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.