VOLUME 7 1 2E4 july 1999 20305 GLOBAL COMMODITY MARKETS a comprebensive review and price forecast THE WORLD BANK Commodities Team Developmnent Prospects Group ISSN 1020-721X VOLUME 7 12 4 jjuly1999 GLOBAL COMMODITY MARKETS a comprehensive review and price forecast E THE WORLD BANK Washington, D.C. Copyright C) 1999 The International Bank for Reconstruction and Development/ The World Bank 1818 H Street N.W., Washington, D.C. 20433, USA All rights reserved. Manufactured in the United States of America You may not copy, reproduce, publish, distribute, transmit, create derivative works, or in any way exploit any part of the contents of this publication without prior written permission from the Office of the Publisher at the address above. The contents of this publication may not be used to construct any kind of database. The World Bank does not guarantee the accuracy of the data and forecasts presented in this report, and accepts no responsibility whatsoever for any consequence of their use. ISSN 1020-721X ISBN 0-8213-4574-5 Contents Summary ............. 5 Regional Price Indices ............. 7 Special Features Anticipating Y2K .............. 8 New Income Support Schemes .......................... 10 Economic Outlook ................................... 12 Ocean Freight. ...................... 13 COMMODITIES Energy C oal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 16 Natural Gas ....................................18 Petroleum ..................................... 20 Non-Energy Agriculture Beverages C ocoa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 24 C offee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 26 T ea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 28 Fats, Oils, and Oilseeds Fats and Oils ....... 30 Coconut Oil ................................... 32 Palm Oil ..................................... 34 Soybean Oil ....... 36 Soybeans ....... 38 Grains G rains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 40 M aize . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 42 R ice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 44 W heat . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 46 july 1999 Contents (continued) Agriculture (continued) Other Food Bananas ....................... 48 Shrimp ....................... 50 Sugar ur.. .................. . 52 Agricultural Raw Materials Cotton ...................... 54 Rubber ...................... 56 Tropical Timber ...................... 58 Fertilizers Nitrogen ...................... 60 Phosphates. . . ................... 62 Potash ...................... 64 Metals and Minerals Aluminum.. . ................... 66 Copper ...................... 68 Gold ...................... 70 Iron Ore and Steel .......... . ...... .... ...... .... 72 APPENDIX Commodity Price Data ................. 76 Commodity Prices and Price Projections in Current Dollars ..... . . . . 78 Confidence Intervals for Price Projections in Current Dollars ..... . . . 79 Commodity Prices and Price Projections in Constant 1990 Dollars. . .. . 80 Confidence Intervals for Price Projections in Constant 1990 Dollars. . . . 81 Weighted Indices of Commodity Prices and Inflation.. . . .. . . . ... . 82 Description of Price Series ............................. . 83 Definitions and Notes ................................ . 85 Acronyms and Abbreviations ............................ . 87 This report was prepared by the Commodities Team of the World Bank's Development Pros- pects Group. The core team includes Donald Mitchell (Team Leader), John Baffes and Shane Streifel (Economists), Betty Dow (Senior Information Analyst), and Paul Llido (Staff Assis- tant). The report was prepared with the assistance of Margaret Moss of G.I.Global, Inc. Questions or comments should be emailed to gcm@worldbank.org. 4 GLOBAL COMMODITY MARKETS SUMMARY Summary compliance with the production cuts agreed in March and this has started to reduce the stocks of crude oil. Commodity prices showed strength in the If current trends continue, the excess supplies could second quarter as supply cutbacks began to be reduced sharply by the end of the year and prices take effect and hopes for the global economy could remain strong. Concern over the potential dis- improved. Energyvprices continued to rise on ruptions associated with Y2K (see Special Feature) OPECprovea ctin cuts contmueagricftore and may cause consumers, processors and distributors to OPeCal production cuts whiled Largrtcut ad stockpile crude oil and products and this could lead to metals prices were mixed. Large stocks of additional price pressure as we enter the winter sea- most commodities preclude a rapid recovery of son of peak demand. A shortage of ocean tankers may prices. However, the outlook has improved develop if importers rush to beat the end of the year since our last report. concerns over Y2K and this could contribute to the potential for price volatility. Energy prices were strong during the second Metals producers announced production cuts and quarter due to cutbacks in production and indications this provided the spark needed to start prices rising. that the strong market discipline shown by OPEC pro- Aluminum prices rose 9.2% when measured on a quar- ducers will continue. Other commodities were less ter-on-quarter basis as LME stocks began to decline clear in their trend of prices. Metals prices showed from record levels. However, the aluminum market some strength, especially aluminum and copper, and is poised to slip back into surplus in the third quarter the index of metals and minerals prices rose 5.2% unless demand strengthens. Copper prices rose 4.3% compared to last quarter. However, gold fell to new quarter-on-quarter as producers began to close high lows on continued central bank selling. Agricultural cost mines. This has led to market optimism that the prices fell an additional 4.3% due to concerns that the lows of this price cycle have been reached. By early new crops, which are now being harvested in the July, copper prices had increased 20% from their May Northern Hemisphere, will be large enough to add to lows, and new orders from Asia further contributed to rather than reduce stocks. the belief that the lows are established. However, The most significant developments of the quar- copper stocks remain high and are expected to increase ter were related to the supplies of commodities rather again this year, which makes the recovery vulnerable. than the demand. OPEC producers have achieved 90% Steel prices rose 3.6% due to reduced trade following Non-Energy Commodity Price Index (Nominal) (1990= 100) 130 110 - - - - - - - - - - - - - - -- - - - - - 50 ---------- -------------------------------------- 30 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 Source: World Bank july 1999 5 SUMMARY anti-dumping complaints by the US and other coun- Brazil was entering the period when frosts could tries. Steel production was down more than 5% dur- occur and damage production, but that concern sub- ing the first five months of this year. Gold prices con- sided and the news turned negative as reports of lower tinued to fall as the announced 25 ton sale from the domestic coffee consumption in Brazil point to in- Bank of England sent prices down to about $260/toz. creased Brazilian exports. The UK plans to auction an additional 25 tons each The overall index of non-energy commodity month until March. prices stabilized as shown in the figure below. We Agricultural commodity prices fell 4.3% on a continue to believe (as we said in our last report) that quarter-on-quarter basis as the estimates of the ex- most commodity prices have either hit their lows of tent of the current surplus continues to grow. Grains the cycle or are near their lows. The recovery of prices production for the old crop (1998/99) was revised is not expected to be rapid unless the outlook for the up only slightly since our last report, but the USDA's global economy improves significantly from the cur- estimate of the global carryover stocks was increased rent forecast. However, the outlook for commodity by 5.4% and this contributed to the 8% fall in grain prices has improved since our last report because of prices. The estimates of fats and oils production was the improved outlook for the global economies and increased 0.6%, and Indonesia lowered its export tax the faster-than-expected recovery in Asia. on palm oil. Together, these two developments Since the peak of the current price cycle in caused palm oil prices to fall 18.6% and the overall May 1996, non-energy prices have declined 29% to index of fats and oils prices to fall 8.3%. Global their recent lows and the decline is comparable in natural rubber production for the 1998 crop was in- length to the two most recent price cycles. Agricul- creased 3.1% and this contributed to the 12.2% de- tural prices continue to fall as estimates of carryover cline in Malaysian natural rubber export prices. Old stocks increase, while metals and minerals prices have crop sugar production has been revised higher by shown surprising strength since their lows in March. 1.5%, and this contributed to the 18% decline in sugar We expect further weakness in agricultural prices due prices during the quarter. The increase in sugar pro- to current large stocks and the prospects of another duction was due largely to increased production in large harvest. Metals and minerals prices appear to Brazil. Production and stocks of cocoa were raised have found strength in the announced production cut- 1.5% and 5.5%, respectively, and prices fell 18.5%. backs, however, stocks are still large and demand has Coffee prices were initially buoyed by concern that not recovered leaving further price recovery difficult. Current and Previous Declines of Non-Energy Commodity Price Indices (Peak= 100) 105 10February 1980-January 1985 95 ^ May 1996-March 1999 85 - - - - - - - - - - - - - - - - - - -- - - June 1988-May 1993 \% 0 12 24 36 48 60 Months from Peak Source: World Bank 6 GLOBAL COMMODITY MARKETS REGIONAL PRICE INDICES Regional Price Indices 120 East Asia and Pacific Prices of developing countries' non-energy commodity exports were down an additional 105 [- _________________ 2.2% in the second quarter afterfalling nearly 30% over the past three years. Sub- so Saharan African and East Asian exporters East Asia and Pacific fared worst the while Latin American and 75 ----------------- Caribbean, and South Asian exporters fared relatively better. 60 Jun-95 Jun-96 Jun-97 Jun-98 Jun-99 The East Asia and Pacific region had a 4.1% decline in its export index for the second quarter com- 140 Latin America and Caribbean pared to the first. The major commodity exports of Latin America and the region which fell included natural rubber Caribbean (-12.2%), palm oil (-18.6%), and rice (-12.3%). Ma- 120 - jor exports of the region which saw higher prices K included tropical timber, with sawnwood prices up ------- 7.1% and logs up 2.0%. Metals prices, especially A o-d> copper and tin, also important exports for the region, 80 World ->= were up 4.2% and 3.6%, respectively. [ The Latin America and the Caribbean region had a 2.0% decline in the index of non-energy com- 60 n9 u-6 Jn9 u-8 Jn9 Jun-95 Jun-96 Jun-97 Jun-98 Jun-99 modity exports in the second quarter. The prices of the major exports of the region include soybeans and 120 South Asia soybean products (-4.9% for the quarter), arabica cof- fee (-1.1%), robust coffee (-13.7%), and sugar (-18.0%). However, these price declines were par- 10 ______________________ tially offset by higher prices for metals and minerals (+5.2%) 90 - Sub-Saharan African exporters fared much World worse than the average during the second quarter, 75 ________________________------- with a decline of 6.2% in their index of non-energy commodity exports. The declines in their major ex- I ports included: cocoa (-18.5%), robusta coffee Jun-95 Jun-96 Jun-97 Jun-98 Jun-99 (-13.7%) and sugar (-18.0%). Higher metals and min- eral prices kept the price declines from being even 120 more severe. South Asian exporters had the smallest de- cline among developing country regions, with a 105 - fall of 1.3% in their export price index for non- World energy commodities. Major exports of the region 90on- and the price changes for these commodities in- clude robusta coffee (-13.7%), rice (-12.3%), and 75 ------------- vegetable oils (-8.2%). Sub-S aranAfric Note: The regional price indices use the non-energy commodity 60 export basket of each region to compute the price index. This Jun-95 Jun-96 Jun-97 Jun-98 Jun-99 index is then compared with the index using global exports. july 1999 7 SPECIAL FEATURE consumers have higher demand prior to the event and Anticipating Y2K lower demand following the event. If a catastrophic outcome does occur, then economic activity may be Anticipation of Y2K disruptions may cause disrupted and prices may continue to rise. Y2K dif- consumers to increase stocks of commodities. fers in one important aspect - it is global. Everyone The supplies of most commodities are large will be affected. enough to meet increased demand, but crude oil supplies are tightening and prices may rise. Historical perspective Transportation is a potential bottleneck. The Gulf War provides a recent example of how commodity prices react to uncertainty. Following Iraq's invasion of Kuwait in 1990, oil prices soared The Y2K technology problem (the millennium because of the loss of Kuwaiti and Iraqi exports, and bug) that is expected to cause havoc at the turn of the fears of further losses from the Gulf. But, non-oil century is receiving widespread attention and predic- commodity prices rose a modest 3.9% through the end tions of major disruptions - even global recession. The of September 1990 and then declined throughout the impact of computer and embedded chip failures po- following months until the allied attack in mid-Janu- tentially threatens simultaneous and multiple disrup- ary 1991. The impact on non-oil commodity prices tions of services. The FAO warns that the millennium was substantially less than on oil because there was bug could prove to be "one of the most dangerous pests less threat of supply disruptions. threatening farmers," and that the whole of the food Food prices rose sharply in the 1970s - wheat chain is vulnerable to the Y2K problem.' There have more than doubled and rice prices tripled - between already been some unpleasant surprises in prepara- 1972 and 1974. This created food shortages and tions for Y2K such as the discharge of raw sewage caused some countries to alter their grain importing into a Los Angeles city park during tests of computer and stocking patterns. For example, Japan and the and electronic systems (Washington Post), the loss of Republic of Korea, which relied on imported wheat telephone service during Y2K testing in Canada (The as an important food source, increased wheat stocks Ottawa Citizen), and the shutdown of a nuclear reac- during and immediately following the period of high tor in Pennsylvania during testing (Newsbytes). prices. France, which was a major wheat exporter, As we near the turn of the century, concerns will doubled its carryover stocks in 1974 despite a record undoubtedly increase and problems will multiply. Re- production and strong global demand for exports. gardless of whether the disruptions to occur are large or small, the anticipation of Y2K will lead to changes Changes in demand and supply in consumer and producer behavior that could have The size of Y2K-related demand increases de- significant impacts on commodity markets. pends on several factors: how much consumers stock- pile, how much speculators buy in anticipation of Anticipating a crisis higher prices, how much governments increase pre- In some respects, Y2K resembles other major cautionary demands for basic staples, and how much events that could have catastrophic outcomes such as industries increase their stocks of raw materials. In war or a natural disaster. When faced with such events, the past, demand for most commodities has not in- consumers (including retailers, wholesalers, and pro- creased significantly in anticipation of a disruption of cessors) stockpile essential items. Following the event, supplies. But, growing concerns about the global im- consumers either delay additional purchases until their pact of Y2K risks may lead to unexpected increases stocks return to normal, or they consume their stocks in demand. Basic staples such as food and fuels are during the period when they cannot purchase these expected to see the greatest increases. items at reasonable prices. This leads to a cycle of Commodity producers may also alter their ac- economic activity. tivities and increase production in anticipation ofY2K Before the event: i) the precautionary demand disruptions. As with consumers, they may take off- for certain items increases, ii) prices may rise in re- setting behavior following the event - or adjust to the sponse to this demand and depending upon supplies consequences of the event. If producers correctly an- of the items, iii) producers increase supplies in re- ticipate increases and subsequent declines in demand, sponse to actual or anticipated increases in demand. then demand and supply could remain in equilibrium If the event does not have a catastrophic outcome then and prices could remain largely unchanged. If pro- 8 GLOBAL COMMODITY MARKETS SPECIAL FEATURE ducers incorrectly anticipate consumer responses, then will be too little or too late, and that stocking and we may see prices rise or fall. speculative demand because of Y2K will exert addi- Not all producers can adjust quickly. Agricul- tional upward pressure on prices. This at time when tural producers are limited by the seasonal nature of markets are already expected to tighten significantly. production. Metals and minerals producers and en- ergy producers can more easily increase production if Transportation bottlenecks may occur they have excess capacity. Global stocks of most com- Transportation could become the bottleneck as modities are large due to the past two years of weak- we near Y2K. Since a large share of global commodi- ened global demand and large production, and this will ties production is traded, a disruption in our capacity buffer most commodity prices from significant in- to transport commodities could lead to local shortages creases. The supplies of many food commodities will and surpluses. The transportation sector may face dis- also be large because the Northem Hemisphere crop ruptions because of computer failures at the end of will be harvested in the fall. the year, but even before then, it may face a demand surge which disrupts normal shipping patterns. If Impact on commodity prices importers attempt to increase their stockpiles of goods Energy appears to be the most vulnerable com- before the end of 1999, this could overburden the trans- modity to the Y2K bug because peak demand is in portation system. winter, when stocks - built up over the spring and sum- The rates for dty bulk ocean freight increased mer - are required to satisfy demand. While oil stocks 14% in the second quarter and have risen 45% since are high at present, they are expected to fall dramati- the lows reached in January. The recent increases may cally in the second half of 1999 because of OPEC's be partly related to Y2K as well as the recovery in large cuts in production. Asian economies. If demand increases and rates con- Energy supplies are also vulnerable because oil tinue to rise, this could have several impacts on com- production is the most technology intensive of major modities. First, adequate space may not be available commodities. Embedded microchips used for produc- to ship commodities, and countries which depend on tion, transportation, refining, and distribution leave imports of food, fuel, and raw materials may find that energy vulnerable to disruption. Oil producing coun- they cannot import as expected. Second, low-valued tries strapped for cash, such as Russia and Nigeria, commodities may be crowded out by high-valued com- may face problems which they lack the resources to modities and manufactures. This could cause bulky fix. Thus, stocks could build at every available point commodities such as grains and tropical timber to be along the supply chain because of fears of computer displaced by higher-valued cargo such as manufac- glitches. tures. This could lead to not only disruptions of nor- During the Gulf War, there was an immediate mal shipping schedules but also to wide swings in loss of supplies from Iraq and Kuwait. Speculative prices as surpluses build in exporting countries and demand bid futures prices up sharply. Saudi Arabia shortages develop in importing countries. and other producers with spare production capacity raised output significantly, albeit with an initial delay, Conclusions to meet demand and support the international coali- Y2K technology problems are expected to lead tion against Iraq. There was no attempt to exploit the to increased demand as consumers stockpile essential situation and keep prices high. Although prices re- commodities. Supplies of most commodities are ad- mained high up to the War in January 1991, they fell equate to accommodate such increases, but crude oil back to pre-crisis levels once the threat of additional supplies are tight and prices could rise on Y2K fears. supply losses were reduced. Transportation may become a constraint as exporters What is not clear, as we approach Y2K, is and importers try to ship before the end of the year. whether there will be a sufficient supply response This could lead to surpluses in exporting countries should speculative demand and stockpiling put undue and shortages in importing countries. Lower-valued pressure on prices. Producers are recovering from a bulk commodities may get squeezed out by higher- prolonged slump in oil prices, and may wish to sus- valued commodities and manufactures leaving trade tain prices around $20/bbl. The risk of being too ac- disrupted. commodating with its production is that they may raise 'News Highlights, Food and Agricultural Organization of the United output too much and prices may fall precipitously. Nations, "The So-called "Millenium Bug" - or Year 2000 (Y2K) Thus there is a risk that a necessary supply response problem," May 10, 1999. july 1999 9 SPECIAL FEATURE effects. Consider the case of an import tariff. Under an New Income Support import tariff, domestic producers supply more because they receive a higher price than what competitive cir- Schemes cumstances would dictate without a tariff. Consumers pay a higher price and the government receives tariff New income support schemes for farmers are revenue. The total losses to the country exceed the gains replacing price subsidies on commodities. by producers because resources are wasted in order to However, recent examples have fallen short of produce more than what market forces would have oth- the ideal and are likely to be less successful erwise dictated. than originally hoped. Under an income support mechanism, the gov- ernment eliminates the tariff and provides income as The EU Commission reformed its Common Ag- lump-sum transfers. Producers supply less (as they re- ricultural Policy (CAP) in March 1999. The main ele- ceive a lower price) and are compensated by the gov- ments of the reform, known as Agenda 2000, are: (i) a emient. Because of the theoretical appeal of this type 15% cut in the intervention price for grains over a 2- of support program, governments have attempted to year period; (ii) a reduction of import duties for all grains apply it in practice (see figure below for the three cases by an estimated $30/ton; and (iii) a 16% increase in excluding Agenda 2000). direct area support for cereals over a 2-year period (i.e., In 1992, the EU member states agreed to reform a from 54.34 euros/ton to 63.00 euros/ton). significant part of CAP by replacing part of the price Agenda 2000 was motivated by the desire to move support with direct area payments, based on average away from quantity-based measures (such as price sup- acreage in support crops during 1989/91. Most cere- ports and import duties) to direct income support pay- als, oilseeds, and livestock were included. While the ments based on historical area under cultivation. payments were fixed in nominal terms, there was no Agenda 2000 is the latest of four attempts to reformn agriculture in this way. Ear- lier reforms included: the 1992 CAP re- EU: CAP refonm Mexico: PROCAMPO US: FAIR fr,Mexico's 1994 PROC AMPO pro- Characteristic implemented 1993 implementated 1994 implemented 1996 ,Objective To compensate produers To compensate producers To compensate producers gram, and the US FAIR Act of 1 996. for a reduction in support for the elimination of for the elimination of While these programs are a step in the prices guaranteed prices on deficiency payments support crops right direction, some shortcomings in Payment basis Average acreage in Average acreage in Acreage for which their designs and implementation may support crops dunng support crops durng deficiency payments were make them less successful than originally 1989-91 1991-93 received in any of the past 5 years hoped. Supported Wheat, maize, bartey, rye, Wheat, maize, sorghum, Wheat, maize, sorghum, products oats, rapeseed, sunflower, barley, rce, cotton, beans, barley, rice, cotton, oats A step in the right direction ... soybeans, dred pulses, soybeans, safflower beans, tobacco, beef, lamb The problem with existing produc- Time profile Hxed in nominal terms; Total of 15 years: first 10 Program lapses after 7 no expiration date years fixed in real terms; years uness extended tion-based subsidies is that In order to declining in final 5 years achieve their objective - usually to in- Payment limits None $6,700 per farm $40,000 per farm crease producer income - they distort Restrictions on Land should be allocated Land should be allocated Land should be kept in production decisions. Policies that raise the use of to support large crops; to support crops, but agricultural uses (excluding support-crop large producers must put since 1996 land can be fruits and vegetables); use the price producers receive, cause pro- land into fallow a allocated to other must be in compliance ducers to increase output, thus leading predetermined level of agricultural uses with existing conservatbn support-crop land plans to stock build-up and pressure on world Other features Support prces continue "Negotiated" prces in Nonrecourse govemment prices, which in turn requires other mea- for cereals at lower level effect for the first 2 guaranteed commodity sures to restore market equilibrium. The transition years of the loans are retained in program; floor prices are modified formn rationale behind replacing these "distort- retained for maize and ing mechanisms" by direct income sup- beans port is to prevent unwanted production 10 GLOBAL COMMODITY MARKETS SPECIAL FEATURE expiration date and no upper limit on how much a pro- commodities which have some price floors still in op- ducer could receive. eration. CAP reform fails to entirely eliminate price Mexico also began its PROCAMPO program in supports and retains many quantitative restrictions. 1994, by replacing price supports with income supports Establishing supporting institutions. A national to grain and oilseed producers. The support was based land registry needs to be in place to ensure fair and on average acreage during 1991-93 and included nine timely payments to producers. The government must grains and oilseeds. The payments are scheduled to have policy credibility or producers will not respond as last 15 years (the first ten years fixed in real terms, de- desired. The macroeconomic environment, especially clining in the last five years). The upper payment was the exchange rate, should be adequate and stable. In set at the equivalent of about $6,700 per farm. some cases, eliminating currency overvaluation makes The US's Federal Agricultural Improvement Act it possible to eliminate protection without providing (FAIR) became law in 1996 after the longest farm-bill fiscal compensation. debate in history. FAIR replaced the so-called defi- Keeping costs down. As a general rule, the fiscal ciency payments with direct income support for most costs of income support programs should not exceed cereals. Payments to producers are declining in real the costs of the programs they replace. When world terms and the program will expire after seven years. prices are high (as they were in 1996 when the US FAIR The upper payment limit is $40,000 per farm. Act was implemented) producers received both high prices and program payments. Thus taxpayers bear a ... but with some shortcomings double burden: they pay both the high consumer prices and the program's costs. Payments should instead be While these programs are a step in the right di- linked to world prices so that when prices are high, pro- rection, a number of shortcomings still exist that pre- ducers receive less support, and when prices are low, vent the programs from achieving their objective of producers receive more support. transforming agriculture into a distortion-free sector. It is important to remember the intent of a direct Limiting the duration of the programs. The pro- income support program: to provide a transition from grams should be transitional and not permanent. Al- price-distorting subsidies to a fully liberalized sector though PROCAMPO is scheduled to be phased out over that allows resources to be allocated more efficiently. 15 years, at which time world prices will prevail, FAIR's Such programs are not intended to be poverty reduc- language leaves open the question of support when the tion mechanisms, although they can raise the incomes program expires after seven years. Agenda 2000 has of small producers. They are not intended to be invest- no time limit (nor did CAP reform). Nevertheless, if ment programs, since they have no provisions on how the final objective is to eliminate support, the programs the support money is to be spent. And they are not should wind down to an explicit expiration date. designed to induce sectoral growth, since they lower Lifting restrictions on land use. An income sup- producer prices. Because income support programs are port scheme should not impose restrictions on the use linked to an asset - land - a majority of the payments of land. With the exception of environmental consid- will inevitably go to larger producers. erations, the main justification for restricting land use is to ensure that payments only go to bona fide produc- Conclusion ers. Yet one important reason for replacing price subsi- Recognizing the waste of resources that traditional dies with income support is to encourage individual commodity subsidization programs have caused over producers to use resources as relative prices and com- the years, recently govemments have attempted to re- parative advantage dictate. place them with programs that support farmers' incomes Making reforms comprehensive. To realize the and do nut cause misallocation of resources. Follow- full benefits of an income support system, the programs ing EU's CAP reform in 1992, Mexico introduced its should include all crops and replace all existing com- own program in 1994, followed by the US in 1996, and modity programs. For example, FAIR does not apply more recently another CAP reform, known as Agenda to sugar, tobacco, peanuts, or milk, all of which are 2000. While these programs are a step in the right di- heavily protected in ways that seriously misallocate re- rection, a number of shortcomings make their success sources. PROCAMPO is restricted to nine doubtful. july 1999 11 ECONOMIC OUTLOOK ~ * 1a *Consensus shows the economy contracting by only Economic O JUtlook 3.5% this year. In the rest of the region, performance World economic activity continues to improve has been mixed, with strong growth in Hungary and disappointing performance in Poland. In the indus- trial countries, GDP is expected to rise more slowly The US economy continues to show surprising in the second quarter than in the first, although the US strength and a faster-than-expected recovery is will continue to record solid growth in the short-term. occuring in Asia. Economic performance in the other European industrial production remains weak, and crisis countries, including Brazil and Russia, has fared growth in Japan is expected to slow following the un- better than initially expected. Nevertheless, signifi- expected spurt in the first quarter. cant downside risks remain, with prospects in the in- In 2000, economic growth is expected to be more dustrial countries particularly uncertain. balanced as the recovery gathers strength in Europe Consensus Forecasts show world GDP growing and spreads in developing Asia, while slowing in the by 2.1% this year, somewhat higher than the 1.8% in US. However, while the conditions for sustained glo- our March 1999 forecast, shown below. The five East bal recovery have improved, a number of risks remain. Asian crisis countries are seen growing by 3% this year The situation in Japan is very uncertain and there re- with the Republic of Korea rising by 5.8%. Industrial mains a risk of an even deeper and more protracted production has been growing by double-digit rates in recession. The recovery in Europe is still hesitant, all the large Asian economies with the exception of and a substantial stock market correction in the US China, whose momentum appears to be faltering. and Europe is possible. In Latin America, Brazil is staging a recovery Countries in Latin America are still grappling with from the depths of the balance of payments crisis and the full force of the crisis, and the speed at which they Consensus now shows GDP declining by only 1% this will recover depends critically on the outcome of the year. Growth is also accelerating in Mexico (Con- electoral cycle and the ability of Argentina and Brazil sensus 2.9%), but debt problems and economic diffi- to consolidate the recent improvement in sentiment. culties in Argentina, Colombia, and Ecuador will re- East Asian countries risk losing some of the cost ad- sult in declining economic activity in those countries. vantage as their currencies have appreciated and the Russia has benefited from higher oil prices and costs of some key inputs are rising, e.g., oil and metals. World Growth, 1981-2007 (Change in real GDP) Forecasts Region 1981-90 1991-97 1998 1999 2000 2001 2002-07 World total 3.1 2.3 1.9 1.8 2.4 2.8 3.1 High-income countries 3.1 2.1 1.9 1.8 2.1 2.3 2.6 OECD countres 3.0 1.9 2.0 1.8 2.0 2.2 2.5 Non-OECD countries 6.6 6.1 -1.7 1.6 3.8 4.7 5.2 Developing countries 3.0 3.1 1.9 1.5 3.7 4.6 5.1 East Asia 7.7 9.4 1.8 4.0 5.5 6.3 6.8 Europe and Central Asia 2.6 -4.0 -0.3 -1.5 2.3 3.6 4.7 Latin America and the Caribbean 1.9 3.6 2.0 -0.8 2.5 3.9 4.3 Middle East and North Africa 1.0 2.9 1.5 0.7 2.5 3.3 3.7 South Asia 5.7 5.5 5.2 4.4 4.8 5.2 5.0 Sub-Saharan Africa 1.9 2.2 2.1 2.5 4.0 4.0 4.1 Memorandum item East Asian crisis countries 6.9 6.9 -7.7 0.3 3.5 4.5 5.3 Indonesia, the Republic of Korea, Malaysia, Philippines, and Thailand. Note: GDP is measured at market prices and expressed in 1987 prices and exchange rates. Growth rates over historic intervals are computed using the least squares method. Source: Global Development Finance, World Bank. Data and baseline projectons, March 1999. 12 GLOBAL COMMODITY MARKETS OCEAN FREIGHT volatile rate soared to $8,679/day in early June. Trans- O cean Freight Atlantic round voyage rates increased by 23% on av- Freight rates rose on strengthening demand erage, although rates surged to $10,000/day at end- amid economic recovery and re-stocking, but April - more than double the lows in January - but weakened at the end of the quarter. settled back to $7,189/day at end-June. Capesize rates for coal and ore tonnage were Dry bulk freight rates rose 14% in the second much softer in the quarter due to weak demand and quarter due to strong demand for time charter routes exports. Coal shipped from Hampton Roads (US) to for Panamax size vessels. The Baltic Freight Index Rotterdam fell 1% in the quarter, as US coal exports (BFI) of rates for Capesize (80,000+ dwt) and slumped due to loss of competitiveness to lower-cost Panamax (50,000-75,000 dwt) size vessels hit 1,125 suppliers. South African coal rates to Europe were in early May, up 45% from the 12-year lows in Janu- off 4.5%, falling to $4.00/ton in June. Rates for iron ary. However, rates slipped back to end the quarter at ore shipments from Brazil to Europe were flat due to 970. The Baltic Handy Index (BHI) - for Handysize weak steel demand, but end-June rates were 15% lower vessels less than 43,000 dwt - increased by 21% in than at the beginning of the quarter at $3.20/ton. the second quarter. The index held fairly steady in Handysize rates for both Atlantic and Pacific May and June, and ended the quarter at 844, down routes rose strongly in May, but by end-June prices slightly from the May high of 892. had fallen back below levels at the beginning of the Panamax rates for grain tonnage rose strongly quarter. End-June time charter rates for a Trans-Pa- for all main destinations. The BFI voyage rates from cific round voyage were $6,827/day and the Trans- the US Gulf to Europe for light grain increased 13%, Atlantic round voyage were $6,118/day. Tanker rates hitting $12.50/ton in May before retreating to $11.18/ fell due to sharply reduced crude oil exports from ton by end-June. Heavy grain shipment rates from OPEC countries. the US Gulf to Japan were up 12% with rates reach- Biffex futures were in contango at end-June sug- ing $19.75/ton, before receding to $16.75/ton at end- gesting weak demand in the dry bulk freight market, June. Time charter rates were up more sharply, espe- and are supported by declining rates in June. Rates cially Trans-Pacific round voyage rates which rose are expected to rise as economic recovery in Asia con- 41%, ending the quarter at $7,288/day - although the tinues and the Y2K deadline nears. Baltic Freight Index (1985=1000) and Biffex Futures 2,500 2,000 .. . . . . . . . . . . . . . . . . . . . . = -B Fi .. . . . .. . . . .. . . . .... .......... . . . . . . . . . . . . 1,500 .. ------------- ---- ... B ~~~9 iJffex a3s --o -fJui n-e 30--- 1,000 A ...... ........ ... .... .. ............. ..................... .. ---------................ -- -- J an-85 J an-86 J an-87 J an-88 J an-89 J an-90 J an-91 J an-92 J an-93 J an-94 J an-95 J an-96 J an-97 J an-98 J an-99 J an-00 Source: Baltic Exchange and LIFFE. BFI Time Charter Routes ($/day) BHI Time Charter Routes ($/day) 11,000 ,13,000, .. l T~~~rans-Pacific Round Voyage Continent/Far 7,000... ..9,000.----------------- 5,000. - - .7,000 . . Trans-Atlantic Round Voyage Atlantic 3,000 S,000 Jun-97 Dec-97 Jun-98 Dec-98 Jun-99 Jun-97 Dec-97 Jun-98 Dec-98 Jun-99 Source: Baltic Exchange Source: Baltic Exchange july 1999 13 ______COMAMODITIES N NN#~~~~~~~~~~~~~~~~~~~~~~~~~ N ~ ~ ~ ~ ~ ~ I42