. In the late 1970s and early 1980s, governments often used them to tax agriculture and suppress food prices for higher priority urban populations. If administered prices were too low, farmers were cheated, while excessive prices created financial difficulties for the marketing board. In addition, they provided little incentive for quality improvements and suffered from inefficiency and rent-seeking behaviour, including corruption.

Nevertheless, some argue that crop marketing boards played a vital role in the development of the agricultural export sectors in several African countries and the policy of dismantling them has been widely criticised. Apart from their role in stabilising prices, they were important for providing ancillary services, such as extension and rural infrastructure, including input provision, product distribution services and credit. Following their abolition, small scale farmers were left atomized and weakened, easy prey for more powerful sections of the value chain such as traders and retailers.

Much of the current debate revolves around a revived role for the state. A closer examination of the role of producer organisations in improving the outcomes for small farmers and poor farm labourers could also produce new policy ideas, especially in post-liberalisation situations where the role of the state is likely to remain constrained.

Whether a return to state marketing boards is either desirable or feasible is a moot point. The challenge is how to ensure that the state does not replicate past mistakes, but equips poor producers to engage with the market on more beneficial terms.

National supply management may have a future for some countries and sectors.

Elsewhere interventions that scale-up the competitiveness and bargaining power of smallholders at national level in producing countries may be more effective.

International coordination and supply management Ever since the demise of the International Commodity Agreements (ICAs), one of the most polarised debates around the commodities issues has been that of supply management at an international level. For some, it is, if not a magic bullet, an essential first step in any attempt to address the commodity crisis. For others, it is both a political impossibility and a distraction from more important issues, such as Market Power or producer organization.

A number of reasons have been advanced as to why this generation of commodity agreements failed. Some believe that the breakdown reflects the difficulties involved in trying to limit production at a time when productivity increases are expanding supply. Lack of enforcement mechanisms and the free-rider problem have also been suggested. In the case of competing commodities, such as sugar, the impact of developed country farm policies played an important role in undermining the agreement.

What is clear, however, is that whatever their flaws, ICAs achieved some beneficial impacts on price levels and volatility. In coffee, the agreement succeeded in stabilising prices and persistently raised them by 24-30% over what would otherwise have been market clearing levels. For that reason, interest in international supply management has revived in recent years. Critics, however, see demanding the return of ICAs as a policy dead end, doomed to fail because consumer countries would refuse to sign up, while at a national level, structural adjustment programmes have destroyed the market coordination mechanisms needed to enforce ICAs.

Market Power Agricultural products are linked to final consumers through so-called global value chains. As with all agricultural producers, ACDDCs are capturing less and less of the value of their markets relative to traders, processors, wholesalers and retailers. In addition, the destruction of marketing boards has further reduced the capacity of farmers to raise their share in value chain rents by removing a useful intermediary that could improve farmers’ bargaining power with large corporate buyers, while the international markets for agricultural commodities have become much more concentrated.

Concentration has created two different forms of value chain. In buyer-driven chains, such as those in horticulture or specialty coffees, retailers dominate, and demand a combination of high quality, standards and product differentiation. In contrast, traderdominated supply chains prevail in bulk commodities, where the main impact of corporate concentration is to drive down producer prices.

Value chains have shifted the balance of power against small-scale farmers. Larger farmers with deep enough pockets, low enough costs and the right kind of technology to meet rapidly changing requirements in volumes, standards and new product development stand to benefit. Moreover, concentration is not just a developed country issue. Supermarkets are spreading rapidly in developing countries. Consequently, small farmers producing for the domestic market increasingly face the same barriers to entry as those trying to export.

A number of measures have been proposed that would contribute to reducing market concentration. These include strengthening national and international competition law. At an international level, many NGOs and developing countries feel the WTO is an inappropriate home for rules on competition. National competition law could address some of these issues, but only if it shifts from its current focus on consumer welfare and retail prices (i.e. monopoly/oligopoly) to one on producers and farmgate prices (monopsony/oligopsony).



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