ISSUES IN WORLD COMMODITY MARKETS

Presented by
Hartwig de Haen
Assistant Director-General
Economics and Social Department

Welcome to this special consultation on commodity prices which has been organized by
the Commodities and Trade Division of FAO.

The Consultation was prompted by the interest expressed in different FAO fora, notably
the intergovernmental groups, and elsewhere in the various international organisations
involved with agricultural commodity production and trade, to take a closer look at the
current depressed levels of most agricultural commodity prices.

The annual average prices of all basic foodstuffs except dairy products have declined
steadily from peaks reached in the mid 1990s to levels not seen for nearly two decades.
More dramatic has been the decline in prices for tropical products: coffee and cocoa
prices had fallen by 2000 to their lowest levels for more than thirty years, although tea
prices had held up until 2001. Among raw materials, cotton prices are at their lowest
level since 1985.

The coincidence of low prices across many commodities has perhaps attracted more
attention than would a depressed market for just one commodity, reviving interest in
'commodity problems'. However, this coincidence may mask a range of different causal
factors affecting individual commodities, making it difficult to define clear-cut and over-
arching solutions to the problems. For a number of years, discussion of world
agricultural commodity prices has been dominated by the issue of trade liberalisation
and the negotiations on improvement of market access and limitation of export
subsidies. But, there remains a 'commodity problem' over and above what trade
liberalisation can address, and which has its origins in market fundamentals rather than
policy-induced market distortions alone.

Those developing countries exporting agricultural commodities, especially beverages

and raw materials, have obviously been particularly concerned by recent low world price
levels and, given the inelastic nature of demand for their commodities, the consequent
decline in their export earnings. The value of agricultural export earnings of developing
countries declined since the mid-1990s to current stable low levels. Developing country
export earnings from beverage crops fell by 18 percent between 1999 and 2000. Overall,
their export earnings actually increased by one percent, but their food import bills
increased by 10 percent.

The problem is obviously most severe where countries are dependent for a significant
share of their export earnings on one or a few agricultural exports, notably in the case of
developing country exporters of coffee, cocoa, sugar, bananas and cotton. Forty-three
countries, concentrated in Sub-Saharan Africa, Latin America and the Caribbean, earn
more than twenty percent of their total merchandise export revenue and more than fifty
percent of their total agricultural export revenue from just one agricultural commodity.
Thirty-two of these countries are least-developed countries or small island developing
states. In countries with high dependence, there can be a clear and direct link between
commodity trade performance and economic growth and food security. This has
rekindled interest in the possibilities for some form of international action to curtail
export volumes and at least slow the rate of price decline.

On the other hand, lower international prices for basic foodstuffs such as cereals and
oilseeds should slow the growth in the food import bills of the importing developing
countries which include many of the poorest countries in the world. Clearly, the
implications of current low agricultural commodity prices are different depending upon
whether the perspective is that of an commodity exporter or a food importer.

I would like to group my comments in relation to the three basic issues around which the
consultation is structured. The first is the nature of the current depressed state of
commodity prices, and whether this indicates a departure from past patterns of market
behaviour. The second is the implications of lower commodity prices and their impact
upon commodity exporting and food importing developing countries - essentially the
question of whether lower commodity prices should be grounds for concern. The answer
to this question leads to the third issue which is whether actions to redress lower
commodity prices should be considered and if so, what those actions might be.

Are current commodity prices too low?

It is important to be clear as to what perceived commodity price problem we are talking

about, and to distinguish clearly between three features of commodity prices - secular
decline, volatility and the current trough. Discussion of any of these aspects requires a
long-term perspective. The Commodities and Trade Division has put together
information and analysis on commodity price levels and variability over the past thirty
years as background.

It is also necessary to distinguish clearly between short-term volatility and longer- term
trends in prices. There is no doubt that commodity prices are volatile, as the course of
cereal prices or coffee prices over the past decade indicates. However, there seems to be
little evidence to support the view that price volatility has increased in general. Indeed, it
appears from the analyses undertaken by the Commodities and Trade Division that for
many commodities prices were more stable in the 1990s than in the 1980s. The
particular current concern is with the levels of prices rather than volatility.

In general, world commodity prices are at historically low levels, and also in general the
short term prospects do not indicate a return to higher average levels. Perhaps the most
widely-publicized cases have been those of coffee and cocoa whose prices have trended
downwards from their peaks in the mid 1970s to levels lower even in nominal terms than
those of thirty or more years ago. The course of most raw material prices has been less
dramatic, and there has been greater diversity between individual commodities, but a
broadly similar pattern emerges. Cereals and oilseeds prices have been rather more
variable but they too had in general reached historically low levels by the end of the
1990s.

Depressed price levels are, of course, not a new phenomenon, and neither are the
questions they provoke about underlying causes, whether they mark a departure from
previous market behaviour, and whether there is a case for remedial action. Secular
relative decline in agricultural commodity prices is expected as technological progress
reduces costs and induces supply expansion at a faster rate than population and income
growth expand demand. These forces and the tendency for resources to shift only slowly
away from agriculture because of social, economic and institutional factors are the
background to long-term relative decline in agricultural commodity prices and the
familiar agricultural adjustment problem.

The apparent co-movement of prices within different commodity groups over the longer
term, and the coincidence of almost all commodity prices falling together since the late
1990s prompts the question as to whether there are common explanations for the recent
price falls. Over the years there have been a number of exogenous shocks - the 1970s oil
price hikes, el Niño, the Asian crisis, for example - which have impacted on all
commodity markets and prices. However, there are no obvious similar exogenous factors
at work more recently.

At a more general level, all commodity prices are obviously affected by the same basic
factors, namely the market fundamentals of demand and supply. However, the nature,
strength and driving forces of these demand and supply factors varies from one
commodity to another. In the case of natural fibres, for example, competition from
synthetics is an important demand shifter while for livestock products income growth is
important. Major impacts on demand and supply on world markets for particular
commodities are also affected by the entry and exit of countries as importers and
exporters. A move towards self-sufficiency decreases import demand, and there are a
number of instances of major importers becoming major exporters - China and cereals or
India and sugar, for example. The emergence of new low-cost suppliers can also disturb
market balance - Viet Nam and coffee, for example. Explanation of the reasons for
commodity price decline, and by implication any actions proposed to ameliorate it
therefore need to be commodity-specific. The basic facts concerning production and
consumption of the various commodities are summarised in the commodity profiles put
together as background information.

While market fundamentals continue to explain commodity price movements these can
change through time as a result of changes in technology, consumer preferences, market
structures, policies or institutions. There are a number of current trends which should be
highlighted in this context. With respect to technological change, wider adoption of
biotechnology may boost the rate of increase of yields and production of some crops
leading to increased downward pressure on prices impacting differently on countries
depending upon the rate of uptake of the new technologies. Technical change can also
lead to pressure on prices from the demand side: improved efficiency of raw material
use in processing can mean a declining share of the raw commodity in the finished
product. With respect to consumer preferences, there is increasing evidence of
globalisation in food consumption one facet of which is increasing livestock products
consumption in developing countries in particular, though this might be offset to some
extent by lower consumption in the developed countries. With respect to changes in
market structures, increasing concentration and specialization of production and vertical
integration change supply-price relationships, while increasing concentration in
processing, marketing and distribution modify commodity demand-price relationships.
In relation to the latter, the increasing market power of the transnational trading and
processing companies and of multiple retailers in consuming markets have changed the
market relationships with developing country suppliers. With respect to policy changes,
the Agreement on Agriculture marked the beginning of an ongoing process of
agricultural trade liberalisation and policy reform which will change the policy and
institutional context of the operation of agricultural commodity markets. The import
restrictions and export subsidies used by some OECD countries, notably the EU and the
US, have been blamed for low international prices of, for example, cereals, sugar and
livestock products, and reform of those polices is expected to raise world prices. I will
return to the effects of trade liberalisation in my comments on possible actions to
improve commodity prices. However, the limited extent of reform to date has arguably
had little significant impact on falling prices.

It has been suggested that the recent commodity price decline may reflect changes in
market relationships between demand, supply and price as a result of the kind of factors
just mentioned. However, econometric analysis for several commodities by the
Commodities and Trade Division indicates no significant changes thus far in the
relationship between prices and consumption and stocks. That analysis therefore seems
to support the view that market fundamentals have continued to be the dominant
influence on agricultural commodity prices and that the nature of that influence has not
changed. In that sense we are still facing the same type of 'commodity problems' as in
the past.

So in answer to the question as to whether commodity prices are too low we can
certainly say that prices for most commodities are low by historic standards, but it is not
so certain that they can be said to be too low given current market conditions of demand
and supply.

Should we be concerned about low agricultural commodity prices?

If we accept that commodity prices are unusually low by historic standards, then the next
question to ask is whether this should be a matter for concern and hence whether some
kind of remedial action is warranted. Unfortunately, the answers to these questions are
not straightforward since there are both winners and losers from low prices.

For food importing developing countries, low world food prices mean lower food import
bills, and provided that low world prices are transmitted through to consumer prices then
consumers gain. If, as suggested by the forthcoming FAO study Agriculture: Towards
2015/30, the agricultural trade deficit of developing countries will increase significantly
over the next thirty years, then the benefits of lower food prices become more
pronounced. The agricultural imports of the least developed countries are already twice
as much as their agricultural exports, and their trade deficit is expected to grow in real
terms by four times, over the next thirty years. Higher food prices on world markets can
only serve to worsen this situation.

However, there may be some qualifications to that view, notably concerning the impact
of lower prices on the domestic agricultural sector and food production. Even in the case
of food importing countries, sustained low prices may not be desirable if they prejudice
future food production through failing to provide adequate incentives for the
maintenance of production levels. Seventy percent of the world's poor live in rural areas,
and most depend directly or indirectly on local agriculture not only for their incomes,
but also their food supplies. A prosperous agriculture therefore provides the basis for
overall rural growth and is a necessary foundation for overall poverty reduction. This is
not to say that agriculture in the net food importing countries can only generate
sufficient income to the often poor farmers through higher prices. It is important that
investments are made in, for example, infrastructure, more efficient technologies, and
product quality improvements. This could also be achieved under low world market
prices if the gains from them were appropriately channelled into pro-poor investments in
rural areas.

In the case of developing countries which are agricultural exporters, especially of

tropical products and raw materials, the benefits of higher commodity prices are clear.
Remunerative prices are needed if production and exports are to be sustained and
developed, and again provide a platform for broader development. In cases where
exporting countries are highly dependent on commodity exports but import food,
significant losses of export earnings due to lower world prices threaten food security and
compromise the pursuit of development goals.

So, the question of whether low commodity prices are a good or bad thing is more
difficult to answer unequivocally than might be expected. Low prices are presumably
immediately beneficial to consumers in importing countries, particularly low income
food deficit developing countries, but they are presumably not to the advantage of
commodity producers/exporters. There is therefore a dilemma in how we should regard
low commodity prices. This dilemma is further complicated by the fact that in practice
who wins and who loses is not a simple matter of food importers versus commodity
exporters. Other factors such as national strategic goals, the competitiveness of the
importers and exporters concerned, and the time period under consideration also need to
be taken into account.

What could or should be done?

Over the years many different actions have been proposed or tried to cope with lower
prices in world agricultural commodity markets and enhance food security in exporting
countries or to limit or compensate for price variability. These actions have included
measures to reduce price variability and to increase mean price levels through specific
interventions to control the supply or expand the demand for particular commodities as
well as more general progress towards trade liberalisation for all commodities. As an
alternative to more direct market interventions, actions have also been proposed to
compensate for price depression and/or variability or to encourage withdrawal from
production of particular commodities and diversify into more potentially profitable lines
of production. Again, it is important to be clear just what problem we are trying to
address - secular decline in commodity prices, volatility, or the current trough (if that is
seen as a something other than a manifestation of volatility). Different actions are
appropriate to each of these perceived problems. It has to be said that the record is not
generally one of success, and why that is so is one of the issues this consultation needs
to address.

Discussions of commodity price problems usually recall the international commodity

agreements (ICAs) with economic clauses which were widely seen as a solution in the
late 1970s. These involved market interventions to influence prices with the objective of
price stabilisation either through export quota arrangements or stock management. The
record of the ICAs' success in these areas was not altogether encouraging, and today
existing ICAs focus on measures to improve the functioning of markets. Nevertheless,
there has been a recent revival of interest in supply management through export
retention schemes, or diversion of low grades into alternative uses, although again, the
experience has not been encouraging. It seems difficult to maintain the continuing
commitment of the parties to the discipline of the agreement, while free rider problems
persist with those suppliers outside.

The difficulties of sustaining co-operative market interventions as a response to

volatility and short-term adverse price movements has led to interest in price, revenue or
income compensation schemes to compensate for export earnings shortfalls or import
costs surges.

The idea of a revolving fund to assist food importing countries meet increases in food
import bills is being considered in the context of the continued reform of agricultural
trade policy under the WTO. Interest in risk management and market based tools to
reduce the adverse impacts of variable prices has been kindled by the World Bank, but
the feasibility of the widespread applicability of such techniques needs to be established.

Market interventions, compensation schemes and risk management might be used to

address the problems of price volatility and short-term price troughs. However they
cannot be used in a one-sided way to counter the tendency for relative commodity prices
to decline in the long-run. This can only be achieved by an improved balance between
supply and demand. Permanent reductions in supply require the exit of resources from
production of the commodity concerned. Diversification has frequently been discussed
as an escape from low prices for specific commodities, especially where dependency
rates are high and where exports are not competitive - due to a loss of trade preferences,
for example. But again the record is not good: countries uncompetitive in one
commodity are often also not competitive in the agricultural alternatives; and niche
products such as organics which have often been suggested as diversification
opportunities cannot compensate in terms of income and employment for the loss of
bulk commodity trade. The result under these circumstances may be a further
acceleration of rural-urban migration.

Co-operative international actions to stimulate demand - generic promotion, consumer

education programmes, for example - have also been used to counter secular price
decline. FAO's Tea Mark is an interesting example. The difficulty, as with supply-side
co-operative actions, is to find an institutional manager for such programmes and a
means to finance them which minimises free-rider problems. For some commodities the
scope for expansion of demand through product and market development is potentially
huge: hard fibres and jute have significant unexploited potential in geo-textile and
automotive uses, for example. The Common Fund for Commodities (CFC) has an
important role in product and market development, but its procedures constrain it from
being more pro-active in identifying projects which meet international commodity
market priorities.

Discussions of international agricultural commodity markets have been dominated for

some years by the issue of trade liberalisation. Trade liberalisation is not specifically
geared towards raising commodity prices but that is supposed to be a result. The
agricultural policies of certain countries, notably of some OECD countries, have
supported domestic prices at higher than world price levels through market price support
bolstered by high import tariffs and or quotas while the excess production thus
engendered was exported on to world markets with the aid of export subsidies. The
result was to reduce world prices, and arguably to increase price variability. The process
of liberalisation is therefore generally seen as one which will lead at least to higher
commodity prices in the short-run. However, there are a number of qualifications which
need to be stressed. The first, as I said before, is that while for food exporters higher
world prices are beneficial, this is not the case for food importing countries. In practice,
the effects of liberalisation on commodity prices so far following the Uruguay Round is
apparently small. The second point to note is that liberalisation also erodes trade
preferences enjoyed by certain developing country exporters of certain products - sugar
and bananas, for example. Finally, while liberalisation in the sense of improving market
access is important for food products, tariff levels for tropical products and raw
materials at least in their less-processed forms are in any case typically not high. Market
access is not a major issue in most cases. A more significant issue is that of tariff
escalation which can discourage developing country exporters from capturing value-
added and hence greater export earnings. This problem has received relatively little
attention and needs to be addressed more seriously in trade negotiations.

Objectives of the Consultation

I have tried to identify some of the issues which we expect this consultation to address.
There are three basic questions in relation to the current situation of many commodity
markets. Are prices unusually depressed? If so, is this grounds for concern? And if so,
what could or should be done?

In terms of specific outcomes of this consultation, we would like to see:

• a definitive review of the recent history of commodity price movements and the
evidence concerning the factors affecting them in an attempt to dispel some of
the uncertainty and misconceptions concerning the current situation and remedial
actions
• a detailed assessment of the implications of depressed commodity prices and a
balanced view of the interests of food importing developing countries and
commodity exporting developing countries
• a reasoned consideration of the case, if any, for international action to reverse
short term declines in prices and to slow the rate of secular decline
• specific recommendations, based on a review of past experiences and current
proposals for effective forms of international action compatible with the current
international trade regulatory framework and including workable and sustainable
funding and coordination mechanisms.

We have gathered a wide range of interests and expertise to participate in this

consultation and are grateful for your interest and participation. Although we do have
distinguished speakers presenting their views on different topics related to commodity
prices, the meeting should emphasise discussion rather than formal presentations. We
would like to see a widening of the discussion of agricultural prices and commodity
markets away from a focus on trade liberalisation alone to address commodity problems
based in market fundamentals. We hope that this consultation will be a first step in this
process.
 COMMODITY PRICES, EXCHANGE RATES AND THE
INTERNATIONAL MONETARY SYSTEM [2]

Presented by
Dr Robert Mundell
University Professor of Economics
Columbia University
(1999 Nobel Prize in Economic Science)

In discussing commodity prices, one is dealing with commodity prices in currencies; so

it may be expected that monetary variables are among the explanations of real change.
International commodity prices are mostly expressed in dollars, for example, in the IMF
International Financial Statistics, or in terms of indices based on dollar prices. Such
commodity prices are obviously affected by inflation as well as real developments, and
also by the value of the dollar exchange rate. There is a definite link between monetary
policies, exchange rates and commodity prices, and this is the subject which I wish to
discuss today.

Pricing in gold and dollars under fixed rates

Prices are relationships between two quantities, a quantity of the object for sale, and a
quantity of a quid pro quo-usually money--offered for it. It may therefore be expected
that changes in prices could reflect not only market-specific trends but also monetary
development. In a world of inflation, for example, commodity prices would be rising,
and in a world of deflation they would be falling. Both would be clear manifestations of
monetary rather than real disturbances. There would not be a problem of "commodity
prices," there would be a problem of monetary stability. To analyze significant trends in
"commodity prices," therefore it is important first to isolate the monetary disturbances
(if they are present) from the real disturbances.

Superimposed on general movements of world-wide inflation or deflation are influences

of exchange rates. In our world of multiple currencies and flexible exchange rates,
commodity prices might rise in one currency but fall in another. The statement of
commodity prices in dollars could reveal either a problem concerning commodity prices
or a problem of the dollar. This bring sup the question: in what currency or currencies
should commodity prices be quoted?

In the post-war world, the dollar was by far the most important currency in the world
and had been since World War I. It was natural to use it as the basic unit of account and
the convertible dollar --the "1944 gold dollar"-- was the anchor for exchange rates.
Parities for currencies were expressed in weights of gold (the dollar was 1/35 of an
ounce or .888671 grams of gold), but currency units and exchange rates were more
normally expressed in terms of the more familiar gold dollar. As long as the dollar was
exchangeable into gold at $35 an ounce, the dollar had the legal role and legitimate
status as the international unit of account. It was natural also to use dollar quotations as
the basis for the index of commodity prices.

All that changed with the international monetary system broke down in the early 1970s.
The dollar was no longer convertible into gold, and foreign currencies were no longer
convertible into the dollar. The dollar lost its judicial status as both monetary anchor and
unit of account. Exchange rates became flexible. The IMF Board of Governors then
officially scrapped the IMF constitution based on fixed exchange rates and officially
accepted the a new regime of market-based "managed" flexible exchange rates. The idea
was to let markets determine exchange rates. At the same time it was decided to rid gold
of its "mystique," and to auction off at least part of IMF gold stocks as well as US
Treasury holdings, and to introduce in its place as a numeraire the index of the value of a
basket of a few major currencies that the Special Drawing Rights (SDR) had become.

What numeraire under flexible exchange rates?

Unfortunately, there was not at the time much understanding of how the new regime
would work or of what would fulfil the functions formerly filled by gold and the dollar.
Unlike the previous system, which had been built upon the experience of hundreds of
years of monetary history, there was no precedent for the new regime of paper
currencies connected by fluctuating exchange rates. In addition there had been little
theoretical analysis of the problems likely to be encountered.

One of the problems related to the use of a unit of account. With all currencies on the
same footing, international payments would be in chaos. At the most rudimentary level,
how would exchange rates be quoted? With n currencies in the world there are ½ n (n-1)
exchange rates. If n = 200 there are 9900 exchange rates! Flexible exchange rates in the
absence of a numeraire in which to express currency prices would involve enormous
confusion.

Fortunately, the market found the solution. Under flexible exchange rates the dollar was
more rather than less important than before. Exchange rates were quoted mainly in
dollars, the currency most frequently used in exchange markets and the main reserve
asset (apart from gold) of central banks. If all currencies were quoted in dollars and
perfect arbitrage could be relied on there would be "only" 199 independently flexible
exchange rates.

The same solution was adopted in the statistical monthly, IMFIFS. There was no longer
any legal basis for using the dollar as the numeraire for expressing exchange rates but it
was the expedient solution. Dollar exchange rates gave some coherence to international
monetary transactions. But it was far from a solution. The usefulness of a currency as
numeraire depends partly on its stability. But was the dollar stable?

Impact of the dollar cycle

There would have been no problem if the dollar had been stable vis-à-vis other
currencies. But in fact that has not been the case. Since the 1970s, the two most
important currencies, besides the dollar, have been the German DM and the Japanese
yen. The dollar has gyrated against other major currencies. Against the DM, for
example, the dollar was DM 3.5 in 1975 and fell in half to DM 1.7 five years later, in
1980. Then the dollar doubled to DM 3.4 by early 1985, and then fell below DM 1.35 in
August 1992, at the peak of the ERM crisis in Europe. Since that time the dollar has
risen far above DM 2.0 This instability of the dollar/DM rate means that commodity
prices in dollars and DM would be for much of the period moving in opposite directions.
In a period when the commodities prices were rising in dollars, they might have been
falling in DMs, and vice versa.

Yen-dollar fluctuations have been just as extreme. In the hey-day of Bretton Woods, the
yen-dollar rate was fixed at 360 yen to the dollar. After the 1970s this rate became
flexible. By 1985 the dollar was 250 yen. Ten year later, by April 1995, the dollar had
fallen to 78 yen. In other words the yen had tripled in value against the dollar. This was
the period in which the balance sheets of Japanese companies were undermined, and
Japanese banks ended up with the non-performing loans that persist in trillions of dollars
to this day. But from April 1995 to June 1998, the dollar soared from 78 yen to 148 yen,
creating the setting for the Asian crisis. After 1948 the dollar fell to 105 yen but then
rose again. During these fluctuations, dollar and yen prices frequently moved in opposite
directions.

The instability of dollar-mark and dollar-yen exchange rates does not prove by itself that
the dollar is unstable. The instability could equally be due to events in Germany or Japan
or elsewhere. Yet there has been a distinct cycle of the dollar measured against other
major currencies, and this means that quotations of commodity prices in dollars may
give rise to grave misinterpretation.

The movement of the dollar with respect to the SDR was one way of measuring the
stability of the dollar. Initially, the SDR was equivalent to 1/35 of an ounce of gold, i.e.,
a 1944 gold dollar, but its gold basis was stripped away in the later 1970s and it
eventually became a basket of five major currencies including, besides the dollar, the
yen, the mark, the pound and the franc. The weights were changed as seemed
appropriate with changing circumstances. The value of this SDR basket in terms of the
dollar was of course unity in 1970, when the first issue of SDRs were made. Then it rose
to $1.32 in 1979 with the dollar's depreciation, fell to $0.98 in 1984 as the dollar soared
in the early 1980s, then rose to $1.49 in 1995 with the weakening of the dollar and then
fell to $1.24 at the end of 2001 as the dollar strengthened in the late 1990s. These
fluctuations, it should be noted, have been extremely large, especially in proportion to
differences in price levels and inflation rates.

Commodity price cycles

The question needs to be asked whether the cycle of the dollar against major currencies
is related to the cycle of the dollar commodity prices. A casual reading of the statistics
suggests that this relationship is quite close. Thus the index of non-oil dollar
commodities tripled in the 1970s when the dollar was depreciating sharply relative to the
SDR; it then fell by more than 20 per cent from 1980 to 1986 when the dollar was
soaring; then it rose by 50 per cent from 1986 to 1995 when the dollar was again
depreciating; and it has fallen by 30 per cent since 1995 when the dollar has been
appreciating. There is therefore a very pronounced association of the cycle of the dollar
against other major currencies (as measured by the SDR) with the cycle of dollar
commodity prices.

This is of course not unexpected. It is natural that there would be a correlation of the
prices of commodities in dollars with the price of currencies in dollar. Whenever US
monetary policy is easy, as it was in the late 1970s and the late 1990s and early 1990s,
the dollar depreciates against foreign currencies and commodities; and when it is tight,
as in the early 1980s and the late 1990s, the dollar appreciates and dollar commodities
prices decline.

It makes a great difference if commodity prices are quoted in dollars, euros or SDRs.
The IMF world index which covers about 50-70 non-fuel commodities quoted every
month in dollar terms, indicates that prices have fallen in the last 3 years. Starting in
1970, the index, with 1995 as one hundred, was 32.8 in 1970, and 57.0 in 1975, and 90.7
in 1980. From 1980 to 1986 it dropped from 90.7 to 67.8, and then rose to the peak of
one hundred in 1995. Subsequently it fell to 70.2 at the end of 2001, a very precipitous
30 percent drop.

Broken down into major commodity groups, the index in 2001 for food was 76.5,
beverages 47.2, agricultural raw materials 68.7, and metals 71.2, while that for fertilizers
was quite different at 102.2. Another index, that of the World Bank for lower middle
income countries' commodity exports stood at 62.4, with 1995 equal 100. All these
numbers show that except for fertilizers which can be considered more of a
manufactured product, all other commodity prices showed a very steep decline during
the 1995-2001 period.

Let us look again at the dollar-SDR rate. From a parity of 100 in 1970 in the dollar-SDR
rate, by 1975 the SDR price of the Dollar had fallen to 82.4 cents, and by 1980 had
dropped further to 77 cents. Then it soared to 98 cents in 1986. Subsequently it fell to 66
cents and then it rose again, to 89 cents. With one exception in the 1970s, that cycle
mirrors that of commodity prices fixed in dollars. When the dollar is weak then
commodity prices rise.

From 1967 to 1981 commodity prices in dollar terms tripled, while the value of the
dollar fell to one-third over that inflationary period. These were the years of the very
strong oil prices that brought euro-dollars into the system, a big expansion of the euro-
dollar market and inflationary prices in the United States, with two-digit inflation rates
during 1979 to 1981.

Then from 1980 to 1985 a big fall occurred in commodity prices, with the index
dropping from 90.7 to 67.8. That coincided almost exactly with the soaring value of the
Dollar. The reversal of the policy mix under Ronald Regan included sweeping tax cuts.
Marginal tax rates were cut from 70 percent at the federal level to 28 percent for the
highest income tax brackets. Corporate taxes were cut from 48 percent to 34 percent and
capital gains taxes were also reduced over that period. Big increases in government
spending were combined with a tightening of Federal Reserve monetary policy. There
was a sharp fall of the price in gold, which dropped from 850 Dollars/ounce in February
1980 to 300 Dollars/ounce within something like two years. This was a period of big
deflation or disinflation. The inflation rate in the United States fell from 13 percent in
1980 to 4 percent in 1986. And that period of disinflation was a period of very sharply
falling commodity prices.

After 1985, there was another shift in United States policy, aimed at depreciating the US
Dollar. The Dollar started to go down slowly against the Yen first, and subsequently the
Yen soared following the drop in oil prices in 1985/86. Over that period, Dollar/SDR
rate fell from 98 cents in 1986 to 66 cents in 1995, and commodity prices soared from an
index value of 67.8 in 1986 to 100 in 1995. However, from 1995 onwards index of
commodity prices fell to 70, while during the same period, the Dollar soared against the
SDR, rising from 66 to 89.

Future of the euro and the dollar

What are the indications for the future? Many believe that the Dollar has reached its
peak and that the future will see a much weaker Dollar and a stronger Euro as a result of
many positive developments in the European economy. However one long-run force
which might contribute to a weakness of the Euro would be the accession of countries,
such as Poland, Romania and other countries of Central and Eastern Europe, which
could raise the level of debt in the Euro zone.

On the other hand, the factors which might contribute to a weaker Dollar include a 400
billion Dollar current account deficit, or four percent of the country's 10 trillion Dollar
GDP. And with the United States recovery, the trade deficit could rise to 600 billion
Dollars, or 6 percent of GDP. Of course, there were deficits of 3.5 percent in the 1980s,
but this was a time when the United States was still a net creditor. Now the United States
has become the biggest debtor in the world to the extent of 25 percent of GDP; in other
words, its international liabilities exceed by 2.5 trillion Dollars its international assets,
and that amount is rising by 4-6 percent of GDP every year. At that high rate, the ratio
will increase to 29 percent at the end of this year and 35 percent in the year following.
Such a rate of increase in indebtedness cannot be sustained for long without giving rise
to strong pessimistic views about the future of the Dollar. The only way in which this
situation can be corrected is to reduce the United States current account deficit, and to
do so would require the depreciation of the Dollar. A halting of lending to the United
States would correct a good part of the deficit but probably not all of it, but when market
sentiment starts to turn, there could be pressure for a very rapid downward trend in the
value of the Dollar. The resultant portfolio shifts could be expected to cause a correction
of commodity prices.

Productivity, the dollar cycle and commodity prices

The link between the commodity price cycle and the dollar cycle is apparent, but the
underlying causes are not clear. Obviously, arbitrary exchange rate changes can lead to
commodity price changes, and as I have said before dollar prices may not reflect truly
trends in real commodity prices. Prices in SDR terms would be better, as would in some
cases an index of gold prices. Using some other types of measures, the swings in
commodity prices are much attenuated.

It should be pointed out that despite the weight of the United States economy in the
world economy, there is not necessarily a direct causal relationship between the strength
of the dollar in currency markets and commodity prices. It could be that the same factors
that cause the dollar cycle also cause the commodity cycle. One of the factors, for
example, which has caused the dollar cycle has been the IT revolution and the resultant
very rapid increase in productivity in tradable goods, which meant that the real Dollar
had to appreciate. With the United States inflation rate around 2.5-3 percent throughout
the period, the appreciation of the real Dollar needed because of the "internet economy"
was something like 5 percent, which was accompanied by deflation in all the countries
that kept their currencies fixed to the Dollar such as Argentina, China, Hong Kong SAR,
the Gulf States and Panama. Every one of those countries had deflation in this period,
prime evidence that productivity effects were behind this strong Dollar.

The United States economy accounts for about 25 percent of the world economy
measured at current exchange rates. So anything that affects the Dollar, the currency of
that big economy, is certainly going to affect real events; and those factors that led to the
Dollar weakening or strengthening can also lead to fluctuations of commodity prices.
Thus, very strong productivity growth and the change in the real exchange rate, coupled
with tightness on the part of the Federal Reserve to keep the consumer price index below
3 percent contributed to the slowdown in the United States and the global economy, and
that would certainly be an important factor in depressing commodity prices.

However, looking for a single cause, is simplistic. For example, there are two kinds of
mistakes that one can make in relating exchange rates to basic real commodity prices.

One is to say that exchange rates do not matter, while the other is to consider exchange
rates as responsible for a whole series of different problems. In fact, in the short run they
matter, while in the long run they do not matter very much. Therefore, it would be a
good idea to have a reform of the international monetary system in order to avoid any
possible link between exchange rates and commodity prices. Moreover, a restoration of
a fixed exchange rate system would provide countries with a new rudder for monetary
policy and would be a great step in the improvement of economic policy.

I want to conclude by emphasizing that the current international monetary arrangements

are far from optimal. They do not constitute a system. If the Balkanized world were
suddenly transformed into a centralized empire, its first act would be to create a common
currency that would be acceptable everywhere, with a great improvement in potential
welfare. In the absence of a hegemonic empire, monetary efficiency depends on
cooperation which in turn requires a world at peace that can be enforced. The end of the
Cold War opened up a new era of globalization and the emergence of a global economy.
As Paul Volcker has said, a global economy needs a global currency.

TECHNOLOGY AND PRICES IN AGRICULTURE

Presented by
Prof. Robert Evenson
Professor of Economics
Yale University

The "farm problem" in most developed countries is usually stated as a price/cost

problem. That is, farm interest groups have argued for decades that prices are often too
low to cover average costs, where average costs are perceived to include a reasonable
return to the labour contributed to the enterprise by farmers and unpaid family workers.
Farm programs to "support" higher farm prices have been implemented in virtually all
developed countries over the post-WW II decades.

Technology is generally recognized as a contributing factor to farm problem prices

(Cochrane). It is also regarded to be a contributing factor to changes in the "structure"
and organization of agriculture in developed countries. In addition, "technological
competition" between producers of the same commodity located in different regions
(e.g., States in the U.S.) has been recognized as an important factor in determining
regional farm income levels.

As commodity markets have become increasingly integrated and globalized, farm

problem prices have also become globalized. World prices for grains reflect world
supply and demand, and technological changes have both global and competitive (local)
effects. One of the dominant features of international grain markets in recent decades
has been the supply provided in developing countries (i.e., the Green Revolution).

In the 1950s, the nature and magnitude of the "population boom" in developing
countries was becoming apparent. With major improvements in health outcomes
(particularly in public health programs), decreases in infant and child mortality rates
were triggering "demographic transitions" in virtually all developing countries. The
magnitude of the population increases was enormous and historically unprecedented.
Global population increased from 2.52 billion in 1950 to 6 billion in 2000. Most of this
expansion took place in developing countries. Those demographic transitions were large
and rapid, and birth rates have now declined in virtually all developing countries.

The food production response to the increase in demand from population expansion has
in many ways been as extraordinary as the population boom itself. In the aggregate, food
production per capita in developing countries increased by roughly 15 to 20 percent over
the past 50 years. But the local country-by-country production response has varied
considerably with many countries achieving little or no increase in per capita food
production. Technology, of course, had a great deal to do with this food production
response.

The past 50 years have thus been years of extraordinary RCR performance in agriculture
in all developed and most developing countries. RCR rates for agriculture have been
approximately double those for the rest of the economy in all countries except for the
rapidly-growing Newly Industrialized Countries (NICs). This has placed an adjustment
burden on the sector that has been of major magnitude. It has also been a blessing of
major magnitude for the present economies of the world.

This paper is organized in four parts. In Part I, a review of the basic economics of farm
problem prices and the attendant economic adjustments is presented. This part shows
that farm problem prices and economic adjustment are virtually unavoidable in the
process of economic development. Part II reports estimates of "Real Cost Reduction
(RCR)" for developing country regions for four decades (1960s-1990s). Part III
summarizes evidence for crop genetic improvement-based RCRs (the Green
Revolution). Part IV then reports "counterfactual" simulations of the price effects of
these RCR achievements in both developed and developing countries utilizing the multi-
market model of the International Food Policy Research Institute (IFPRI). Part V
discusses prospects for future price effects.

Analytics - Prices and Productivity

Technology, when adopted and used by farmers, typically changes the cost curves of
farmers and hence, of their supply to markets. Cost changes, however, may be due to
efficiency improvements and factor price changes as well as to the adoption of new
technology. Section II of this paper discusses measures of "Real Cost Reduction"
(RCR), and Section III discusses Crop Genetic Improvement (CGI) technology. In this
section, two types of cost reduction are considered, scale neutral and scale biased.

Consider first the simple analytics of scale neutral cost reduction in a closed agricultural
economy. Figure 1 presents the essentials. Panel A depicts cost curves for a single farm.
Scale neutral cost reduction shifts average (AC) and marginal costs (MC) downward as
depicted.

Figure 1. Scale Neural Cost Reduction

Panel B depicts the market equilibrium in the short run (i.e., with no entry or exit into
the production of this commodity). The supply curve is the horizontal sum of the
marginal cost curves for each farm, S0. With cost reduction, the supply curve shifts
downward to S1. Equilibrium price declines from P0 to P1.

We can first notice that with a scale neutral cost shift, the payments to fixed factors
(PFF) on farms actually producing this commodity actually increase (from the area
P0A0C0 to the area P1A1C1) as long as the demand curve has some price elasticity.
However, the payments to variable factors (PVF) (the area under the supply curve),
change from OC0A0Q0 to OC1A1Q1. With inelastic demand (where the elasticity of
demand h is between 0 and -1). These payments will decrease (actual total PPF + PVF
will decrease). More importantly, it is possible that prices fall by more than average
costs even in the short run, creating "farm problem" conditions and short run
adjustments.

The condition for short run farm problem conditions is expressed by the ratio of average

cost changes ( ) to price changes ( ):

where es is the short run elasticity of supply and ôhdô is the absolute value of the
elasticity of demand.
Is the ratio of the change in marginal cost to the change in average costs. In the short run
this ratio is less than one.

Thus, even in the short run, farm problems arise for variable factors as long as demand is

inelastic and for all factors, if supply is more inelastic than demand. With the term
being less than one, this is further exacerbated.

In the long run farms will begin producing this commodity if cost reduction ( ) is

greater than price reduction ( ) and will exit production if cost reduction is less than
price reduction. This is depicted as the horizontal supply curve in Panel C. Note here

that price reduction will equal cost reduction in the long run, i.e., .

Figure 2 depicts the case for scale biased cost reduction. For individual farms (Panel A)
cost reductions are depicted as scale biased, i.e., the minimum point on the AC curve
moves to a larger scale of production. This produces a "fanning out" of the MC and
supply curves. For this case, PFF will decrease, causing real stresses on farm
organization. Essentially, farms will be presumed to prevent loss of income only by
becoming larger even in the short run.

Figure 2. Scale Biased Cost Reduction

Figure 3 depicts the case of unequal access to cost reduction technology. This is a
realistic case both within a country and between countries. Consider the case of Crop
Genetic Improvement (CGI) technology. This technology is highly location-specific,
i.e., sensitive to soil, climate and related plant disease and pest conditions. Farmers do
not have access to this technology unless CGI programs are in place in a given location
(agro-ecosystem) "tailoring" CGI to the location. Furthermore, as Section III will show,
these CGI programs sometimes require many years of sustained effect in a location
before farmers have access to CGI-based cost reductions.

Figure 3. Partial Access to Cost Reduction

Figure 3 depicts the essentials of unequal access. Suppose there are two groups of
farmers, Group A and Group B. Since supply curves can be summed horizontally (i.e.,
for each price there is a corresponding quantity whose marginal cost equals price (the
profit maximizing condition). The supply curve for Group A can be depicted as SA.
Total supply is SA + SB, and in period, equilibrium price will be P0.

Now suppose that Group A farmers do not have access to cost reducing technology, but
Group B farmers do. The supply curve of Group A farmers will not shift, but total
supply will increase as Group B farmers adopt the cost reducing technology. This will
result in increased total supply and a decrease in price to P1.

Note now that Group A farmers are harmed by technology made available to Group B
farmers, but not to Group A farmers. Their quantity supplied will decline (to QA1) and
payments to both fixed and variable factors for Group A farmers will decline. They will
now have a serious farm problem. Group B farmers, on the other hand may enjoy
increased income (PFF) because of this cost reduction technology even though they do
experience price reductions.

Unequal access to RCR is a problem both within and between economies. Within
countries, it creates regional income problems. For countries with decentralized
government structures, unequal access can be reflected in competitive public goods
systems. For example, in the case of Group A farmers and Group B farmers, if Group A
farmers can develop support for a publicly funded CGI program tailoring CGI
technology for them, they will do so, and by doing so, they will be in a competitive
position with Group B farmers. As they succeed in gaining access to CGI technology,
this will inflict damage on Group B farmers. This in turn will stimulate Group B farmers
to do more, thus setting up competitive production of public goods. This competition
model will also affect policies toward private sector firms supplying RCR.

Internationally, with integrated global markets this unequal access model is very
relevant because global prices are determined in international markets and reflect
technology-related shifts in supply curves in many countries. Farmers in different
countries do compete in global markets and RCRs realized in one country affect global
prices, hence farm problems in other countries. Farmers without access to technology
and without competitive RCR delivery systems are penalized in global markets.
Consumers, on the other hand, benefit from RCRs pretty much independently of their
origin.

RCR Evidence for Developing Countries

Two concepts of productivity change have been used to characterize agricultural

production. These are "partial" productivity measures such as production per worker or
production per hectare of land, and "Total Factor Productivity" or TFP measures. When
properly calculated, TFP measures are also measures of Real Cost Reductions (RCR).
TFP measures can be directly derived from cost function methods and directly measure
RCRs (the term "measure of our ignorance" is often applied to TFP measures, but this
term refers to the "sources" of TFP or RCR gains, not to the measure itself). The actual
measure of RCR (or TFP) is easily derived from the minimized cost function:

where are cost minimizing input quantities and Ri are factor prices.

More generally, this can be written as:

where R is a vector of factor prices and t is a period indicator.

Then

Transforming to rates of change and using the property that marginal costs = prices, we
obtain:

The accounting approach to measurement for TFP provides a more general definition
Thus, RCR = TFP and both rates of change measure real cost reduction (i.e., real
average cost reductions.

Surveys of TFP-RCR measure for developing countries are not comprehensive, but
crude measures of TFP are possible from FAO data. Table 1 reports such crude
measures for four decades - the 1960s, 1970s, 1980s and 1990s - aggregated from
country data for eight major developing country regions. These measures are crude. No
attempts to adjust for quality change in factors (particularly in labour) are made, but
subject to the crudity, these are measures of real cost reduction (RCRs). (See Section III
for details regarding TFP calculations).

Production Impacts of CGI

This section provides estimates of the magnitude of CGI impacts on production in

developing countries. Two estimates are provided. Both are expressed in terms of annual
contributions to productivity growth by decade and region. A range of estimates (high,
low) is provided to reflect the uncertainty in the estimates.

The first estimate provided is for all CGI improvements since 1965 in developing
countries. The second estimate provided is for the IARC CGI contributions. These
estimates are utilized in Part III, where the economic consequences of CGI on prices,
production, trade and welfare are analyzed.

In order to measure CGI contributions to TFP-RCR gains, we first require data on actual
adoption of modern varieties (varieties produced after 1965). These estimates are
summarized in Table 2.

The second step in computing the CGI contribution is to estimate the productivity gains
associated with the conversion of land area from traditional varieties (TVs; i.e., pre-1965
varieties) to MVs. Estimates of these gains are reported in Evenson and Gollin, 2002,
and summarized in Table 3.

TFP calculations for the three major crops in developing countries, rice, wheat and
maize, are also reported and related to MV adoption (Tables 4 and 5).

Table 2 summarizes estimates of MV diffusion by region and crop for 1970, 1980, 1990
and 1998. These estimates are not of equal reliability, being most reliable for wheat and
rice, but on the whole they offer a reasonably accurate picture of modern variety
diffusion. That picture is one of unevenness by region and crop. This is particularly
apparent for the Middle East and North Africa (MENA) and Sub-Saharan African
regions where MV adoption rates were low for all crops in 1970 and were still low for
most crops in 1980. By contrast, Latin America and Asia have significant MV adoption
by 1980. As of 1998, MV adoption was still low for cassava, beans and lentils in all
regions and for sorghum, millets and maize in Sub-Saharan Africa.

Table 2 also clearly shows that MV diffusion for aggregate crops differs greatly by
region. Sub-Saharan Africa had less than one-third the level of MV adoption attained in
Asian economies in 1998. In the 1960s and 1970s Sub-Saharan Africa had a little over
10 percent of the MV adoption levels of Asia.

Three sets of evidence are used to evaluate the productivity impacts of MV/TV
conversion (and in some cases of MV/MV conversion as well). The first set of evidence
is reported in Crop Study chapters in Evenson and Gollin (2002). The second set of
evidence is reported in three country study chapters in Evenson and Gollin (2002) (see
Table 3). The third set of evidence is based on crude crop TFP calculations based on
FAO country data. These calculated TFP growth rates are statistically related to MV/TV
conversion data for rice, wheat and maize, where data are available (Table 4).

Each set of evidence is subject to limitations and each taken separately may not be
regarded to be "consensus" estimates of MV/TV or MV/MV turnover impacts on crop
productivity. But taken together, all three sets of evidence are in substantial agreement
and this agreement supports the consensus concept.

Crops study evidence is of two types. The first type is experimental evidence, where
MV/TV yield comparisons (and MV/MV comparisons as well) are made under
conditions where experimental controls are utilized. These experiments may be on field
station locations or they may be on farm sites with some degree of farm management. In
the absence of a statistical design to farm site experiments, however, this evidence is
subject to the criticism that real farm experience is not being replicated.

The second type of crop study evidence is based on secondary data (e.g., at the province
or district level) on production, area and yield. In some cases data on other inputs,
fertilizer, labour, machines are available to enable crop TFP calculations.

Productivity impacts, whether based on MV/TV conversions or MV/MV turnover, are

not necessarily constant as MV/TV ratios change. For rice and to some degree for other
crops as well, MV "generations" have been defined. The first generation MVs are based
on quantitative-high yielding plant type traits. This generation, once established may
have high MV/TV impacts but these are often transitory because of susceptibility to
plant diseases and insect pests. The second generation of MVs is based on direct
responses to these susceptibilities. Host plant resistance to diseases and pests is sought
through qualitative trait breeding. As these varieties are adopted, they replace first
generation MVs and expand MV areas to new regions where first generation
susceptibility limited first generation MV adoption.

Third generation MVs in rice have incorporated host plant tolerance to abiotic stresses
(drought, salinity, submergence, etc.). These traits have also enabled expansion of MV
area as well as MV/MV turnover.

Byerlee and Traxler (1995) have argued that first generation impacts are larger than
second and third generation impacts in wheat. For rice, however, the evidence is less
clear.

A study of the productivity impact of rice varieties by Gollin and Evenson (1998)
estimated that improved rice varieties had contributed 13.4 percent to production by
1984 when 41 percent of rice area was planted to modern varieties. A second study for
rice (Evenson, 1998) utilizing district data for the 1956-87 period, estimated modern
variety impacts in a multi-equation model where the adoption of MVs was treated as an
endogenous variable. Determinants of MV adoption included the availability (in MVs
suited to the district) of HPR traits for disease and insects and HPT traits for drought and
salinity. The study concluded that the incorporation of these traits into MVs increased
the MV coverage from under 40 percent to over 60 percent by 1987. The yield effect
was unrelated to the MV coverage variable, indicating that the new area covered
achieved yield gains that were roughly of the same order of magnitude as those achieved
in the earliest adopting regions. The estimated yield effect was one tonne per hectare
(i.e., rice yields would have risen from 1.5 tonnes to 2.5 tonnes with 100 percent MV
adoption).

Table 3 reports a summary of estimates of yield impacts of MV adoption and of MV

turnover on productivity from both crop studies and country studies. Most of the
estimates are of MV adoption effects, i.e., the replacement of traditional varieties by
MVs. The "percent" estimates are estimates of full (i.e., 100 percent) replacement of
TVs by MVs. Some studies are based on statistical studies of micro farm level data and
some are based on aggregate panel data of the type utilized in the India chapter.

Several of the statistical studies treated the area planted to modern varieties as an
endogenous variable to be predicted as a function of variables such as extension service,
farmer schooling and of agricultural research services suited to the area. In the Evenson
1998 study, variables measuring the availability of AST traits for drought and
submergence tolerance and the number of landraces in the suitable released varieties
were also included in the MV adoption specifications.

These studies did not fully resolve the comparison between MV/TV versus MV/MV
effects, because the HPR and AST traits were incorporated into the second and third
generation MVs that were replacing first generation MVs as well as in the MVs
replacing TVs. However, the country studies summarized in Table 3 do provide some
evidence on the matter of MV/TV versus MV/MV conversion because most of the
turnover in Brazil and China was MV/MV conversion, i.e., of new MVs replacing older
MVs. These turnover estimates (for 100 percent replacement) are roughly one-third of
the gains associated with replacement of TVs.

Table 3 also reports mean "consensus" estimates of full MV-TV replacement by crop.
These are relatively conservative estimates based on the available evidence. The strategy
in the CGI contribution to productivity reported in Table 6 is to apply 2/3 of the
consensus estimate to the increments in MV acreage by decade. The remaining one-third
is applied to cumulated MV acreage from past and current decades, so that the total
effect at the end of each decade is the present MV at that time multiplied by the
consensus factor.

Evidence for MV/TV conversion impacts directly on TFP growth is presented in Table 4
and 5 for the three major crop commodities in developing countries. This evidence is an
important addition to the crop and country study estimates in two respects. First, it is
based on TFP calculations rather than yield. Second, it is based on international
comparisons as well as comparisons over time thus adding an international dimension to
the micro-crop studies and the regional country studies.

The TFP growth relationship can be expressed as:

 GTFP = GP - SAGA - SWGW - SFGF - SAPGAP- SMGM where
GP is the growth rate in production of the crop
GA is the Growth rate in land (and water)
GW is the growth rate in work hum power use
GF is the growth rate in fertilizer use
GAP is the growth rate in animal power use
GM is the growth rate in mechanical power use.

The shares SA, SW, SF, SAP, and SM are cost shares and reflect the marginal products of
each factor of production. Under conditions of scale neutrality, cost shares, i.e., the share
of the factor in total cost, are the correct shares for this calculation. These shares can be
changed from one period to the next if appropriated data are available.

FAO maintains a data base for countries from 1961 to date, enabling the following
calculations:

GP and GA for rice, wheat and maize

GW, GF, GAP and GM for all crops.
SF, SAP, and SM for all crops.

There are two issues then associated with calculating GTFP.

First, is it reasonable to use GW, GF, GAP and GM measured for all crops as proxies for
crop-specific measures?

Second, can one obtain measures of the missing shares, SA and SW ?

There is no question that errors of approximation are made when GW, GF, GAP and GM are
treated as crop specific. But this error is lower for major crops than for minor crops.
Rice, wheat and maize are the three major crops in most developing countries. In
aggregate those three crops are planted on roughly two thirds of cropped land in
developing countries.

The second question is also important because land rent data are not available to
compute SA, and wage data are also not effectively available to compute SW.

In view of the importance of the crops and the potential value of corroborating evidence
from MV/TV impacts, a decision was made to calculate GTFP measures for rice, wheat
and maize in countries producing more than one million hectares of the crop. These
calculations were made for three periods - 1965-75, 1976-85 and 1986-95. Three year
averages were used for the growth measures. Shares were calculated by period for SF,
SAP and S M using international (dollar) prices for fertilizer, animal services, tractors and
harvester-threshers, and the estimates of the crop agricultural value (in dollars). The
shares of land and labour were arbitrarily set to equal half the residual (1- SF - SAP - SM).
(This allocation is generally consistent with farm management cost studies.)

The reader should, of course, be aware that there are errors of attribution in these
measures (note, however, that GP and GA are crop-specific measures).
Tables 4 reports simple analyses of the GTFP measures computed for 54 countries for
rice, 32 countries for wheat, and 64 countries for maize. Table 5 reports estimates of
MV/TV impact on GTFP for the subset of countries for which MV/TV data are available.

Table 4 reports estimates of GTFP measures by decade. These estimates are based on area
weighted OLS regressions of GTFP measure on time period (specification 1) and
geographic region dummy variables (specification 2). The explanatory power of this
regression estimate is low (although all meet the basic F test requirement). This reflects
the fundamental nature of international agricultural production data.

These data show that rice TFP growth was modest in the first two periods, then declined
in the third period. For wheat the picture is one of very high TFP growth in the first
period, high growth in the second period and modest growth in the third period. For
maize TFP growth has been high in all three periods.

These calculations then show high TFP growth rates for both wheat and maize of over 2
percent per year for 30 years and more modest TFP gains for rice (approximately 1.2
percent per year over the 30 year period). Growth in the first (original green revolution)
period was highest and has slowed in the past two decades.

Table 5 reflects the major objective of this exercise. It relates cumulated TFP growth to
cumulated MV percent measures for 17 rice producing countries, 20 wheat producing
countries and 19 maize producing countries where MV adoption data are available.

These OLS estimates (weighted by area harvested) should be interpreted in the context
of a dependent variable with attribution errors as well as weather errors and other
measurement errors.

The estimates do show that MV/TV conversion produces TFP growth. Note that time
dummy variables also show that other factors are producing cumulated TFP growth over
time as well. Some variation in the coefficients is apparent.

Consider the pooled regression,[3] however. For these three crops in the countries in the
sample, MV adoption had reached roughly 65 percent of harvested area for the countries
concerned. The MV/TV coefficient of .534 then indicates a CGI contribution to TFP
growth of .534 x .65 = .35 percent. This CGI contribution is approximately 55 to 65
percent of realized TFP growth and 44 to 52 percent of realized yield growth for these
crops.

These estimates while subject to error (note the statistical procedure recognizes these
errors in dependent variables) do corroborate the consensus estimate reported in Table 3
from the crop and country studies.

Table 6 reports a summary of annual CGI contributions to yield growth by crop by

decade. The estimates are produced from the MV adoption data in Table 2 and the
consensus MV/TV TFP estimates reported in Table 3 (and supported by Tables 4 and 5)
(note the 1960-2000 estimates include projection for 1999 and 2000). (These growth
components are reported by crop and region in Table 8.) Since these estimates are based
on MV adoption levels and on the consensus productivity estimates, it is not surprising
that they are largely determined by MV adoption patterns. The highest growth
contributions over the 40-year period are realized in the "green revolution" crops, wheat
and rice. Interestingly, contributions in potatoes are also high. Maize contributions have
been important as well. Growth contributions in lentils, beans and cassava have been
low, although they are rising rapidly for beans and lentils.

Table 6 also enables a comparison of the IARC content of adopted varieties with the
IARC content of released varieties over the entire period. For all crops, IARC crosses
accounted for 36 percent of releases and 35 percent of area under MVs. It should be
noted that IARC crosses have higher levels of multiple releases than NARS crosses (see
Chapter 2, Evenson and Gollin), and when this is considered, IARC crosses have a
higher proportion in adoption than in releases. This is particularly pronounced in crops
other than wheat, maize and potatoes. It can also be noted that both proportions are very
high in barley, lentils, beans and cassava, where IARC programs effectively initiated
CGI work on the crop in most regions.

Table 7 reports the CGI growth estimates for aggregated crops by region and period. The
growth picture that emerges here is quite impressive in terms of regional differences and
their timing. Many observers have noted that the agricultural productivity performance
of Sub-Saharan Africa, and to some extent of the Middle East North Africa region, has
been disappointing when compared with expectations and when compared with Asian
and Latin American performance. While the CGI component is not the only component
contributing to productivity growth, it is the major component in most developing
countries (see for estimates that CGI represents as much as one-half or more of the full
TFP component. One need look no further than Table 7 for an explanation of regional
differences in growth performance. Research systems were simply not delivering MVs
that merited adoption to Sub-Saharan and MENA farmers in the 1960s and 1970s. (Note
that they were producing MVs but their MVs did not merit adoption.) It was not until the
1980s that MENA farmers realized high growth from CGI programs and not until the
1990s that Sub-Saharan African farmers realized modest growth from CGI programs.
Over the 40-year period, Sub-Saharan African farmers received only 30 percent of the
CGI growth delivered to Asian farmers. They received only 10 percent of the CGI
growth delivered to Asian farmers in the 1960s and 1970s.

Table 7 also provides on IARC content indicators for adopted and released varieties.
IARC crosses make up higher proportions of both releases and adoption in the MENA
and Sub-Saharan Africa regions than in Asia and Latin America. This attests to the
relative strengths of NARS programs. The delivery of CGI growth to Asia and Latin
America reflects stronger, i.e., better organized and managed, NARS. It also reflects
differences in institutional settings, as well as in basic biological factors underlying the
production of CGI growth itself. There is little question that CGI growth has been more
difficult to obtain in cassava, lentils and beans than in rice and wheat. Much of this is
related to the fact that temperate zone developed country CGI systems had achieved
gains before 1950 in rice and wheat that were brought to the tropical and sub-tropical
regions by IARC programs. (It should also be noted that there are differences in CGI
growth achievement between countries in regions and within countries in each region.)

The estimation of IARC CGI contributions is complex, but it can reasonably be related
to the data on both IARC crosses and NARS crosses, and IARC ancestors. Estimations
made in Evenson and Gollin (2002) reported that IARC programs have a germplasmic
contribution to NARS CGI programs that in the aggregate was roughly equivalent to the
NARS cross - IARC ancestor proportion in varietal releases. IARC programs were
estimated to make NARS programs 30 percent more productive over the period studied.
It was also estimated that NARS CGI investment responded positively to the availability
of CGI germplasm. This effect was approximately 13 percent and would have led to 7 to
8 percent more NARS varieties.

The complexity in calculating the IARC effect is that in the absence of IARC programs,
stronger regional and other coordinating programs would have provided some IARC
services. In addition, there is a competition effect (noted in Chapter 21) between IARC
crosses and NARS crosses. In the absence of IARC crosses, more NAR crosses would
have been released and adopted. These crosses, however, would have been affected by
the loss of IARC germplasm.

Table 8 presents calculations of two alternative IARC CGI growth contributions by crop
and region. The IARC CGI calculations are made as follows:

1/4 Substitution = (.75 IX = IA (1 - .75 IX)) x 1960-99 Total CGI Contribution when IX
is the proportion of IARC crosses in adopted varieties and IA is the proportion of NARS
crosses with IARC ancestry in adopted varieties

and

1/2 Substitution = (.5 IX + IA (1 - .5 IX)) x 1960-99 Total CGI Contribution

The 1/4 substitution computation postulates that in the absence of IARC programs,
NARS programs would have produced 25 percent more varieties that would be adopted
by farmers with the same yield impact as the IARC crosses would have had. It also
presumes that the germplasm loss (proxied by IA) applies to the 25 percent expansion.

The 1/2 substitution computation postulates a 50 percent substitution of NARS varietal

production for the IARC crossed varieties. Again, it is presumed that the loss of the
IARC germplasmic effect (IA) applies to this substitution proportion. As a result the
differences between the two substitutions cases are muted (for all crops all regions the
1/2 substitution calculation is 89 percent of the 1/4 substitution case).

The Economic Consequences of CGI Programs

In this section, the economic consequences of CGI programs are assessed. The
methodology for this assessment requires a multi-market, multi-country model where
crop supply and crop demand factors determine market-clearing prices, quantities
produced and consumed, and international trade volumes. For this purpose, the IMPACT
model of the International Food Policy Research is utilized to created the
"counterfactual" or "what if" simulations. The two counterfactual simulations ask the
following questions:

• how would food prices, food production, food consumption and international
food trade have differed in the year 2000 if the developing countries of the world
were constrained to have had no CGI after 1965, while developed countries
realized the CGI that they historically achieved? (This is the 1965 CGI
counterfactual in this chapter.);
 • how would food prices, food production, food consumption and international
food trade have differed in the year 2000 if the IARC system had not been built
(and thus the IARC CGI contributions had not been realized), but NARS CGI
gains in both developed and developing countries would have been realized?
(NARS include both public and private research programs.) (This is the no IARC
CGI counterfactual.).

The CGI contributions calculated in Table 8 were utilized in the IFPRI-IMPACT

simulations.

The economic consequences of CGI are realized through markets and changes in market
equilibria. CGI effects are both direct and indirect. The direct effects are the RCR
effects, where farmers realize cost reductions from yield improvements. These direct
effects, as noted in the previous chapter, vary by crop, region and period. The indirect
effects are CGI-induced price effects. These effects tend to be crop specific to some
degree (although with substitutability in demand, CGI-induced price effects for one crop
are transferred to other crops) but they are global in today's globalized economy.

Comparison of economic equilibria is a meaningful way to evaluate economic

consequences. It is important to distinguish between people as demanders of food and
people as suppliers of food. CGI effects lower costs of production and increase the
incentives for producers to supply more food. For given demand conditions this will
mean a lower price in the new equilibrium. In a dynamic version of a market model a
"base case" rate of growth in demand and in supply is posited. Then a decrease in the
CGI contribution will result in less supply and higher prices than in the base case
scenario. The extent of the price change will depend on the localization or globalization
of the market.

If the market is a local autarchic market with little trade between regions and countries,
the price response associated with CGI improvements can be quite severe. This is
because, in a local market, food demand elasticities can be quite inelastic. Suppose, for
example, that an RCR of ½ percent is produced by CGI programs. This would induce
farmers to produce ½ percent more under "neutral technical change" conditions. With a
demand elasticity of minus one, prices will fall by ½ percent. But if demand is inelastic,
this will result in a price decline of more than ½ percent. If this happens, the production
economy must make long-term structural adjustments, which in this case means that
some producers will exit from production. Thus in this local market situation, consumers
will gain (including farmers who are also consumers), but producers will actually lose
and may be forced into costly adjustment.

Now suppose that producers have differential access to CGI within this localized region.
For example, suppose only half of the farmers in the region have the natural resource
conditions to benefit from the CGI. Then the supply increase will be half as much as in
the case where CGI is available to all. The price effect will be half as large, so
consumers will gain half as much. But now the consequences for producers become very
different for those with access to CGI and those without access. Those with access will
realize RCR gains of ½ percent so their costs may fall by as much or more than prices
fall. This may produce a net gain in income for them. The producers without access to
CGI will unequivocally lose. Their costs will not fall, but prices will. Thus, their
incomes will fall.
This phenomenon of differential delivery of CGI then has important welfare
implications. A study of differential CGI delivery by David and Otsuka (1995) for rice
farmers noted that agricultural workers can escape the burden of unfavourable delivery
if they are mobile. But to the extent that they are mobile they shift more of the burden on
the owners of non-mobile assets (family labour and land).

This localized economy is increasingly less relevant in a globalized economy. We

observe that most countries today have integrated national markets in grains and
agricultural products and increasingly, international or global markets are emerging for
most commodities.

When a local economy opens itself up to trade, there are two consequences. The first is
that it can enjoy higher demand elasticities. This means that price effects (both for
increases and decreases) will be smaller, easing the burden on producers. In fact for a
small open trading economy CGI or RCR gains may have little or no price effects,
enabling producer incomes to increase with access and for producer incomes to remain
unchanged for those without access.

The second consequence of opening to trade is that the local economy is now "exposed"
to competition from abroad. If farmers in other countries realized CGI gains that are not
delivered to the local economy, the local economy will be in the same position as local
producers without access were. Thus, if China is realizing CGI in rice, this will have a
negative effect on the incomes of rice farmers in Indonesia and vice-versa. However,
consumers in both China and Indonesia will benefit from CGI in China.

In a globalized economy, the issue of delivery of CGI is not only an issue within
countries, but between countries as well. There are gains from CGI, but the distribution
of these gains depends on the nature of CGI delivery. In the previous section, it was
noted that CGI delivery has been very uneven regionally, with farmers in Sub-Saharan
Africa realizing only 10 percent or so of the gains (per hectare) that farmers in Asia were
realizing in the 1960s and 1970s. This had serious negative consequences for the region.
Fortunately the situation is more balanced in the 1990s.

Another phenomenon is likely to exist in global markets where developing countries

realize high rates of CGI gains. Most developing countries are experiencing high rates of
population and labour force growth. Only a few are realizing rapid industrial growth.
Under these conditions agricultural wage rates will tend to be low and to rise slowly.
When these countries realize CGI gains, their supply response is large because wages
will rise slowly and because wages are an important part of costs (in developed countries
wages are likely to rise faster). Over the past four or five decades, CGI gains in
developing countries have been rapid as noted in previous chapters. The supply response
to these gains has been large contributing to extraordinary declines in the real prices of
crops.

The International Model for Policy Analysis of Agricultural Commodities (IMPACT)

developed at the International Food Policy Research Institute (IFPRI) is a partial
equilibrium model covering 17 commodities and 35 country/regions. It computes global
equilibria in real prices. It is synthetic in that it uses price elasticities and non-price
parameters from other studies. The model incorporated non-agricultural sector linkages
but does not compute equilibria for markets other than for the 17 agricultural
commodities.

Each country/region sub-model has a set of equations for supply, demand and prices for
each commodity and for intersectoral linkages with the non-agricultural sector. Crop
production is determined by area and yield response functions. Area functions include
price responses (own and cross-price terms) and a non-price trend reflecting remaining
land availability and technology. Yield is a function of the price of commodity and
prices of inputs and a non-price total factor productivity (TFP or RCR) term. (This term
is discussed further below.)

Livestock commodities are similarly modelled.

Domestic demand is the sum of food, feed and industrial use demand. Food demand is a
function of prices (of all commodities), per capita income and population. Income
growth is partially endogenous to the model and agriculture-non-agriculture links are
specified. Feed and industrial use demands are derived from final demands.

Prices, production and trade volumes are endogenously determined in the model.
Domestic prices are linked to global equilibrium prices via exchange rates, and
producer-consumer subsidies and trade restrictions are allowed. Other policy
instruments (acreage restrictions) are considered. Trade is determined by net supply-
demand equilibrium conditions and global market conditions.

National Population Growth is Exogenously Based on UN Projections (World

Population Prospects UN).

The non-price terms in the area and yield functions were developed for each commodity
and country/region as follows:

First, an accounting structure based on experience in India and Brazil (Rosegrant et al.,
1998; Avila and Evenson, 1999) was developed. The accounting components were:

1. Public (IARC-NARS) Research Contributions

a. Management Research (non-CGI) Contributions

b. Conventional Plan Breeding (CGI) Contributions
c. Wide-Crossing-Marker-Aided breeding (CGI)
Contributions

2. Private Sector Agriculturally-Related R&D Spill-in Contributions

3. Agricultural Extension Contributions

4. Markets Development Contributions

5. Infrastructure Contributions

6. Irrigation (interacting with technology) Contributions

The yield growth contribution of modern inputs such as fertilizers is accounted for in
price effects in the yield response function.

The growth accounting contributions of both the public and private agricultural research
components include both CGI and non-CGI contributions. CGI contributions affect the
value of non-CGI contributions and vice-versa. The CGI calculations reported in the
previous section, however, do not include the complementarity between CGI and non-
CGI components.

These computations, reported more fully in Rosegrant et. al. (2000) were used to
simulate a "base case." This base case was actually a forward projection. For our
purposes we are using this forward projection to compute a "backcast" or counterfactual
simulation. To do this we need first, to check the base case for consistency with the CGI
calculations. Then we can "subtract" CGI contributions from the base case and compare
the equilibrium calculations with the base case to create the "counterfactual" simulation.

The consistency between the CGI reductions requires that the CGI components represent
roughly the proportion of RCR growth that were indicated in Table 5. In addition, the
population and related demand growth conditions should be similar between the
backcast period and the projection period.

The first counterfactual is the 1965 CGI counterfactual. This counterfactual is intended
to simulate conditions where developing countries are constrained to 1965 CG. For the
lower end of the range of this counterfactual, we subtract the CGI components averaged
for the 1965-2000 period reported by crop and regions in Table 8. These are our best
estimates of the CGI components ignoring CGI-non-CGI complementarity. For the
upper end of the 1965 CGI counterfactual we subtract 1.3 times the CGI components in
the lower end of the range to reflect CGI-non-CGI complementarity. This estimate is
consistent with the IARC-NARS germplasm complementarity estimates and roughly
consistent with growth accounting studies evidence.

The second counterfactual is the NO IARC CGI counterfactual. For this counterfactual,
we subtract the IARC CGI contributions calculated in Table 8. We use the 1/2
substitution case as the lower end of this range and the 1/4 substitution case as the upper
end of this range. We also subtract 1/4 of the 1/2 substitution case for wheat and rice in
developed countries to reflect the IARC contribution to developed country production
(See Alston and Pardey, 1999).

Note that, in the 1965 CGI counterfactual, developed countries realize their actual CGI
gains. In the NO IARC CGI case, we subtract a small component for wheat and rice
from developed country CGI gains.

Table 9 reports global aggregate simulations for the two counterfactual scenarios. The
simulation results are the percentage differences between the base case, i.e., the
simulation representing actual changes, and the counterfactual case.

Thus for equilibrium prices (which are global equilibrium prices in U.S. dollars per
tonne with allowances for country price differentials because of tariffs) the 1965 CGI
counterfactual indicates that equilibrium wheat prices would have been from 29-61
percent higher than they actually were in 2000. For rice, the price increases are from 80-
124 percent higher (note the range). Price increases from CGI reductions in developing
countries depend both on actual CGI gains which varied by crops and on the proportion
of the crop produced in developing countries. Price increases for rice, which is produced
mostly in developing countries, thus exceed those for wheat, half of which is produced
in developed countries.

For all crops (weighted by production) prices in the 1965 CGI counterfactual would
have been from 35 to 66 percent higher. Since prices actually fell by 35 percent or so
from 1965 to 2000, this would have more than offset the price fall. Some readers may be
surprised that these price differentials were not larger. It should be noted, however, that
the counterfactual does not posit lost CGI in developed countries and, with a supply
response to price increases, production increases in developed countries partly offset
production decreases in developing countries (see below).

For the more realistic NO IARC CGI counterfactual, the price effects are smaller, but
they are significant. For all food crops, prices without IARC CGI contributions would
have been 18 to 21 percent higher. This suggests that, even in the absence of IARC
programs, world prices of food crops would have fallen in real terms from 1965 to 2000.
This, again, may appear inelastic to many observers who credit the IARCs with creating
the "Green Revolution." But, as noted in this volume, the green revolution is largely a
joint product of NARS, IARCs and, in some countries, the private seed companies. But
much of the reason for the food price decline in the absence of developing country IARC
contributions is that developed countries were realizing high rates of CGI gains.

Global production decreases under the 1965 CGI counterfactual are also more modest
than many would expect. For all food crops, production would have been 8 to 12 percent
lower. But this is misleading because it would have increased for developed countries
(because of higher prices, see below).

Production decreases under the NO IARC CGI counterfactual would have been between
4 to 5 percent of production. This is roughly 45 percent of the decrease under the 1965
CGI counterfactual. The decline in production in the counterfactual is moderated by the
strong rise in cereal prices. These price increases induce farmers in both developing and
developed countries to expand area and increase the use of other inputs, partially
compensating for the loss of crop yield growth.

Area effects under the counterfactuals would have been substantial. This is because, if
yields are lower and prices higher, farmers would have planted more area to crops with
attendant environmental consequences. These area effects are particularly large for rice.
For all food crops, area under crops would have expanded by 2.8 to 4.6 percent in the
1965 CGI counterfactual. For the No IARC CGI counterfactual area under crops would
have expanded by 1.5 to 2.7 percent.

As developing country regions lose competitiveness, they import more of their food
crops from developed countries, which have gained competitiveness. For all food crops,
developed country exports to developing countries would have risen by 27 to 30 percent
under the 1965 CGI counterfactual. Note that this would have been in addition to the
expansion in this trade that actually took place over the 1965-2000 period.
To provide further insight into the processes underlying the aggregate data, Area, Yield
and Production Effects are reported for Developed Countries (including the transition
economies) and Developing Countries (including China) in Table 10.

Consider the Yield effects. These include the direct losses of CGI and the indirect CGI-
induced price effects. For developed countries, the 1965 CGI counterfactual is entirely
the indirect price effect. This effect is substantial for wheat and maize, but not for other
crops that are produced predominantly in developing countries. The NO IARC CGI case
includes both direct and indirect effects. For developing countries, crop yields would
have been significantly lower in 2000 in spite of the positive indirect price effects. The
NO IARC CGI effects on yields are also substantial.

Area effects, interestingly, are approximately the same for developed and developing
countries. This is because they depend on the indirect price effects and these occur
globally. The NO IARC CGI area effects are a substantial part of the 1965 CGI effects
in developing countries (especially in rice).

Production effects then show that, under the 1965 CGI counterfactual, developed
countries would have produced approximately 5 to 7 percent more food crops and
developing countries would have produced from 16 to 19 percent less. The NO IARC
CGI case would also have resulted in 1 to 2 percent more production in developed
countries and 7 to 8 percent less production in developing countries.

Tables 11 and 12 provide further detail for area and production effects for developing
country regions. Table 11 shows that area effects differ by crop and region. The
relatively small area effects in Sub-Saharan Africa, for example, are due to the fact that
this region had relatively low CGI gains, less than one-third those of other regions.
Accordingly, the lost CGI counterfactuals are lower. Had Sub-Saharan African CGI
gains been as large as those in Asia, area increases under both counterfactuals would
have been more than double those in Asia.

It is important to note, however, that the implications of area effects in the 3 to 4 percent
range are significant from an environmental perspective. This increased cropland
amounts to 9 to 12 million hectares in developed countries and 15 to 20 million hectares
in developing countries under the 1956 CGI case (5 to 6 million hectares in developed
countries, and 11 to 13 million hectares in developing countries for the NO IARC CGI
case). This would constitute an expansion of croplands on marginal areas with higher
environmental sensitivity (erodability, etc.) than cropland currently under production.

Table 12 shows production effects. Again we note that these are lower in Sub-Saharan
Africa because that region had the lower CGI gains over the period. Thus the
counterfactuals based on taking these gains away have lowest effects in this region.

The IFPRI-IMPACT model can also be used for projections of equilibrium prices.
Evenson (1999) reports each projection for a base case to 2020 and for five policy
modifications to the base case. The policy modifications shown were:

Trade Liberalization - This modification eliminates all barriers to trade.

Delayed Industrialization - The modification here is to delay industrial reforms by a
decade. This is important to agriculture because of industrial technological spillovers.

IARC-NARS Phaseout - The modification here is similar to the IARC counterfactual

case where IARC programs are ended over the next decade

Biotechnology Capacity Delay - Developing countries lag developed countries in

introduction biotechnology capacity. The modification is for a ten-year delay over the
delay built into the base case.

Climate Change - This modification is based on studies of climate change (1 degree C

rise in global temperature, 3.5 percent increase in rainfall).

The salient points regarding Table 13 are:

1. All prices are projected to decline in real terms by 2020. This reflects the technology
momentum built into the base case and this in turn is based on productivity gains
realized in the Green Revolution and continued in the Gene Revolution. Farm
problem prices will continue into the foreseeable future.
2. Slower population growth (the demographic shift) will produce even lower prices.
3. Delayed industrial reform will reduce spillover to agriculture and lead to higher
prices.
4. Reduction in IARC support will lead to higher prices.
5. Climate change will have little impact on prices.

Concluding observations

Technology contributes to real cost reduction (RCR). RCR shifts supply curves and
lowers average costs. Low demand elasticities at the global level produce "farm
problem" prices where price declines tend to exceed average cost declines. This, in turn,
calls for economic adjustment. This phenomenon holds even when significant numbers
of farmers are excluded from RCR gains.

Over the past half century, RCR gains in developed countries have averaged roughly one
percent per year greater in the agricultural sector than in the rest of the economy. Thus,
even in the absence of significant RCR gains in developing countries (the Green
Revolution) world prices would have declined for most agricultural commodities. World
trade volume would have been higher, but without RCR gains in agriculture, developing
country impacts would have been income constrained. For developed countries, the pace
of "industrialization of agriculture" would have been little affected because it was driven
mostly by factor price changes (the price of labour relative to the price of machines;
Huffman and Evenson).

But the world did witness a Green Revolution in developing countries. RCR gains were
high in many, but not all countries. The CGI component of these RCR gains was high.
Market model counterfactual simulations showed that these CGI gains did cause lower
world prices than would have been the case with lower RCR gains in developing
countries.

These lower prices were a boon to consumers in almost all economies. They contributed
to lower infant and child mortality and to improved health and nutrition. They
accelerated the demographic transitions in developing countries. For farmers, the
comparison between decreases in average costs and in prices is what matters. For
farmers with little access to CGI gains, world prices fell faster than average costs, and
many of the poorest farmers thus experienced severe farm problem prices.

But even for farmers with good access to RCR technology, the low elasticities of
demand for commodities at the farm level, led to farm problem prices and, hence, to
economic adjustments. This was exacerbated in developed countries when scale biased
RCR was the norm. Much of the scale bias was due to general price relationships in a
growing economy (region wages, falling machinery prices).

Thus, agriculture the world over has been subject to economic adjustment pressures in
recent decades, and this will continue. We are in the age of biological invention. The
Green Revolution will be followed by the Gene Revolution. Farmers will not have the
luxury of being able to avoid competition and adjustment. Most farm program solutions
in recent decades have not provided this luxury to farmers (In fact, most programs have
exacerbated the problem at high cost to tax payers).

For developing economies there are two aspects of low prices (relative to costs) that bear
further analysis. The first is that many of the poorest families in the world are
"technologically trapped." They have little access to RCR technology gains and global
prices have declined. These are the "dollar per day" populations. These farmers have few
non-farm employment options, and in spite of the anti-technology mood that pervades
many of the growing political movements (anti-biotech, anti-globalization). These
farmers have few options other than RCR technology to raise their incomes.

The second concern is that low prices in many developing countries reduce incentives to
invest in capital in agriculture. This capital includes pubic investments in irrigation
systems, markets and CGI programs as well as private investments in machinery, and for
the world's poorer farmers, capital investment combined with RCR technology
represents their only avenues to move out of the dollar per day income category.

Tables 1-7

Table 1: Decadal RCR Estimates by Developing Country Region

Region 1960s 1970s 1980s 1990s 1996-2000

(CGI)
Contribution
Latin America & Caribbean .111 .198 .175 .284 .192 (.066)
Asia (incl. China) .078 .075 .229 .204 .147 (.089)
Middle East North Africa .179 .138 .214 .214 .186 (.069)
Sub-Saharan Africa .154 -.067 .274 .217 .144 (.028)

Table 2: Modern Variety Diffusion 1970, 1980, 1990, 1998.

Percent area planted to modern varieties

Latin America Asia (including Middle East - North Sub-Saharan Africa
China Africa
1970 1980 1990 1998 1970 1980 1990 1998 1970 1980 1990 1998 1970 1980 1990 1998
Wheat 11 46 82 90 19 49 74 86 5 18 38 66 5 22 32 52
Rice 2 22 52 65 10 35 55 65 0 2 15 40
Maize 10 20 30 46 10 25 45 70 1 4 15 17
Sorghum 4 20 54 70 0 8 15 26
Millets 5 30 50 78 0 0 5 14
Barley 2 7 17 49
Lentils 0 0 5 23
Beans 1 2 15 20 0 0 2 15
Groundnut 0 15 20 50 0 0 20 40
Cassava 0 1 2 7 0 0 2 12 0 0 2 18
Potatoes 25 54 69 84 30 50 70 90 0 25 50 78
All crops 8 23 39 52 13 43 63 82 4 13 29 58 1 4 13 27

Table 3: Synthesis: Estimates of MV/TV and MV/MV Impacts on Yield Crop

Studies and Country Studies

MV/TV Estimates (Full Replacement) MB/MV (Turnover) Estimates (Full Turnover)

Crop Country Tonnes/ha Percent Source Country Tonnes/ha Percent Source Consensus
increase increase
Wheat India .98 46 Evenson, China .74 24 Chapt. 45%
'98 18
India .98 45 Chapt. Latin .2 10 Chapt.
19 America 4
Rice India .50 33 Gollin & China 1.6 29 Chapt. 47%
Evenson, 12
'99
India .98 65 Evenson, Brazil .5 20 Chapt.
'98 20
India .67 43 Chapt.
19
Sub- 24 Chapt. 6
Saharan
Africa
(upland)
Maize India .98 65 Chapt. Brazil .41 20 Chapt. 50%
 19 20
Sub- .60 45 Chapt. 8 Latin 5-15 Chapt.
Saharan America 7
Africa
Sorghum India 1.38 80 Chapt. 9 45%
India 37-40 Chapt. 9
Sub- 7-63 Chapt. 9
Saharan
Africa
Pearl India .48 45 Chapt. India 40-45 Chapt. 45%
Millet 19 10
India 45 Chapt.
10
Sub- 38 Chapter
Saharan 10
Africa
Barley Middle 25 Chapt. 41%
East- 11
North
Africa
Lentils Middle 41 Chapt. 41%
East- 13
North
Africa
Beans Latin .21 35 Chapt. 25%
America 12
Sub- .4 55 Chapt.
Saharan 12
Africa
Cassava Sub- 3.74 49 Chapt. 48%
Saharan 16
Africa
Latin 3.29 29 Chapt.
America 16
Potatoes Global 2.5 35 Chapt. 35%
15

Table 4: TFP Growth Estimates, Rice, Wheat and Maize. Dependent Variable TFP
Growth by Decade

Rice Wheat Maize Pooled

(1) (2) (1) (2) (1) (2) (1) (2)
1965-76 .147** .083** .582** .431** .282** .254** .231** .253**
1975-86 .159 .094 .384** .236** .186** .150** .148** .160**
1986-95 .059 .015** .096** .048** .308 .279** .096** .122**
Wheat .143**
Rice -.131**
East-SE Asia .089** .309** .143** .134**
South Asia .043 .193** -.217** .045*
Middle East .104 -.046 -.128 -.113*
North Africa
Sub-Saharan .102 .192 .018 .170**
Africa
# Obser. 162 162 96 96 192 192 450 450
R2 .084 .119 .304 .436 .034 .157 .034 .288

Table 5: TFP-MVA Relationships. Dependent Variable: Cumulated TFP Growth

Independent Rice Wheat Maize Pooled Pooled

variables (1) (2)

Cumulated MV .720 .470 .644 .534 Sq (CMVA) .253 (.73)

Adoption (3.82) (1.18) (3.24) (2.83) SQRT (CMVA) .156 (.82)
(CMVA) HA x CMVA 4.88 (1.00)
.059 .302 .179
d 1976-85 (.66) (1.23) NR (1.31) (1.45)
-.048 .355 2.476 .201 .188
d 1985-95 (.42) (1.17) (5.43) (1.57) (1.32)
-.079 .467 -.019 1.203 .231
Constant (.89) (2.43) (.15) (.73) (.95)
.421 -.302
D Wheat (2.93) (2.04)
-.218 -.306
D rice (1.13) (2.05)
# Obser 51 60 38 149 149
R2 .339 .152 .497 .390 .337

Table 6: CGI Contributions to Yield Growth by Crop

Contribution Shares
Adoption Varieties
(1998) (1965-2000)
Crop 1960s 1970s 1980s 1990s 1960-98 IX IA IX IA
Wheat .514 .981 1.125 .975 .960 .32 .32 .49 .37
Rice .342 .940 .959 .747 .794 .29 .29 .20 .32
Maize .311 .481 .733 .906 .665 .23 .32 .28 .19
Sorghum .055 .391 .716 .676 .504 .22 .16 .16 .11
Millets .228 .428 .537 .854 .565 .27 .38 .15 .50
Barley .073 .199 .424 1.01 .490 .50 .30 .49 .20
Lentils 0.0 0.0 .193 .750 .283 .70 .20 .54 .65
Beans .022 .027 .367 .331 .208 .80 .20 .72 .05
Cassava 0.0 .006 .087 .636 .222 .74 .19 .53 .16
Potatoes .708 .711 .749 .846 .739 .08 .09 .17 .08
All Crops .321 .676 .832 .823 .718 .35 .30 .36 .22

IX: Varietal cross made in IARC program

IA: Varietal Cross in NARS program with IARC ancestor

Table 7: CGI Contributions to Yield Growth by Regions

Contribution Shares
Adoption Varieties
(1998) (1965-2000)
Region 1960s 1970s 1980s 1990s 1960-98 IX IA IX IA
Latin America .312 .600 .781 .751 .658 .28 .30 .39 .18
Asia (including China) .452 .932 1.030 .890 .884 .30 .37 .18 .39
Middle East- North Africa .141 .270 .681 1.228 .688 .51 .31 .62 .28
Sub-Saharan Africa .017 .142 .358 .497 .280 .44 .27 .45 .28
All Regions .321 .676 .832 .823 .718 .35 .34 .36 .19

IX: Varietal cross made in IARC program

IA: Varietal cross in NARS program with IARC assistance

Tables 8-13

Table 8: CGI and IARC Contributions to Yield Growth

Annual Yield Growth Contribution for CGI Adoption IARC Growth

shares Contribution
Crop/Region 1960s 1970s 1980s 1990s 1960- IX IA ¼ ½
98 Substitution Substitution
Wheat
Latin 0.394 1.320 1.563 0.768 1.059 0.54 0.30 0.620 0.518
America
Asia 0.678 1.118 1.168 0.846 1.006 0.23 0.35 0.465 0.427
M.E.N.A. 0.189 0.531 0.861 1.388 0.829 0.50 0.32 0.477 0.406
S.S. Africa 0.183 0.838 1.093 0.855 0.531 0.37 0.26 0.285 0.254
All Regions 0.514 0.981 1.125 0.975 0.960 0.32 0.32 0.464 0.412
Rice
 Latin 0.077 0.787 1.315 0.876 0.818 0.30 0.30 0.374 0.331
America
Asia 0.375 0.998 0.966 0.713 0.868 0.30 0.30 0.370 0.327
S.S. Africa 0.000 0.085 0.572 1.219 0.545 0.20 0.20 0.174 0.153
All Regions 0.342 0.940 0.959 0.747 0.794 0.29 0.29 0.352 0.312
Maize
Latin 0.402 0.474 0.547 0.862 0.625 0.10 0.27 0.203 0.192
America
Asia 0.407 0.694 1.016 1.377 0.959 0.30 0.32 0.454 0.405
S.S. Africa 0.041 0.131 0.481 0.197 0.224 0.20 0.50 0.129 0.123
All Regions 0.311 0.481 0.733 0.906 0.665 0.23 0.32 0.291 0.265
Sorghum
Asia 0.148 0.622 1.403 0.976 0.847 0.05 0.20 0.195 0.186
S.S. Africa 0.000 0.257 0.316 0.514 0.304 0.50 0.10 0.133 0.122
All Regions 0.055 0.091 0.716 0.683 0.504 0.22 0.16 0.151 0.127
Millets
Asia 0.515 0.963 0.954 1.392 1.043 0.27 0.41 0.552 0.510
S.S. Africa 0.000 0.000 0.205 0.425 0.184 0.26 0.26 0.075 0.066
All Regions 0.228 0.428 0.537 0.854 0.565 0.27 0.58 0.286 0.262
Barley
M.E.N.A. 0.073 0.199 0.424 1.010 0.490 0.50 0.30 0.278 0.235
Lentils
M.E.N.A. 0.000 .000 0.193 0.750 0.283 0.70 0.20 0.144 0.112
Beans
Latin 0.034 0.041 0.463 0.281 0.222 0.70 0.10 0.127 0.092
America
S.S. Africa 0.000 0.000 0.188 0.426 0.180 0.80 0.20 0.122 0.094
All Regions 0.022 0.027 0.367 0.331 0.208 0.75 0.15 0.131 0.098
Cassava
Latin 0.000 0.043 0.055 0.238 0.100 0.05 0.01 0.005 0.003
America
Asia 0.000 0.000 0.091 0.485 0.174 0.80 0.20 0.118 0.091
S.S. Africa 0.000 0.000 0.093 0.771 0.249 0.80 0.20 0.169 0.129
All Regions 0.000 0.000 0.087 0.636 0.222 0.74 0.19 0.142 0.109
Potatoes
Latin 0.672 0.885 0.631 0.694 0.752 0.07 0.09 0.104 0.092
America
Asia 0.811 0.672 0.759 0.846 0.825 0.05 0.07 0.086 0.077
S.S. Africa 0.000 0.716 0.864 1.099 0.739 0.55 0.17 0.379 0.294
All Regions 0.708 0.711 0.749 0.846 0.807 0.08 0.09 0.117 0.102
All Crops
Latin 0.312 0.600 0.781 0.751 0.658 0.28 0.27 0.279 (.42) 0.245 (.37)
America
Asia 0.452 0.932 1.030 0.890 0.884 0.26 0.31 0.393 (.44) 0.353 (.40)
M.E.N.A. 0.141 0.270 0.681 1.228 0.688 0.50 0.31 0.391 (.57) 0.332 (.48)
S.S. Africa 0.017 0.142 0.358 0.497 0.280 0.38 0.24 0.128 (.46) 0.108 (.33)
All Regions 0.321 0.676 0.832 0.823 0.718 0.30 0.30 0.328 (.46) 0.291 (.41)

Table 9: Price Production Area and Trade Effects. Alternative Counterfactual

Scenarios

Wheat Rice Maize Other Potatoes Other All Food

Grains Root Crops
Crops
Price Effects (Positive)
1965 CGI 29-61 80- 23-45 21-50 13-31 28-52 35-66
124
NO IARC CGI 19-22 30-35 13-15 14-16 2-3 15.32 18-21
Production Effects
(Negative)
1965 CGI 9-14 11-14 9-12 5-9 12-18 2-3 8-12
NO IARC CGI 5-6 4-5 4-5 3-4 3-4 1-2 4-5
Area Effects (Positive)
1965 CGI 3.2-2.1 7.5- 1.1- .4-2.2 0.0-0.0 2.2-3.2 2.8-4.6
9.4 1.9
No IARC CGI 2.1-2.1 2.9- .5-.6 .5-.6 0.0-0.0 1.4-3.2 1.5-2.7
3.3
Trade Effects (Positive)
1965 CGI 31-19 0-2 45-46 25-19 190-192 21-65 27-30
NO IARC CGI 7-6 0-2 16-18 1-2 16-33 11-12 6-9

Table 10: Yield, Area and Production Effects - Developed and Developing
Countries: Counterfactual Scenarios

Wheat Rice Maize Other Potatoes Other All Crop

Grains Root
Crops
A. YIELD EFFECTS

Developed Countries (Positive)

1965 CGI 4.4-7.5 0.0-6.7 1.4-3.1 0.0-1.8 1.5-2.0 nc 2.32-4.7
NO IARC CGI 2.7-5.1 0.0-1.0 .5-2.5 0.0-1.8 0.5-1.0 nc 1.35-2.4

Developing Countries
(Negative)
1965 CGI 26.2- 18.3- 21.5- 15.0-17.1 23.5- 4.3-4.4 19.45-
31.3 22.9 25.9 28.3 23.50
NO IARC CGI 11.6- 7.8-8.7 8.7-9.5 5.6-5.8 3.4-3.9 2.5-4.0 8.07-8.9
12.9

B. AREA EFFECTS

Developed Countries (Positive)

1965 CGI 4.5-7.5 11.8- 2.2-3.4 .4-1.8 0.0-.1 nc 2.82-4.9
15.8
NO IARC CGI 2.7-3.1 4.8-5.5 .9-1.1 .3-.4 0.0-.1 nc 1.59-1.8

Developing Countries (Positive)

1965 CGI 1.7-3.6 7.3-9.3 .6-1.2 .5-.6 0.0-.1 ´2.2-3.3 2.82-4.9
NO IARC CGI 1.4-1.5 6.1-6.5 .3-.4 .4-.5 0.0-.1 1.4-3.3 1.59-1.8

C. PRODUCTION EFFECTS

Developed Countries (Positive)

1965 CGI 8.3-11.0 15.7- 2.0-5.3 1.8-2.3 1.2-4.9 nc 4.43-6.9
19.3
NO IARC CGI 1.6-2.1 3.1-5.5 1.6-1.3 1.3-1.4 1.2-1.6 nc .96-1.68
Developing Countries
(Negative)
1965 CGI 25.0- 12.1- 21.0- 14.0-14.6 24.5- 2.0-2.5 15.85-
28.6 15.2 24.9 29.1 18.63
NO IARC CGI 10.4- 5.1-5.7 8.5-9.3 4.9-5.2 4.9-5.4 1.1-2.1 6.48-7.3
11.6

Table 11. Area Effects (Positive Except where Noted) by Region and Crop:
Counterfactual Scenarios

Wheat Rice Maize Other Potatoes Other All Food

Grains Root Crops
Crops
Latin America
1965 CGI 5.1-9.6 9.1-11.7 2.1-3.6 .4-.6 -1.2-.0 .3-.5 3.10-5.12
NO IARC CGI 3.1-3.6 3.5-4.0 1.0-1.2 .4-.6 -.1-.0 .3-.3 1.54-3.08
Sub-Saharan Africa
1965 CGI 2.5-4.4 6.7-7.4 .8-1.5 2.1-4.8 -.2-2.0 2.5-3.6 2.19-4.00
NO IARC CGI 1.7-2.0 2.3-2.6 .4-.5 .2-.3 0.1-0 1.6-3.6 .63-1.01
Middle East-North Africa
1965 CGI 4.0-7.1 12.5-14.3 1.2-1.3 .9-3.1 -.0-.0 3.20-5.78
NO IARC CGI 2.5-2.9 4.3-4.8 .2-.3 .6-.7 -.1-.0 1.84-2.14
Asia (including China)
1965 CGI 1.4-1.8 7.2-9.2 -.5-.0 -.4-.7 -.1-.0 2.6-3.5 3.52-4.74
NO IARC CGI .6-.7 2.8-3.2 -0.0-0.0 .5-.6 -.1-.0 1.0-1.5 1.47-1.71

Table 12: Production Effects by Region and Crop. Alternative Counterfactual

Scenarios

Wheat Rice Maize Other Potatoes Other All Food

Grains Root Crops
Crops
Latin America(negative)
1965 CGI 25.6-29.6 9.6-12.0 15.8-18. 26.8-31.1 23.8-28.2 1.5-4.0 15.41-18.32
NO IARC CGI 12.3-14.6 3.8-4.3 3 4.0-4.1 9.8-10.3 4.6-5.0 1.5-4.0 5.41-5.62
Sub-Saharan Africa (negative)
1965 CGI 9.3-10.1 1.6-2.0 2.0-3.4 2.0-5.0 22.5-26.3 1.8-2.5 2.04-3.32
NO IARC CGI 3.6-3.8 1.6-2.0 1.6-1.9 1.1-1.9 10.8-14.0 .9-1.5 1.15-1.73
Middle East-North Africa (negative)
1965 CGI 27.1-31.5 3.0-3.5 3.3-3.9 3.5-5.1 22.5-26.9 17.56-20.66
NO IARC CGI 10.9-11.6 3.0-3.5 2.4-2.5 1.6-1.7 10.6-15.0 7.36-7.87
Asia (including China) (negative)
1965 CGI 26.7-30.8 12.9-16.3 27.5-33.3 27.5-32.1 24.1-29.8 .6-1.6 20.12-22.
NO IARC CGI 10.7-11.4 5.3-5.9 12.0-13.3 10.0-10.6 3.9-4.1 .6-1.6 8.30-9.1275
Developed Countries (Positive)
1965 CGI 8.3-11.0 15.7-19.2 2.0-5.3 1.8-2.3 1.2-4.9 4.43-6.93
NO IARC CGI .6-2.1 3.2-5.5 1.0-1.3 1.3-1.4 1.2-1.6 .96-1.68
Developing Countries (Negative)
1965 CGI 25.0-28.6 12.1-15.2 21.0-24.9 14.0-14.6 24.5-29.1 2.0-2.5 15.85-18.63
NO IARC CGI 10.4-11.6 5.1-5.7 8.5-9.3 4.9-5.2 4.9-5.4 1.1-2.1 6.48-7.30

Table 13: Price Projections 2020/1997: IFPRI IMPACT Model

Commodity Base Case Trade Delayed Delayed Global

2020/1997 Liberalization Industrialization (LDC) Warming
Ratio Biotech Access
Wheat .93 8.1 5.9 10.6 1.2
Rice .88 14.0 7.5 20.0 1.0
Maize .99 8.8 5.2 16.8 1.0
Other Cereals .89 8.1 8.0 9.3 0.1
Beef .96 17.5 7.4 1.1 1.1
Pork .97 10.9 15.5 1.1 1.0
Sheep-Goats .97 18.9 3.1 1.0 1.0
Poultry .96 11.7 2.2 1.1 0.1

WTO NEGOTIATIONS AND COMMODITY MARKET

DEVELOPMENTS
Presented by
Tim Josling
Professor and Senior Fellow
Institute for International Studies
Stanford University
REFORMS IN GLOBAL COMMODITY MARKETS: A
PERSPECTIVE
Presented by
John Wainio
USDA/ERS
A DECLINE IN COMMODITY PRICES: CHALLENGES AND
POSSIBLE SOLUTIONS
Presented by
Don Mitchell
Lead Economist, Development Prospects Group

and

Panos Varangis
Senior Economist, Rural Development

World Bank
 COMMODITY PRICE DEVELOPMENTS SINCE THE 1970S
Presented by: Ali Arslan Gürkan
Chief, Basic Foodstuffs Service
Commodities and Trade Division
Food and Agriculture Organization

Introduction

Since the pioneering work of Prebisch and Singer (1950), which drew international
attention to the declining trends in primary commodity prices, economists and policy
makers have been intrigued by the causes and consequences of commodity price
developments. A rich body of literature already exist on this issue and international
actions to cope with such developments have been in place over the last three decades[13].
The available empirical evidence has produced mixed results regarding what the actual
tendencies are: with some showing positive, negative or no decline in commodity price
trends. In general, most agree that commodity prices are non-stationary, i.e. they do not
revert back to their old levels after receiving a shock, but views differ regarding the
nature of nonstationarity, i.e. whether the trend is stochastic or deterministic or whether
there are structural breaks - Spraos (1980), Thirwall and Bergevin (1985), Grilli and
Yang (1988), Diakasavvas and Scandizzo (1991), Cuddington and Urzúa (1989),
Reinhart and Wickham (1994). Nonstationarity in commodity prices has found support
recently in empirical evidence provided by Cashing, et. al. (1999), indicating that shocks
to primary commodity prices are long lasting with wide variability in persistence levels.
Sarris (1998) also found that the underlying trend in cereal prices were deterministic
with some tendency of increased volatility during the 1995/96 period. Maizel, Becon
and Mavrotas (1997) concluded that commodity prices exhibit a long run decline rather
than volatility.

Variability in commodity prices arises as a direct consequence of shocks in underlying

demand and supply conditions, and is affected significantly by policy measures
implemented at the national level. For storable commodities, Deaton and Laroque (1992)
characterize the nature of price shocks depending on prevailing market conditions. In
tight markets, a sudden increase to consumption induces a sharp rise in prices which are
temporal in nature, while in slack markets, the impact of a shock induces the release of
stocks and other policy measures that dampen price increases but render them persistent.
They conclude that this behaviour of prices results in price cycles often observed with
flat tails and sharp spikes.

During the 1996 FAO meeting of experts on agricultural price instability[14], it was
generally agreed that compared to the past, world commodity markets in the future were
likely to be characterized by lower levels of overall stocks, although, at the same time,
being less prone to instability because of faster and broad-based adjustments to
production/demand shocks. However, the path to the new market environment was seen
as uncertain and it was generally felt that price instability would be greater during the
transitional period.

The primary aim of this document is to summarise the behaviour of agricultural

commodity prices over the last three decades to form the back-drop of discussions in the
2002 Commodity Consultation.

The first part of this note presents a summary view of monthly developments of
representative international prices of 18 important agricultural commodities over the
period covering 1970-2000. This is done by splitting the period into three decades in an
arbitrary manner and presenting the results of statistical analyses conducted to test for
differences in levels and variances of the nominal and real prices. The second part of the
note reports on the results of more sophisticated analysis of trends and volatility of the
same set of prices.

Have there been changes in the levels and variability of international commodity
prices over the past three decades?

Appendix I presents a graphical display of both nominal and real prices for all
commodities considered in this study. In general, over the last three decades, agricultural
commodity prices could be characterized as exhibiting a large shock during the early 70s
followed by a series of smaller shocks and relatively flat surfaces.

One simple way of looking at different aspects of price developments is to divide the
various series into a number of periods and compare the changes that have occurred in
order to discover consistencies across time and across commodities. In this case the
series have been divided into three equal samples (arbitrarily), each representing a
different decade (i.e. 1970-80, 1980-90 and 1990-2000). Two aspects of the series, both
in nominal and real terms[15], levels and variances, were then subjected to statistical
tests[16].

Table 1 presents the results of the analyses and indicates that the mean real prices of all
commodities over the three decades, with the exception of banana during the earlier part
of the period under study, appear to have been on the decline.

Table 1: Changes in mean levels (real) over time

Change from decade 1 Change from decade 2 (1980-90)

(1970-80) Decade 3 (1990-00)
Decade 2 (1980-90)
Commodities Increase Decrease Increase Decrease
Banana X X
Cocoa X X
Coffee X X
Sugar X X
Tea X X
Jute X X
Sisal X X
Rubber X X
Cotton X X

Maize X X
Wheat X X
Soybeans X X
Soymeal X X
Sunflower meal X X
Rapeseeds X X
Rape oil X X
Rice X X
Palm oil X X

All results are significant at the 10% level

Somewhat different results are obtained when nominal prices are analyzed in the same
manner. Table 2 indicates that the mean prices of 12 commodities have increased in a
statistically significant manner over the first two decades, with 3 experiencing a
significant decline and a further three no change. The comparisons over the last two
decades, on the other hand, indicate a complete reversal: with the mean prices of 12
commodities decreasing significantly, while 3 increasing and a further 3 exhibiting no
change.

Table 2: Changes in mean levels (nominal) over time

 Change from decade 1 Change from decade 2 (1980-90)
(1970-80) Decade 3 (1990-00)
Decade 2 (1980-90)
Commodities Increase Decrease Increase Decrease
Banana X X
Cocoa X X
Coffee X X
Sugar X X
Tea X X
Jute X X(a)
Sisal X X
Rubber X X
Cotton X X

Maize X X
Wheat X X
Soybeans X(B) X
Soymeal X X
Sunflower meal X X
Rapeseeds X X
Rape oil X X
Rice X (e)
X
Palm Oil X(e) X(e) X

(a) - at the 10% level of significance, the mean in decade 2 = mean in decade 3.
(b) - at the 10% level of significance, the mean in decade 1 = mean in decade 2.
(e) - at the 10% level of significance, all means are equal.
All the other results are significant at the 10%.

It is obvious that during the 1990s most of the commodities analyzed have experienced
depressed global markets, regardless of the manner in which the prices are measured.
More analysis is, however, needed to determine the underlying causes for such a state of
affairs. Discussion to be held during the Consultation will hopefully provide guidance
for such an undertaking.

Tables 3 and 4 present a summary of the results of the analyses related to changes in
variability in real and nominal prices over time as revealed by the estimates of
interquartile range[17] for the three decades. From the latter table, it is apparent that 9 out
of 18 commodities (i.e. in nominal terms) showed a lower level of variability in decade
3, relative to decade 2. However, in real terms, 16 out of 18 commodities showed a
decrease in variability for the same period. Where there were ambiguities in interpreting
changes in variability, a comparative test was conducted using a two sample test for
variances at the 5% level. For both real and nominal commodity prices, the following
commodities exhibited a decline in variability during decade 3 relative to decade 2:
sunflower meal, maize, palm oil, soybeans, soybean meal, rice, cocoa, sugar, and rubber.

Is it possible to look at price variability in other ways?

Another way of looking at the variability of prices is by removing any consistent

component of the price series and analyzing the resulting variability of the residuals. The
analysis was carried out by estimating a stochastic trend unobserved component model
(for each of the 18 commodities in both real and nominal terms) using the State Space
Kalman filter procedure (see Appendix VI for details) and then testing to see whether
the resulting distribution of residuals is significantly different from a normal one. In this
context, the departure from normality is viewed as being a measurement of volatility
caused by factors that could not be represented by the consistent components of the
processes generating the time series. The tests tend to support the analyses conducted
using more traditional measures of variability/volatility, in that, in real terms, 11 out of
18 commodities (cocoa, maize, palm oil, rapeseed, rubber, soybean, soy meal, sugar,
sunflower, rubber, and tea) show less volatility over the last two decades of the period
under study: Though not to the same extent[18].

Table 3: Changes in real price variability over time

Change from decade 1 (1970-80) Change from decade 2 (1980-90)

Decade 2 (1980-90) Decade 3 (1990-00)
Commodities Increase Decrease Increase Decrease
Banana X X
Cocoa X X
Coffee X X
Sugar X X
Tea X X
Jute X X
Sisal X X
Rubber X X
Cotton X X
X
Maize X X
Wheat X X
Soybeans X X
Soymeal X X
Sunflower meal X X
Rapeseeds X X
Rape oil X X
Rice X X
Palm Oil X X
Other tests were also conducted to test for the stability of a different kind: the stability of
the reduced form representation of a number of commodities where time series data are
available for all the main variables relevant for the markets, i.e. consumption, production
and ending stocks. This was done by testing for the stability of the coefficients of a
reduced form price equation. The coefficients were estimated recursively and their
behaviour examined. For the subset of commodities, it was observed that the structural
parameters were stable throughout the last decade of 1990s, indicating no significant
behavioural changes affecting the response coefficients.

Is there empirical evidence to suggest structural breaks in the price series over the
past three decades?

Very little attention has been given to the issue of structural changes in agricultural
commodity prices. As the agricultural sector is intertwined with other sectors and
constitutes a major contribution to economic activity in many importing and exporting
countries, economy-wide changes in the levels of economic activity would have a direct
impact on the agricultural sector. Besides, changes in the economic structure, agriculture
is perhaps more prone to shocks caused by weather and other natural disasters, which
can have sustained and lasting effects. In addition, technological changes can alter
productivity levels and can shift the way resources are allocated, thus, leaving
permanent effects on the agricultural sector. In addition, major policy reforms both at the
national and international levels can induce structural changes in prices.

Table 4: Changes in nominal price variability over time

Change from decade 1 Change from decade 2 (1980-90)

(1970-80) Decade 3 (1990-00)
Decade 2 (1980-90)
Commodities Increase Decrease Increase Decrease
Banana X X
Cocoa X X
Coffee X X
Sugar X X
Tea X X
Jute X X
Sisal X X X
Rubber X X
Cotton X X
X X
Maize X X
Wheat X X
Soybeans X X
Soymeal X X
Sunflower meal X X
Rapeseeds X X
Rape oil X X
Rice X X
Palm Oil X X

Using the full series available, and assuming that break points are not known a priori, the
outlier procedure was used (see Yin and Maddala, 1997 for full details) to identify the
year or years in which breaks could have occurred. The rationale of the procedure is that
outliers are aberrant observations that are away from the rest of the data, caused by
errors in measurements or unusual events such as changes in economic policies, wars,
disasters, and so on (Perron, 1989). Structural change outliers are classified as (i)
additive outliers (one-time changes) - these occur when there is a spurious change in the
data, but the data returns back to its normal pattern in subsequent periods; (ii) level shifts
- occur when the effect of a large innovation persists over time. As can be seen from
Table 5, for the important basic food commodities 1988 appears to be a year in which
persistent level changes have occurred, though not all seem to have had a significant
break during the food crisis of early 1970s[19]. For tea and cocoa, early 1980's appears to
be a period when level breaks occurred.

Table 5: Probable structural changes for selected (real) commodity prices

Commodity Dates
Level changes Additive changes
Tea 1983
Jute 1974
Cocoa 1981
Sugar 1974
Banana

Maize 1988 1981

Wheat 1973, 1988
Rice 1996
Soybean 1973, 1988 1988
Rapeseed 1988

Break dates were significant at the 1% level.

Additive changes refer to one time break and level changes refer to changes that persist
over time.

References

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Lived or Long-Lived?", IMF Working Paper, WP/00/72.
Cashing, P., C. J. McDermott and Alasdair Scott, (1999). Booms and Slumps in World
Commodity Prices", IMF Working Paper, WP/99/155

Cashing, P., Hong Liang and C. J. McDermott, (1999) "How Persistent Are Shocks to
World Commodity Prices?", IMF Working Paper, WP/99/80.

Cashing, P., C. J. McDermott and Alasdair Scott, (1999). "The Myth of Comoving
Commodity Prices", IMF Working Paper, WP/99/169.

Cashing, P., C. J. McDermott, (2001). "The Long-Run Behavior of Commodity Prices:

Small Trends and Big Variability", IMF Working Paper, WP/01/68.

Cuddington, J. (1992). "Long-Run Trends in 26 Primary Commodity Prices: A

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Cuddington, J. and H.C. Wei (1990). "Trends and Cycles in the Net Barter Terms of
Trade: A New Approach", Economic Journal, vol.99, pp. 426-442.

Deaton, A. and Guy Laroque, (1992). "On the Behaviour of Commodity Prices", The
Review of Economic Studies, vol. 59, pp. 1-24.

Engle, R. (1995). ARCH: Selected Readings. Oxford University.

Grilli, E. and M.C. Yang (1988). "Primary Commodity Prices, Manufactured Goods
Prices and the Terms of Trade of Developing Countries: What the Long Run Shows",
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[13]
For a description of the various international actions, See, "Dealing with Commodity Price
Volatility in Developing Countries: A Proposal for Market Based Approach". Discussion Paper for
the Round Table on Commodity Risk Management in Developing Countries, International Task
Force on Commodity Risk Management in Developing Countries, World Bank, Washington, D. C.,
September 24th 1999.
[14]
Report of a Meeting of Experts on Agricultural Price Instability, Commodities and Trade
Division, FAO, Rome 10-11 June 1996.
[15]
Real prices have been obtained by deflating nominal representative prices by the World Bank's
index of manufacturing unit values.
[16]
Non-parametric Wilcoxon signed-rank test, which does not assume normality and equality of
variances, was used to test for differences in means across decades.
[17]
The complete results and detailed description of the statistics used are given in Appendix IV.
[18]
This may be as expected since tests conducted for the same periods indicate that none of the
series are stationary, i.e. the effects of underlying shocks persist in influencing prices over many
months (see Appendix VII for the results).
[19]
This may indeed also be due to the fact no data prior to 1970 were used in the analyses.