Global Trends by Martin Khor

Monday 30 August 2004


While the oil price hike grabs the headlines, developing countries continue to suffer from low prices of most other commodities.  For years, nothing was done to help these countries, prompting French President Jacque Chirac to talk of a “conspiracy of silence” on commodities.   At last, a task force is being set up to deal with commodities, but will it be effective?


The rising price of oil is still making the headlines.  It’s good news for oil exporting countries which are enjoying higher export revenues this year.

Last week, the Bank Negara Governor, Tan Sri Dato’ Sri Dr. Datuk Zeti Akhtar Aziz, revealed that Malaysia would gain by RM 100-200 million with each dollar increase in the oil price.

However, oil is a glaring exception in the otherwise dismal world of commodities.  The prices of most commodities have been falling steeply over the past several decades. That’s a main reason why poverty persists in many Third World countries.   

From 1980 to 2000, world prices for 18 major export commodities fell by 25% in real terms, according to the World Commission on Globalisation’s report. The decline was especially steep for cotton (47%), coffee (64%), rice (61%), cocoa (71%) and sugar (77%). 

The effects have been devastating.  According to UN data, in sub-Saharan Africa, a 28 per cent fall in the terms of trade between 1980 and 1989 led to an income loss of $l6 billion in 1989 alone.   In the four years 1986-89, sub-Saharan Africa suffered a $56 billion income loss, or 15-l6 per cent of GDP in 1987-89.  

For 15 middle-income highly indebted countries, there was a combined terms-of-trade decline of 28 per cent between 1980 and 1989, causing an average of $45 billion loss per year in the 1986-89 period, or 5-6  per cent of GDP.

In the 1990s, the losses were even higher as non-oil primary commodity prices fell by another 33.8 per cent from the end of 1996 to February 1999.

The case of coffee illustrates the plight of commodity producers.  The price of coffee beans has dropped sharply, so too the share of the coffee market revenue accruing to producer countries.

The price of coffee fell from 127 US cents per lb in December 1980 to 46 cents in December 2001.  In 1992, producer countries earned US$10 billion from a global coffee market worth around $30 billion; in 2002 they received less than $6 billion export earnings from a market that has doubled in size.  Their share of revenue fell from 33 per cent to less than 10 per cent.

The price fall has had devastating effect on national export revenues and the incomes and lives of 25 million coffee farmers worldwide, according to a recent Oxfam report. 

Coffee accounts for over 50% of Ethiopia’s export revenue and 80% of Burundi’s.  It is linked to the livelihoods of a quarter the population in Uganda, 10% in Honduras and 8% in Guatemala.  In Brazil there are 230,000 to 300,000 coffee farmers and another 3 million are employed in the coffee industry, and in India 3 million are also employed in the coffee industry. 

The main reason for the price fall is over-supply.  Supply has grown by over 2% per year whilst demand growth has been lower at 1-1.5% per year, leading to stocks being built up to 40 million bags.  

Up to 1989, the coffee market was regulated by the International Coffee Agreement (ICA) made up of producer and consumer countries and managed by the International Coffee Organisation (ICO). The ICA broke down in 1989, with opposition from the US (which left as a member) being a major factor.  The Agreement remains but no longer has the power to regulate supply through quotas and the price band. 

Coffee prices are now determined by futures markets.  After the ICA broke down, prices have fallen very low.  Proposals to revive the Agreement have been impeded by lack of political will, with consumer countries not willing re-start their participation.  

Moreover, there is a great imbalance in the global coffee supply chain, with small farmers at the lowest end being paid very low prices by their traders, the exporting traders in developing countries being paid little by the large roaster companies in the US and Europe that buy the coffee beans, and these companies reaping much of the benefits on their retail coffee business. 

An Oxfam study found that the coffee farmer in Uganda received 14 US cents per kilo for his green beans, which pass through various traders to the roaster factory at a price of $1.64 per kilo.  It ends up at a UK supermarket shelf as soluble coffee at $26.40 a kilo, which is 7000 percent higher than the price paid to the farmer.  A similar journey into a pack of roast and ground coffee sold in the US involves a price rise of nearly 4000 percent.    

The coffee story illustrates the general plight of commodity producers overall.   It is a plight that has not received much media or public attention.

Indeed, President Jacques Chirac of France last year spoke of the existence of a “conspiracy of silence” on the commodities crisis, and tried to launch a special initiative on commodities at the Summit of the Group of 8 Summit in Evian.  However Chirac did not get a positive response from the other leaders.

The United Nations is at last trying to do something.  In 2003, it set up an expert group on commodities. Its report and action plan spurred some debate at the General Assembly last October. 

Then, at the eleventh session of the UN Conference on Trade and Development (UNCTAD) in Sao Paulo last June, participants called on UNCTAD and other agencies to “break the conspiracy of silence” on the commodities crisis and to take comprehensive action.

The conference agreed to set up an independent task force on commodities, made up of member states, international agencies, commodity bodies, the private sector, academics  and NGOs.

The Task Force will address issues such as collaboration among stakeholders, greater coherence among agencies in commodity issues, sharing best practices; commodity sector vulnerability and risks; distribution of value added in the commodity value chain;  and promoting sustainable approaches to production and trade.

The task force and its cautious list of issues is a far cry from the work of UNCTAD in the 1960s to 1980s when initiatives to attain fair prices for commodities and negotiations for  commodity agreements were its bread and butter work.

Nevertheless, despite its mild and limited agenda, the decision to set up the task force is a step forward, given the severity of the commodity crisis and the absence of an international venue to discuss let alone address it.    

Let’s hope the new Task Force will soon be set up and that some action will be taken to break this long-standing commodities crisis.   It shouldn’t be just another talk shop.