Development strategies: commodities matter

Parvindar Singh Common 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 Tropical beverages Coffee – arabica, c/kg Coffee – robusta, c/kg Cocoa, c/kg Food Sugar, c/kg Beef, c/kg Maize, $/mt Wheat, $/mt Rice, $/mt Sorghum, $/mt Bananas, $/mt Vegetable oilseeds and oil Soya beans, $/mt Groundnut oil, $/mt Palm oil, $/mt Average price, 1979-81

Nominal (in U.S. currency)

Average price, 2009-11

Actual prices As per cent of 1979-81 As per cent of 1979-81, deflated*

Percentage change in av. real price, 1979-81 to 2009-11

339 304.3

265.7

449 193 300 132 63 113 57 27 49

-43 -73 -51

40.3

270.3

124 169.3

394.3

121 368 294 930.3

603

48 334.3

214.7

254.7

529 195 894.3

476 1,524.4

903

119 124 173 150 134 161 243 162 164

150

51 53 75 65 58 70 105 70 71

65 -49 -47 -25 -35 -42 -30 +5 -30 -29 -35

Average world primary commodity price indices over three-year periods, 1979-81 and 2009-11 Agricultural raw materials Cotton, c/kg Cattle hides, c/lb Rubber, c/kg Tropical logs, $/m 3 Minerals, ores and metals Aluminium, $/mt Phosphate rock, $/mt Iron ore, c/dry mt unit Tin, c/kg Copper, $/mt Gold, c/troy ounce Crude oil, $/barrel

188 53.59

126.7

225.7

1,547 43.3

26.7

1,546 1,969.7

458.3

34 233 66.263

346.3

445 2,079.7

143.3

131.3

2,001 7,171 1,255.3

81.7

124 124 273 197 134 331 492 129 364 274 240 58 143 213 56 157 118 104 53 53 118 85

-42 +43 +113 -44 +57 +18 +4 -47 -47 +18 -15

*

Unit value of manufactured goods (base = 2005) 47.97

111.13

- - --

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

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

ICO Other mild arabica (US cent/lb)    Producer 1, 90 ¢/lb Producer 2, 100 ¢/lb Producer 3 , 110 ¢/lb 4/28/2020 Common Fund for Commodities 9

Price boom and competitiveness

Result: Producer 1: profitable at 90c/kg Producer 2: marginal at 100c/kg Producer 3: out of business at 110 c/kg 4/28/2020 Common Fund for Commodities 10

Exposure to volatility: place and relative power in value chain

3 2 1 0 100 200 300 400 500 600 700 800 900 1000 PRIX BORD CHAMP THEORIQUE FRAIS USINE A BORD CHAMPS FRAIS LOCO MAGASIN A USINE AUTRE FRAIS DE FOB A LOCO MAGASIN CERTIFICAT QUALITE DIVERS TRAITEMENT PHYTO ETABLISSEMENT BV RESERVE DE PRUDENCE DUS REDEVANCE SACHERIE FDPCC REDEVANCE FRC REDEVANCE BCC REDEVANCE ARCC TAXE ENREGISTREMENT (5% CAF) CAUTION D'ENREGISTREMENT 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 4/28/2020 Common Fund for Commodities 19

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

• • • • • 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 Photo: I. Moreno (ETH Zurich)

   

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 Flour

FORWARD 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

1. Grain producer brings grain to the certified warehouse

Warehouse Receipt Cycle

1 TC

Grain

PC

Grain 5. Warehouse unloads grain to the mill.

PC 5 TC TC 3

3. Producer sells grain to the mill

Grainproducer

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

2 PC PC 4 Grain Processor - mill

Loan + interest Common Fund for Commodities © 2002 4. The mill repays the loan to the Bank

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What matters first:

NOT the scale, but Precise targeting of interventions against constraints: Production small and scattered farm units Marketing transportation Capacity and capability human and institutional Financing inappropriate funding mechanisms risk management quality storage packaging and branding grades and standards organizational support and development technical and managerial expertise reluctance of commercial banks to finance agriculture lack of favourable policy for agricultural financing advocacy skills lack of venture capital consistency of supply access to correct inputs support services planning and information services 28

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