Global Trends by Martin Khor

Monday 3 November 2008

Countries hit by falling commodity prices

Malaysia has been affected by the fall in prices of export commodities like petroleum, palm oil and rubber.  Many developing countries are hit by the end of the commodity boom resulting from the global economic crisis.

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Commodity prices have begun to decline sharply in the past few months, at a time when the turmoil in global financial markets intensified, and as recessionary conditions took hold in many developed countries.

Malaysia is one of the countries affected.  As a net oil exporter, it has been hit by the dramatic fall in the oil price from a peak of US$140 a barrel just a few months ago to the current price of just above US$60.

Even more significant has been the alarming and quick decline in the price of palm oil. Crude palm oil futures in Malaysia tumbled from an all-time high of MR 4,500 per tonne in early March to about RM1,500 at the end of last week.

This 66% drop is causing incomes to fall correspondingly among the smallholders in Malaysia and Indonesia.  According to a Financial Times report, millions of small producers in Indonesia are now struggling to survive.

The price of rubber is also coming under pressure.  Last week, officials of Malaysia, Thailand and Indonesia met in Bangkok and agreed to cut rubber output by 215,000 tonnes in 2009 to boost prices, which according to Thai official had fallen from US$2 a kilo a year ago to US$1.72.

The output cuts in the three countries will be through the felling of plantations, reduction of tapping per tree and delay of starting in tapping of new trees by a year, according to a Thai official after the meeting.

The fall in commodity prices is not all bad news.  Consumers benefit from lower prices and manufacturers have lower costs.  Importing countries also get reduced import bills.

But for developing countries like Malaysia which are commodity exporters, the losses far outweigh the benefits, as export earnings fall and millions of producers suffer reduced incomes.

For the past few years there has been a boom in prices of most commodities.  Some analysts even predicted that there had been a structural shift in commodity trends and the boom would last many years, instead of being part of the usual boom-and-bust cycle.

Other analysts saw the super-boom as partly driven by real demand increase (especially in China) but also significantly driven by speculators.  This is now proving correct.  There is a slowdown in demand, but more importantly a flight from commodity markets by speculators, due to the global financial crisis and the deepening recession.

Data from the U.N. Food and Agriculture Organisation show that for many food commodities, export prices peaked around June and have been declining since, with the price falls intensifying in the past two months.  However, prices of most food commodities are still higher than a year ago, with some exceptions.

Meanwhile, the prices of many minerals and metals have also fallen significantly in recent weeks.

The “commodity boom” seems to be over and is being replaced by a new general commodity price slump. 

The FAO Food Price Index (FFPI) dropped another 6% in September, falling to a nine-month low of 188 points. The sharp decline in the index reflected the rapid decrease in international prices of all major food and feed commodities.

The fall in food prices overall was reflected in the decline in indices for cereals, oils and fats, meat and sugar.

After reaching a high of 278 points in June 2008, the FAO Cereal Price Index fell to 228 points in September. The FAO Oils/Fats Price Index fell further to 209 points in September, or 28 percent below the June record.

The FAO Meat Price Index fell to 140 points in September, 4% below its peak in August.  And the Dairy Price Index fell to 218 points in September, down almost 12% from August.

According to the FAO report, the fall in prices of most cereals continued in September and into the first week of October.

This was largely in response to favourable prospects for 2008 harvests, the influence of falling crude oil prices and financial turmoil in world economies.

The report gave detailed account of the price situation in three major cereals – wheat, maize and rice.

On rice, the FAO said that expectations of record 2008 paddy crops in the northern hemisphere are keeping downward pressure on export prices. The price of Thai white rice 100% B averaged $764 per tonne in September, about 3% down from August, and fell to USD 734 in the first week of October.

The drop in Thai prices over the past few months would likely have been more pronounced had it not been for the country’s official procurement programme launched in June.

Indeed, in other export markets the slide has been deeper, with price quotations over the same period down 35% in Viet Nam and Pakistan and 16% in the United States.

However, prices are still well above their values of September 2007 (by 130% in Thailand, 92% in the United States, 74% in Viet Nam and 53% in Pakistan).

On wheat, international prices continued to decline sharply. The US wheat price averaged $308 per tonne in September, and fell to $264 in the first week of October, about 45% below its peak in March, and 25% down from October 2007.

Maize prices fell further towards the end of September and in early October. The US maize price averaged $229 per tonne in  September, and fell to USD 184 in the first week of October, 35% below the peak in June, but still 13%  above October last year.

According to the FAO, 36 countries are in need of external assistance as a result of crop failures, conflict or insecurity, natural disasters, and high domestic food prices.