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.


**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.


**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.


October 2019

October 2019

What companies are for (from the Economist 2019)

Competition, not corporatism, is the answer to capitalism’s problems

ACROSS THE West, capitalism is not working as well as it should. Jobs are plentiful, but growth is sluggish, inequality is too high and the environment is suffering. You might hope that governments would enact reforms to deal with this, but politics in many places is gridlocked or unstable. Who, then, is going to ride to the rescue? A growing number of people think the answer is to call on big business to help fix economic and social problems. Even America’s famously ruthless bosses agree. This week more than 180 of them, including the chiefs of Walmart and JPMorgan Chase, overturned three decades of orthodoxy to pledge that their firms’ purpose was no longer to serve their owners alone, but customers, staff, suppliers and communities, too.

The CEOs’ motives are partly tactical. They hope to pre-empt attacks on big business from the left of the Democratic Party. But the shift is also part of an upheaval in attitudes towards business happening on both sides of the Atlantic. Younger staff want to work for firms that take a stand on the moral and political questions of the day. Politicians of various hues want firms to bring jobs and investment home.

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However well-meaning, this new form of collective capitalism will end up doing more harm than good. It risks entrenching a class of unaccountable CEOs who lack legitimacy. And it is a threat to long-term prosperity, which is the basic condition for capitalism to succeed.

Ever since businesses were granted limited liability in Britain and France in the 19th century, there have been arguments about what society can expect in return. In the 1950s and 1960s America and Europe experimented with managerial capitalism, in which giant firms worked with the government and unions and offered workers job security and perks. But after the stagnation of the 1970s shareholder value took hold, as firms sought to maximise the wealth of their owners and, in theory, thereby maximised efficiency. Unions declined, and shareholder value conquered America, then Europe and Japan, where it is still gaining ground. Judged by profits, it has triumphed: in America they have risen from 5% of GDP in 1989 to 8% now.

It is this framework that is under assault. Part of the attack is about a perceived decline in business ethics, from bankers demanding bonuses and bail-outs both at the same time, to the sale of billions of opioid pills to addicts. But the main complaint is that shareholder value produces bad economic outcomes. Publicly listed firms are accused of a list of sins, from obsessing about short-term earnings to neglecting investment, exploiting staff, depressing wages and failing to pay for the catastrophic externalities they create, in particular pollution.

Not all these criticisms are accurate. Investment in America is in line with historical levels relative to GDP, and higher than in the 1960s. The time-horizon of America’s stockmarket is as long as it has ever been, judged by the share of its value derived from long-term profits. Jam-tomorrow firms like Amazon and Netflix are all the rage. But some of the criticism rings true. Workers’ share of the value firms create has indeed fallen. Consumers often get a lousy deal and social mobility has sunk.

Regardless, the popular and intellectual backlash against shareholder value is already altering corporate decision-making. Bosses are endorsing social causes that are popular with customers and staff. Firms are deploying capital for reasons other than efficiency: Microsoft is financing $500m of new housing in Seattle. President Donald Trump boasts of jawboning bosses on where to build factories. Some politicians hope to go further. Elizabeth Warren, a Democratic contender for the White House, wants firms to be federally chartered so that, if they abuse the interests of staff, customers or communities, their licences can be revoked. All this portends a system in which big business sets and pursues broad social goals, not its narrow self-interest.

That sounds nice, but collective capitalism suffers from two pitfalls: a lack of accountability and a lack of dynamism. Consider accountability first. It is not clear how CEOs should know what “society” wants from their companies. The chances are that politicians, campaigning groups and the CEOs themselves will decide—and that ordinary people will not have a voice. Over the past 20 years industry and finance have become dominated by large firms, so a small number of unrepresentative business leaders will end up with immense power to set goals for society that range far beyond the immediate interests of their company.

The second problem is dynamism. Collective capitalism leans away from change. In a dynamic system firms have to forsake at least some stakeholders: a number need to shrink in order to reallocate capital and workers from obsolete industries to new ones. If, say, climate change is to be tackled, oil firms will face huge job cuts. Fans of the corporate giants of the managerial era in the 1960s often forget that AT&T ripped off consumers and that General Motors made out-of-date, unsafe cars. Both firms embodied social values that, even at the time, were uptight. They were sheltered partly because they performed broader social goals, whether jobs-for-life, world-class science or supporting the fabric of Detroit.

The way to make capitalism work better for all is not to limit accountability and dynamism, but to enhance them both. This requires that the purpose of companies should be set by their owners, not executives or campaigners. Some may obsess about short-term targets and quarterly results but that is usually because they are badly run. Some may select charitable objectives, and good luck to them. But most owners and firms will opt to maximise long-term value, as that is good business.

It also requires firms to adapt to society’s changing preferences. If consumers want fair-trade coffee, they should get it. If university graduates shun unethical companies, employers will have to shape up. A good way of making firms more responsive and accountable would be to broaden ownership. The proportion of American households with exposure to the stockmarket (directly or through funds) is only 50%, and holdings are heavily skewed towards the rich. The tax system ought to encourage more share ownership. The ultimate beneficiaries of pension schemes and investment funds should be able to vote in company elections; this power ought not to be outsourced to a few barons in the asset-management industry.

Accountability works only if there is competition. This lowers prices, boosts productivity and ensures that firms cannot long sustain abnormally high profits. Moreover it encourages companies to anticipate the changing preferences of customers, workers and regulators—for fear that a rival will get there first.

Unfortunately, since the 1990s, consolidation has left two-thirds of industries in America more concentrated. The digital economy, meanwhile, seems to tend towards monopoly. Were profits at historically normal levels, and private-sector workers to get the benefit, wages would be 6% higher. If you cast your eye down the list of the 180 American signatories this week, many are in industries that are oligopolies, including credit cards, cable TV, drug retailing and airlines, which overcharge consumers and have abysmal reputations for customer service. Unsurprisingly, none is keen on lowering barriers to entry.

Of course a healthy, competitive economy requires an effective government—to enforce antitrust rules, to stamp out today’s excessive lobbying and cronyism, to tackle climate change. That well-functioning polity does not exist today, but empowering the bosses of big businesses to act as an expedient substitute is not the answer. The Western world needs innovation, widely spread ownership and diverse firms that adapt fast to society’s needs. That is the really enlightened kind of capitalism.