Class 1 The economics of commodity markets and products What are commodities? Overview of commodity...
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Transcript of Class 1 The economics of commodity markets and products What are commodities? Overview of commodity...
Class 1The economics of commodity markets
and products
• What are commodities?• Overview of commodity trade and trends• Changing market structures • Following the commodity chain – the example of sugar• Commodity-related risks
What are commodities?
Statistical definition: specific SITC sections:- section 0 (agricultural commodities - largely foods, including processed ones)
- section 1 (agricultural commodities - drings and tobacco)
- section 2 (crude inedible materials - largely oilseeds and raw materials as well as mineral ores)
but groups 233, 244, 266 and 267 exclude (synthetic materials)
- section 3 (fuels - including electricity)
- section 4 (vegetable oils)
- item 522.56 (aluminum - partly also reported in 287.32)
- division 68 (some (semi-)processed minerals and metals)
Problems with the SITC definition
Somewhat artificial: e.g.:
- gemstones excluded
- gold at times reported as a metal and at times as a financial transfer (excluded in commodity statistics)
- textile yarns are largely excluded, even though they are standardized and require much less processing than many metals that are included under “commodities”
- products such as paper and plywood are excluded
- the products do not have a lot in common
Defining the “essence” of commodities?
It is attractive to think of commodities as products that are:- fungible- can easily be described using a few standard parameters- have a more or less uniform price in any single market
When considering the possibilities for sophisticated financial markets, this is a very useful way of thinking of commodities: it allows to identify for which products it is possible to introduce sophisticated instruments. But:
* it would exclude many products normally considered as “commodities” (e.g. fruits, vegetables, flowers)
* and would include many others (e.g., yarns, fertilizers, computer chips, interest rates, pollution rights, crop yields)
Commodity groups
Shares of world exports, 1995
- manufactures: 75%
- food items: 9 %
- fuels: 7 % (1980: 24%)
- ores and metals: 3 %
- agricultural raw materials: 3 %
- non-classified, including non-monetary gold: 3%
Growth rates, 1980-95
8.6 %
4.8 %
-1.7 %
4 %
4.4 %
The main export productsShares of world exports, average 1994-1995 1. Passenger vehicles: 4.9 % 2. Crude petroleum: 4.4 % (194 bn US$) 3. Transistors 3.3 % 4. Data processing eq. 2.5 %5. Motor vehicle parts 2.5 % 7. Petroleum products 2.4 % (109 bn US$)24. Aluminum 0.9 % (41 bn US$)25. Meat 0.9 % (37 bn US$)29. Natural gas 0.9 % (35 bn US$) Note: role of manufactures35. Copper 0.6 % is over-estimated due the46. Shaped wood 0.6 % importance of re-exports47. Alcoholic beverages 0.6 % 49. Fruits and nuts 0.6 % 79. Cosmetics 0.4 %56. Vegetables 0.5 % 93. Wheat 0.3 %66. Animal feeds 0.4 % 96. Coffee 0.3 %68. Fish 0.4 % 103. Sugar 0.3 %74. Coal 0.4 % 111. Cotton 0.3 %
The major developing country exports
Shares of developing country exports, average 1994-1995
1. Crude petroleum: 12.9 % (149 bn US$) 2. Transistors 5.0 % 3. Petroleum products 3.3 % (38 bn US$)18. Natural gas 1.0 % (12 bn US$)22. Shell fish 1.0 % (11 bn US$)23. Coffee 1.0 % Note: role of manufactures24. Copper 0.9 % is over-estimated due the27. Fruits and nuts 0.9 % importance of re-exports31. Precious stones 0.8 %
0% 2% 4% 6% 8% 10% 12% 14%
Wood
Fish
Veg. oils
Meat
Cereals
Fruits
Vegetables
Dairy products
Tobacco
Sugar
Cotton & yarn
Coffee
Cocoa
1970-72
1996-97
Main world agricultural exports, by category (commodity as % of total agricultural exports)
Traditional commodities are losing importance
New dynamic sectors have emerged
Who exports?
(1994) Developedmarket
economies
Developingcountries
Foods 69 % 23 %
Raw materials 74 % 20 %
Ores/metals 67 % 23 %
Fuels 41 % 51 %
Some commodity export data
(non-fuel commodity exports, 1994)
USA: 75.8 billion US$Netherlands: 40.3 billion US$Brazil: 18.7 billion US$Africa: 17.8 billion US$
exports: fuel non-fuel exports
commoditiesAsia 122.9 127.0Latin America 65.6 28.8Africa 17.8 36.7
0
5
10
15
20
25
30
35
40
45
70-72 80-82 90-92 96-97
EU
Other developed economies
AsiaUSAUSA
Latin America
Eastern EuropeAfricaLDCs
0
5
10
15
20
25
30
35
40
45
50
70-72 80-82 90-92 96-97
EU
Eastern Europe
AsiaUSA
USA
Japan
Commodity exports Commodity imports (% of world commodity exports) (% of world commodity imports)
0
5
10
15
20
25
70-72 80-82 90-92 96-97
billi
on U
S$
8%
10%
12%
14%
16%
18%
20%
22%
24%
shar
e of
dev
elop
ing
coun
try
expo
rts
Sub-Saharan Africa
LDCs
Brazil
Brazil
Sub-SaharanAfrica
Comparative development of exports: sub-Saharan Africa, LDCs and Brazil
Agricultural products
0
50
100
150
200
250
70-72 90-92 96-97
US$
billi
on
Exports
Imports
Minerals & metals (incl. steel)
0
50
100
150
200
250
70-72 90-92 96-97
US$
billi
on
Exports
Imports
Fuels
0
50
100
150
200
250
70-72 90-92 96-97
US$
billi
on
Exports
Imports
Developing country trade balancesfor the major commodity groups
30
40
50
60
70
80
90
100
1970-72 1990-92 1996-97
Coffee
Sugar
Tea
Cotton & yarn
Cocoa
Losing market shares in traditional sectors: developing countries’ shares in the world market
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1970-72 1990-92 1996-97
Sh
are
in
va
lue
co
coa
tra
de
Chocolate
Cocoa beans
Cocoa products
Developing country exports
Developed country exports
Losing out in the value-added:the example of the cocoa sector
Regional trade balances (billion of US$, 1994)
Africa Asia LatinAmerica
Foods - 2 + 10 + 24
Raw materials + 2 - 5 + 2
Ores/metals + 3 - 10 + 12
Fuels + 33 + 62 + 14
Commodity dependency - some examples
In many countries, a large part of export earnings comes just from one commodity: (commodity’s share of total exports, average 1993/1994)
Crude oil: Angola 92 %; Cameroon 37 %; Congo 87 %; Ecuador 34 %; Gabon 87%; Iran 83 %; Nigeria 91 %; Papua New Guinea (PNG) 31 %; Saudi Arabia 75 %
Coffee: Burundi 54 %; Colombia 20 %; El Salvador 32 %; Ethiopia 64 %; Guatemala 21 %; Honduras 25 %; Kenya 18 %; Madagascar 20 %; Rwanda 54 %; Uganda 77 %
Cocoa: Cote d’Ivoire 38 %; Ghana 29 %;
Sugar: Barbados 20%; Belize 40%; Cuba 45 %; Fiji 40 %; Guyana 26 %
Cotton: Burkina Faso 59 %; Paraguay 20 %; Sudan 28 %; Togo 18 %
Gold: Burkina Faso 17%; Burundi 26 %; Fiji 9 %; Guyana 26 %; PNG 20%
Copper: Chile 28 %; PNG 19 %; Peru 18 %; PDR Congo and Zambia > 80 %
Bauxite/aluminium: Ghana 17 %; Guyana 21 %; Jamaica 50 %; Suriname > 80 %
Changing international market structures
InformationInformationrevolutionrevolution
Trade houses are Trade houses are no longer ableno longer able
to make profits on to make profits on simple trade simple trade transactions.transactions.
Concentration/Concentration/consolidation:consolidation:medium-sized medium-sized
players areplayers aredisappearingdisappearing
Some tradingSome tradinghouses movehouses move
into new areasinto new areas(e.g. futures trade, (e.g. futures trade, physical broking)physical broking)
PenetrationPenetrationinto trading atinto trading atdomestic leveldomestic level
Penetration Penetration into value-addedinto value-addedactivities (e.g. activities (e.g.
service “packages”,service “packages”, processing)processing)
Entry of Entry of new actorsnew actors
Before liberalisation
Government monopoly
Cooperative unions or large traders
Cooperatives/small traders
Producers
After liberalisation
Exporters
Changing domestic market structures
Large traders
Small traders/ cooperatives
Producers
Banks Banks
Foreign buyers Foreign buyers
Inte
grat
ion
Deman
d for
finan
ce
Government Government ensures qualityensures quality
Nee
d f
or e
xter
nal
age
nci
es (
incl
ud
ing
fore
ign
on
es, t
o p
rovi
de
serv
ices
(qu
alit
y co
ntr
ol, i
nsu
ran
ce)
Input supply
Input supply
??
Price risk exposure
There are many marketing forms
• Intra-company sales/purchases• Long-term contracts, with fixed or
reference prices• Countertrade• Fixed-price forward contracts, with one or
several deliveries• Price-to-be-fixed contracts• Spot sales/purchases
Following the commodity exchange - a brief example:
sugar
Where are sugar prices determined?
Raw sugar
1. Is the sugar exported?
2. If so, is the price “pooled” or not?
3. Is the price preferential?
If yes, under ACP quota: price is a function of EU price If yes, under USA quota: price is a function of No. 14 futures contract.
4. If not preferential, then probably, the reference price is the
New York No. 11 futures contract.
Seller
Buyer
EXW
FASFCA
FOB
CFRCIF
CIP
CPT/
DAF
DDUDDP
DEQDES
Domestic transport
Clearing at export port
International transport - who pays insurance?
Clearing at import port
Domestic transportAre import duties paid?
The flow of goods:
INCOTERMS
Raw sugar is generally sold FOB, white sugar CIF. What does this mean, and why is this so?
Sugar is generally sold against a reference price, for example, « 0.5 cents over New York No. 11 » – what does this mean?
A reference price is a price that market parties use as a starting point for their price negotiations. The price they agree on is likely to be different (related to quality, location, bargaining strength, etc.) from this reference price. In a physical trade contract, both the reference price and the differential can be made explicit (“Price-To-Be-Fixed” contract). The reference price is usually, but not necessarily, a futures market price.
Quantity Origin Grade Shipment Destination Futures Price BasisDates Month
BIDSArabica Washed3600 bags India Plantation A Mar - Apr Open May Less 19c/lb Fob
Robusta Unwashed1680 bags Cote d'Ivoire Grade 2 Apr Open May Less $100 C&F3360 bags Cote d'Ivoire Grade 2 May-Jun Open Jul Less $100 C&F
3600 bags India Cherry ab Mar-Apr (1800 each)Open May Less $40 Fob1800 bags India Cherry ab May Open Jul Less $40 Fob3600 bags India Cherry clean bulk Mar-Apr (1800 each)Open May Less $80 Fob 1800 bags India Cherry clean bulk May Open Jul Less $80 Fob
3600 bags Indonesia EK1 gr4 80 def May&Jun Open Jul Less $230 Fob
1280 bags Uganda Screen 15 Jun Open Jul Less $20 Fob2560 bags Uganda Screen 15 Jul-Aug (1280 each)Open Sep Less $20 Fob
OFFERSArabica Washed3600 bags India Plantation A Mar - Apr (1800 each) Open May Less 15c/lb Fob
If relevant futures markets exist, physical commodities are often priced on the basis of futures contracts. Eg, coffee:
Market and pricing structure - sugar
Sugar beet
Sugar cane Rawsugar
Refinedsugar
Consumers
Sugar beetproducers
Sugar caneproducers
Sugarmills
Sugarrefineries
Consumers
Much production is at a cost well above the world market price
CONSEQUENCES
AlternativesweetenersDemand at
times stimulated by high sugar prices
In some countries, run-down
Overcapacity
Most beet production is at a cost well above the world market price
Com
plex
pro
duce
r pr
icin
g ar
rang
emen
ts
Price paid by consumers varies very strongly from country to country
Government taxes/ subsidies
Sugar beet
Sugar cane Rawsugar
Refinedsugar
ConsumersInternationally traded
Internationally traded
White sugar
annual
Perennial(pro-cyclical investment)
Two different type of processing factories, but an identical product
Alternativesweeteners
ResearchByproducts
Sugar beetproducers
Sugar caneproducers
Sugarmills
Sugarrefineries
Consumers
Price/fashion/ health concerns
Processing
margins
Full production cost vs. price
Variable production cost vs. price
MOTIVATIONS
Alternativesweeteners
Production cost (e.g., function of maize price)
Value ofbyproducts
Sugar beetproducers
Sugar caneproducers
Sugarmills
Sugarrefineries
Consumers
May or may not be paid for quality/location
ADDITIONAL COMPLICATION: MARKET BARRIERS
Alternativesweeteners
Not always allowed
May be subsidized
May benefit from very low energy
costs
Producer price often determined by Government
Much trade takes place at preferential prices - e.g. ACP
Price paid by consumers is often effectively determined by Government
Commodity-related risks
Annual crops Perennial crops(e.g. cereals, cotton, e.g. tree crops (rubber, palm oil,soyabeans, sugar beet) coffee, cocoa) and sugar cane
Limited investment needs Large investment needs(e.g., small-scale mining) (most mining and petroleum
production; processing ofagricultural crops)
Risks depend on engagements:
Price trends
Price volatiliy
Seasonality
Quantity
30
50
70
90
110
130
150
1970 1980 1990 1998
basic foods
tropical beverages
vegetable oils
Agr. raw materials
Minerals & metals
1999
The declining price trend continues: deflated price indices, 1970-1999 (1980 = 100)
Sugar price volatility
1970 1975 1980 1985 1990 1995
Highest and lowest average monthly raw sugar price, and the yearly average, 1970-1997
3rd /4th week of December Harvesting of cotton by farmers, sorting and storage atfarm level.
1st /2nd week of January Delivery to buying stations, grading and purchase frombuyers, packaging and storage.
3rd /4th week of January Transportation to ginnery, grading and stocking of seedcotton.
1st/2nd week of February Ginning, baling and storage of lint and cotton seed untilend of November. Low exports in July/August because ofrains.
1st week of March Start of export of cotton bales
December-mid-January Maintenance of ginnery
Most commodities are seasonal - eg, cotton in Uganda
Seasons differ from country to country
“Exposure” of ginnery J F M A M J J A S O N D
Cotton lint
Raw cotton
Conditions do not remain the same. Eg, technological factors.
Explo
ratio
nPr
oduc
tion
Trans
port
Proc
essin
gM
arke
ting/
dist
ribu
tion
Info
rmat
ion
Easier identification of reserves has led to geographical diversification
Falling production costs; and competition from new products
Drastic fall in international shipping costs; bulk transport
Increasing flexibility of processing equipment
Just-in-time delivery; electronic trading
Highly competitive pricing.