Producers have been left vulnerable by an increasingly unpredictable and chaotic market for coffee and cocoa. The high ideals of free trade are failing to remunerate them for their efforts, as the UN Conference on Trade and Development highlights in its new World Commodity Survey. Keith Nuthall examines the options identified by UNCTAD.

The collapse in the world cocoa price, at a time when its national market has been liberalised, has left policy makers in the world’s largest exporting country – the Ivory Coast – with the difficult task of reinventing financial protection for its producers.

This was a conclusion of the World Commodity Survey 2000-2001, published by the Geneva-based United Nations Conference on Trade and Development, (UNCTAD). In a statement, it has claimed: “Commodity markets around the world are experiencing dramatic transformations,” attributing these “to globalisation and liberalisation, which have ‘profoundly changed’ traditional methods of production, marketing and financing.”

The report traces the dramatic fall in world cocoa prices, trading in London from around £1,100 (US$1,540) per tonne in early 1998, to £718 per tonne in October 1999 and £571 per tonne in December that year, with lower levels in 2000.

This, concluded the survey, was “bad news for the proponents of free trade.” Using the Ivory Coast, which accounts for half of world cocoa exports, as an example, UNCTAD concludes: “leaving matters completely in the hands of the free market is very hard to sell as a proposition when the market no longer manages to remunerate producers for their output efforts.”

Under aid agency pressure in 1999, the west African country’s state-run commodity body Caisse Nationale de Stabilisation des Prix was dissolved, to be replaced by a public-private partnership body the New Caistab. This new body proved unable to protect Ivorian growers from the effects of a collapse in prices, leading them to threaten the abandonment of cocoa and the cultivation of subsistence crops.

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The paper notes IMF and World Bank claims that the price collapse and liberalisation were “coincidental,” and while drawing back from contradicting this view about the Ivory Coast, the report points out that the reforms have left producers without a “safety net.”

 And with the holding back of stocks unlikely to help a country highly dependent on cocoa earnings, and state intervention being presently ruled out, UNCTAD has concluded that “building a savings fund for security is, in theory, the solution to prices falling to or below production costs.” One option outlined by the development organisation was the use of market-based instruments, mainly futures, options and swaps, which could be used to offer minimum process to growers. However, said UNCTAD, there are problems, namely over costs, such as “information access, broker remuneration and margin call settlements, as well as training and capacity building for producers.”

It added that for hedging, producers would also need reliable access to a “solid network of banking and credit institutions.” Noted the report: “Small exporters not associated with multinational trading houses have difficulty in obtaining lines of credit.”

The 350-page survey, produced with the French academic group Cyclope, offers new information and statistics on markets, structures and innovations for more than 80 commodities, also including coffee, dairy produce and wheat. Looking at coffee, UNCTAD tried to draw conclusions with difficulty from what is usually seen as a chaotic and unpredictable market. It claimed that the problem here was lack of information about supply and demand, with even prices failing to give a clear guide about the relationship between the two. Said the report: “The simple reason for this is the factor of anticipated scarcity. When precise market information is lacking, forecasting is difficult.

“And in markets where export availabilities and import demand are very distant entities, and where there is a long path to the market, forecasting is vital, but the notion of an instantaneous adjustment of supply and demand as set out in the economic textbooks simply does not apply.”

Looking at consumption, the survey claimed to have detected an end to a long-term decline in the US market, because of the “sustained interest by American consumers in speciality and gourmet coffees,” the favourable exchange rate between the US dollar and Latin American currencies and the previously robust health of the United States economy.

Considering dairy produce, the report noted the weakening of the position of the European Union as the world’s number one exporter of dairy produce, with its command of export markets falling from around 50% in the early 1990’s to below 40% by the end of the decade. By contrast the market share of Australia and New Zealand rose to 15% and 20% respectively.

The EU has consolidated its strengths on world grain markets, however, the survey noted, pointing out that it “now holds a key position…largely by virtue of the control that it exerts over its intervention stocks, together with its set aside schemes.”

By Keith Nuthall, correspondent