February 2020

February 202

Commodity dependence and its relevance for food security and nutrition

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DEPENDANT – Eighty percent of the countries with a rise in hunger during recent economic slowdowns and downturns are highly dependent on primary commodities for export and/or imports.

Commodity price trends and booms

Low- and middle-income countries are exposed to external vulnerabilities. A key vulnerability arises relating to what these countries produce and what they trade with the rest of the world: essentially, primary commodities.

International commodity price shocks and volatility can create harmful impacts for food security and nutrition in all combinations of high commodity dependence. The trend in rising commodity prices that started in 2003 and the period of extreme price volatility in 2008 have been followed by largely declining global commodity prices for five consecutive years from 2011 to 2016.

Why does commodity dependence matter?

Commodity dependence matters because it increases the vulnerability of countries to world price swings. Recent slowdowns and downturns in economic growth in many regions are largely explained by marked declines in commodity prices. This is mainly affecting countries dependent on primary commodity exports, particularly in South America, but also other regions including Asia and some countries in Africa.

Countries from these regions are commodity-export-dependent as they derive the bulk of their export earnings from primary commodities. Many of these countries also show commodity-import dependence having a high ratio of commodity imports to total import merchandise traded. This includes essential goods, such as food items and fuel.

Out of a total of 134 low- and middle-income countries studied for the period 1995–2017, 102 countries are classified according to three types of high commodity dependence, whereas the remaining 32 are low commodity dependent.

Most of the countries (52 out of 65) that experienced rising undernourishment in correspondence with economic deceleration during 2011–2017 are highly dependent on primary commodity exports and/or imports.

In 2018 most (27 out of 33) of the food crisis countries where economic shocks worsened the severity of acute food insecurity are high primary commodity-dependent countries. Most are also net food-import dependent (25 out of 33), where inflationary pressure stemming from the depreciation of national currencies against the US dollar was a key factor that contributed to an escalation in domestic food prices.

Many high commodity-dependent countries (67 out of 102) witnessed a rise in hunger or a worsening food crisis situation during 2011–2017. Twenty-three high commodity-dependent countries underwent two or more consecutive years of negative growth and most of these (15 countries) also saw rises in undernourishment or a worsening food crisis situation in 2018.

Commodity dependence and food security and nutrition: transmission channels

Designing policies to help offset the vulnerability that arises with high commodity dependence requires direct and indirect channels that link global commodity markets with domestic economic, social and human development outcomes, including food security and nutrition.

The transmission channels are complex, and a given commodity price change does not affect all commodity-dependent countries in a uniform manner.

There are direct impacts emanating as the change in commodity prices affects terms of trade, exchange rate adjustments and the balance of payments; and secondary indirect effects of these macroeconomic impacts on domestic prices, including food; unemployment, declining wages and loss of income; and health and social services.

Terms of trade, exchange rate and balance of payments

Sharp and continuous declines in international commodity prices from 2011 to 2016 led to substantial shifts in the terms of trade (TOT) and a sharp deterioration of GDP growth in commodity-dependent countries.

Declines in commodity prices since 2011 led to a deterioration in public finances for many commodity-export-dependent countries (oil and non-oil exporters) in Asia, Africa, North Africa and the Middle East, and in Latin America and the Caribbean.

For many commodity-dependent countries that experienced an increase in undernourishment or worsening food crises, the decline in commodity prices from 2011 to 2016 is associated with significant currency depreciations.

Rising domestic prices, including food

The pass-through of international commodity price developments to local domestic prices can be particularly challenging for food security and nutrition, as it can affect people’s access to food, care and feeding, as well as access to health services.

Declining commodity prices may result in depreciation and devaluation of currencies that may pass through the system resulting in domestic price increases, including food prices. In these situations, households that need to buy food are immediately affected by higher domestic retail prices as the cost of food relative to their incomes increases.

Unemployment and loss of income and wages

Sluggish economic activity as a result of falling commodity prices can lead to unemployment, loss of wages and, consequently, loss of incomes.

The impacts can be felt particularly hard in agriculture, both because of what happens within the sector and because of urban-rural linkages.

Where export crops are grown by smallholder producers, the impacts can be more widely spread.

 

January 2020

January 2020

Factbox: Commodity prices continue to fall as coronavirus spreads

New York — The coronavirus outbreak in China continued to push commodity markets lower Monday as the number of cases has risen and spread across the globe, sparking concerns of lower demand growth.

In oil, Dated Brent crude prices fell $1.48 to $58.35/b Monday, according to S&P Global Platts assessments. That was down $6.07, or 9.4%, since January 20.

In metals, the London Metal Exchange three-month copper price ended $174.5 lower Monday at $5,748/mt. That was down $515, or 8.2%, from January 20. Copper is often seen as a barometer for global economic health.

In contrast, precious metals have held up as investors increase allocation to safe-haven assets, with London gold closing at $1,580.10/oz, Platts assessments show.

The Chinese government has extended the Lunar New Year holiday period, closing businesses in key provinces and suspending air and rail travel in a bid to contain the virus. The virus has now sickened 2,900 people globally, with cases emerging in the US and Europe, while the death toll across China has climbed to 82, according to CNBC.

S&P Global Platts Analytics is forecasting a drop of 200,000 b/d in oil demand for the next two to three months, reflecting roughly 15% of the expected oil demand growth in 2020.

If the coronavirus is as bad as the Sudden Acute Respiratory Syndrome (SARS) outbreak in 2003, oil demand could fall by 700,000-800,000 b/d, reflecting more than half of the expected demand growth for 2020, according to Analytics.

“A SARS-like virus spreading out of China would damage global oil demand to a greater extent than it did in 2003, due to Asia’s much heavier weight in current global demand,” Platts Analytics said.

OPEC members are considering deeper production cuts, or extending their existing deal, in response to a slump in oil prices, according to a source in the group.

“The next two weeks are very critical for not only the oil market but the global economy,” the OPEC source said Monday, speaking on condition of anonymity.

PRICES

**Dated Brent crude prices fell $1.48 to $58.35/b Monday, according to S&P Global Platts assessments. That was down $6.07, or 9.4%, since January 20.

**In metals, the London Metal Exchange three-month copper price ended $174.5 lower Monday at $5,748/mt. That was down $515, or 8.2%, from January 20.

**Crude prices tumbled in early 2003 on the demand impacts of SARS. ICE Brent futures fell below $24/b in April 2003 from roughly $34/b in early March.

**However, it is worth pointing out that crude futures were already under downward pressure following the September 11, 2001 attacks in the US, and other terrorist attacks in 2002. Brent futures spent most of 2002 below $30/b.

**Jet crack spreads against Brent crude have weakened in recent days. The Rotterdam jet/kero crack ended Monday at $12.18/b, down from $14.17/b January 20, S&P Global Platts data shows. The US Atlantic Coast jet crack ended Monday at $11.44/b, down from $12.99/b January 21.

**The Singapore jet/kero crack spread ended Friday at $10.98/b, down from $11.34/b January 20. Singapore was closed Monday.

TRADE FLOWS

**S&P Global Platts Analytics is forecasting a drop of 200,000 b/d in oil demand for the next two to three months, reflecting roughly 15% of the expected oil demand growth in 2020.

**Platts Analytics estimated that in a “worst-case scenario” where Wuhan coronavirus is as deadly and contagious as the 2003 SARS pandemic, global jet demand could fall by 700,000-800,000 b/d.

**The coronavirus currently has a mortality rate of 3%, below the 10% rate for SARS, and governments “have better technologies to contain the spread of the virus,” according to Platts Analytics. So it is likely that the Wuhan coronavirus could lower global jet demand by 50,000-150,000 b/d for the next two months.

**Platts Analytics estimated that the SARS virus reduced global oil demand, led by jet fuel, by 230,000 b/d for around six months in 2003, primarily in the second quarter. However, global jet fuel demand has since grown by 47% to 7.11 million b/d, with “growth heavily concentrated in China, Southeast Asia, and South Asia.”

**The Lunar New Year, which falls in either late January or early February each calendar year, is a major national holiday that marks one of the country’s busiest travel seasons, when gasoline and jet fuel consumption typically spikes.

**China’s apparent demand for jet fuel rose 7.3% year on year to 898,000 b/d during the first quarter last year, Platts Analytics’ data showed. Apparent demand for the fuel in mainland China dropped around 35% on the year to 131,000 b/d in May 2003, Platts Analytics’ data showed.

**The SARS outbreak reduced annual traffic of Asian airlines by 8% in 2003, compared to only 3.7% for North American carriers, implying that Singapore jet fuel prices weakened more than the European and US prices.

**China’s gasoline demand may also register a year-on-year decline in Q1 as the central Hubei province, where Wuhan is located, is considered one of the major transportation hubs along the Changjiang River.

**The jet market is currently subject to a number of bearish factors. It is in a period of low demand and the upcoming refinery turnaround schedule that usually tightens the market is expected to be smaller and more spread out than usual, limiting its bullish impact.

**OPEC is considering deeper oil production cuts, or extending its current supply curbs beyond their March expiry, if the coronavirus outbreak spreads further, according to a source from the organization.

**The coronavirus is expected to be bearish for most metals. “For metals and bulk commodity demand, we see a slightly weaker February-March than may have been anticipated, but limited changes to expectations for the year as a whole,” BMO Capital Markets analysts said Monday.