PRI-81492 Market Outlook for Major Primary Commodities (In Two Volumes) Volume I: Agricultural Products, Fertilizers, and Tropical Timber October 1992 International Trade Division International Economics Department FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  FOR OFFICIAL USE ONLY Market Outlook for Major Primary Commodities Report 814/92 Volume II: Summary, Agricultural Products, Fertilizers, and Tropical imber This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Contributors to the volume were: Takamasa Akiyama (coffee, tea); Brent Borrell (sugar); Merlinda Ingco (meats, grains); Rick Lacey (dairy products); Don Larson (vegetable oils); Don Mitchell (grains); Suan Tan (rubber); Elton Thigpen (cotton, jute, tobacco), Panos Varangis (cocoa, tropical timber); Maw-Cheng Yang (bananas, fresh citrus fruit, fertilizers). Contents Preface ....... vi Notes and Definitions ............................................... vii Commodity Description .............................................. viii Summary . ....................................................... ix Highlights of Forecasts to 2005 ......................................... ix Commodity Price Forecasts ........................... x Commodity Market Outlook-Agriculture ................................... x Commodity Market Outlook-Metals and Minerals ............................ xiv Commodity Market Outlook-Energy .................................... xvi Agricultural Products, Fertilizers, and Tropical limber Coffee .. ........................................................ 1 Summ ary ...................................................... 1 Recent Developments ............................................... 3 Prospects for Supply and Exports ....................................... 7 Prospects for Demand and Imports .. .................................... 11 Price Outlook . ................................................... 12 Policy Issues ................................................... 13 Cocoa . ........................................................ 20 Sum m ary ..................................................... 20 Recent Developments .............................................. 21 Supply Prospects................................................. 22 Consumption Prospects ............................................... 26 Cocoa Consumption and Imports in Eastern Europe and the FSU ................... 27 Price Prospects .................................................. 28 Policy Issues ................................................... 30 Tea ............................................................ 37 Summary .. ................................................... 37 Recent Developments .............................................. 38 Production and Export Outlook ......................................... 40 Demand Prospects ................................................ 42 Price Prospects .................................................. 42 Sugar ......................................................... 45 Sum m ary ..................................................... 45 Consumption Outlook................................................ 46 Production and Trade Outlook ........................................ 49 Price Prospects .................................................. 53 iii Bananas ..... . 56 Summ ary ..................................................... 56 Outlook for Import Demand ............................................ 57 Outlook for Export Supply............................................. 58 Price Outlook................................................... 60 The EC Banana Policy ............................................. 61 Fresh Citrus Fruit .................................................. 67 Sum m ary ..................................................... 67 Supply Outlook.................................................. 68 Demand Outlook................................................. 70 Trade Outlook .................................................. 71 Price Outlook................................................... 73 Trade Policy Issues ............................................... 73 G rains . ......................................................... 76 Sum m ary . ..................................................... 76 Recent Grain Market Developments ....................................... 77 Grain Price Forecasts .............................................. 81 Outlook: Production, Consumption, Trade, and Stocks ......................... . 83 Major Policy Developments .......................................... 92 Vegetable Oils ..................................................... 112 Summary . .................................................... 112 Market Characteristics and Recent Developments ............................. 115 Demand Prospects for Vegetable Oils ..................................... 125 Demand Prospects for Vegetable Meals .................................... 128 Supply Prospects for Oilseeds ......................................... 130 Price Forecasts .................................................. 131 Policy and Trade . ................................................ 133 M eats ......................................................... 166 Sum m ary ..................................................... 166 Production Trends ................................................ 167 Supply Prospects................................................. 169 Consumption Trends and Demand Prospects .................................. 173 Trade Prospects ................................................. 179 Developments in Eastern Europe and the FSU . .............................. 188 Dairy Products.................................................... 193 Sum m ary ..................................................... 193 Introduction .................................................... 193 Recent Developments .............................................. 194 M arket Outlook ................................................. 206 iv Cotton ........................................................ . 213 Sum m ary ..................................................... 213 Consumption ................................................... 214 Production..................................................... 215 Trade ........................................................ 218 Price Outlook ................................................... 220 Jute........................................................... 227 Summ ary ..................................................... 227 Production Prospects .............................................. 228 Consumption Prospects ............................................. 228 Price Prospects .................................................. 230 Rubber......................................................... 233 Summary . ..................................................... 233 Supply . ....................................................... 234 D em and . ...................................................... 235 Trade . ........................................................ 238 Price Outlook ................................................... 240 International Natural Rubber Agreement (INRA2) and Futures Trading ............... .240 Tobacco ........................................................ 243 Su ammary ..................................................... 243 Consumption ................................................... 244 Consumption Prospects ............................................. 244 Production Prospects .............................................. 245 Trade and Price Prospects ........................................... 246 Fertilizers ....................................................... 249 Sum m ary ..................................................... 249 Demand Outlook................................................. 250 Supply Outlook.................................................. 253 Trade Outlook .................................................. 256 Price Outlook ................................................... 260 Tropical Timber ................................................... 279 Summar y ..................................................... 279 Consumption: Past Trends and Prospects ................................... 280 Production: Past Trends and Prospects ................................... 281 Prices: Past Trends and Prospects....................................... 283 V  Preface This report is a compilation of studies which review the market prospects for major primary commodities exported by developing countries. The forecasts are mainly used in forecasting the balance of payments of countries that borrow from the World Bank and in appraising investment projects that include these commodities as inputs or outputs. Because of the multiple purposes they are intended to serve, the price forecasts are presented in current (nominal) as well as 1990 constant dollar (real) terms.' For the period 1992-95, the price forecasts are in terms of prices expected for the individual years. For 2000 and 2005, the price forecasts are forecasts of the average price levels expected during that period. The forecasts are conditional on the various macroeconomic and commodity-specific assumptions used-all of which are subject to uncertainty. The macroeconomic assumptions forming the basis for the forecasts are available in the World Bank's report Global Economic Prospects and the Developing Countries, 1992. Because of the uncertainty which is inherent in commodity price forecasts, the International Trade Division periodically prepares probability distributions of its price forecasts. These are available upon request. The primary commodity market outlooks are discussed by commodity. For most commodities or group of commodities, there is a standardized set of tables giving historical and forecast values for production, consumption, exports, and imports; these tables give details in terms of major economic regions as well as for countries which are major participants in these markets. For most commodities, the forecasts have been based on simulation runs of global commodity models maintained within the International Trade Division of the World Bank's International Economics Department. Details of these models can be obtained directly from the Division. The assistance given to the Division in preparing this report is gratefully acknowledged. People in both public and private organizations have been most forthcoming in providing data and in discussing the outlook for the various commodity markets. Their cooperation has added greatly to the usefulness of the report. ' Commodity prices have been deflated by the World Bank's Manufacturing Unit Value (MUV) index and the G-7 CPI. The MUV index is the c.i.f. index of US dollar prices of industrial countries' manufactured exports (SITC 5-8) to the developing countries and may be regarded as a useful deflator to measure changes in the net barter terms of trade of developing countries highly dependent on exports of primary commodities. The 0-7 CPI may be a useful deflator to use in circumstances where the major countries' inflation rate is believed to be an appropriate measure of changes in the overall price or cost level. VI  Notes and Definitions * Commodity market-price descriptions are shown on the next page. * Dollars are United States dollars unless otherwise specified. * All tons refer to metric tons (1,000 kilograms) unless otherwise noted. Abbreviations and Symbols tons = metric tons lb = pounds cum = cubic meters bbl = barrels kg = kilograms mb/d = million barrels per day ha = hectares N.A. = not available MTOE = million tons of oil equivalent ..-1 = no data Country Classifications High-Income Countries OECD Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Iceland, Ireland, Italy, Japan, Luxembourg, Netherlands, New Zealand, Norway, Spain, Sweden, Switzerland, United States, United Kingdom. Non-OECD Andorra, Aruba, Bahamas, Bermuda, Brunei, Channel Islands, Cyprus, Faeroe Islands, French Polynesia, Greenland, Hong Kong, Israel, Kuwait, Mayotte, OAE ', Qatar, Singapore, United Arab Emirates, Virgin Islands (US). Low- and Middle-Income Countries (LMICs) Africa Angola, Benin, Botswana, BurkinaPaso, Burundi, Cameroon, Cape Verde, CentralAfrican Rep., Chad, Comoros, Congo, Rep., C6te d'Ivoire, Djibouti, Equatorial Guinea, Ethiopia, Gabon, the Gambia, Ghana, Guinea, Guinea- Bissau, Kenya, Lesotho, Liberia, Madagascar, Malawi, Mali, Mauritania, Mauritius, Mozambique, Namibia, Niger, Nigeria, Reunion, Rwanda, Sio Tom6 and Principe, Senegal, Seychelles, Sierra Leone, Somalia, South Africa, Sudan, Swaziland, Tanzania, Togo, Uganda, Zaire, Zambia, Zimbabwe. America Antigua and Barbuda, Argentina, Barbados, Belize, Bolivia, Brazil, Chile, Colombia, Costa Rica, Cuba, Dominica, Dominican Rep., Ecuador, El Salvador, French Guiana, Grenada, Guadeloupe, Guatemala, Guyana, Haiti, Honduras, Jamaica, Martinique, Mexico, Netherlands Antilles, Nicaragua, Panama, Paraguay, Peru, Puerto Rico, St. Kitts and Nevis, St. Vincent, St. Lucia, Suriname, Trinidad and Tobago, Uruguay, Venezuela. Asia and Pacific American Samoa, Bangladesh, Bhutan, Cambodia, Fiji, Guam, Indonesia, Kiribati, Korea, Dem. Rep., Korea, Rep., Lao PDR, Macao, Malaysia, Maldives, Mongolia, Myanmar, Nepal, New Caledonia, Pacific Islands, Trust Territory, Pakistan, Papua New Guinea, Philippines, Solomon Islands, Sri Lanka, Thailand, Tonga, Vanuatu, Viet Nam, Western Samoa. Europe Albania, Bulgaria, Czechoslovakia, Former Soviet Union (PSU)w, Gibraltar, Greece, Hungary, Isle of Man, Malta, Poland, Portugal, Romania, Turkey, Yugoslavia. Middle East and North Africa Afghanistan, Algeria, Bahrain, Egypt, Arab Rep., Iran, Islamic Rep., Iraq, Jordan, Lebanon, Libya,, Morocco, Oman, Saudi Arabia, Syrian Arab Rep., Tunisia, Yemen, Rep. a/ Other Asian economies-Taiwan, China. b/ Data are not available for individual republics. vii Commodity Description Energy Petroleum, averag OPEC price: OPEC government sales weighted by export volumes through 1981; beginning 1982 OPEC spot prices weighted by OPEC export volumes. Thermal Coal, (12,000 BTU/lb, less than 1.0% sulfur, 12% ash), f.o.b. Piers, Hampton Roads, Norfolk. Food Coffee (ICO), indicator price, other mild Arabicas, average New York and Bremen/Hamburg markets, ex-dock for prompt shipment. Cocoa (ICCO), daily average price, New York and London, nearest three future trading months. Tea (London Auction), average price received for all teas. Sugar (World), ISA ric fo.b. and stowed at greater Caribbean ports. Beef (Australian/New Zeand), cow forequarters, frozen boneless, 85% chemical lean, c.i.f. US port (East Coast), ex-dock. Bananas (Central and South American), first-class quality tropical pack, importer's price to jobber or processor, f.o.r. U.S. ports. Oranges (Mediterranean Exporters), navel, EEC indicative import price, ca.f. Paris. Cereals Rice (Thai), white, milled, 5% broken, government standard, Board of Trade sted exrt price, f.o.b. Bangkok. Wheat (Cadan), No. 1 Western Red Spring (CWRS) 13.5%, basis in store Thunder Bay, domestic through March 198 ; subsequently St. Lawrence, export. Maize (US), No. 2, yellow, f.o.b. Gulf ports. Grain Sorghum (US), No. 2, Milo yellow, f.o.b. Gulf ports. Fats and Oils Palm Oil (Malaysian), 5% bulk, c.i.f. N.W. Europe. Coconut Oil (PhilippinesIndonesian),bulk, c.i.f. Rotterdam. Groundnut Oil (Nigerian/West African), bulk c.1.f. UK, through January 1977; subsequently (any origin), c.i.f. Rotterdam. Soybean Oil (Dutch), crude, f.o.b. ex-mill. Soybeans (US), c.i.f. Rotterdam Copra(Philipines/lndonesian),bulk, c.i.f. N.W. Europe. PlM K e a (N ian), c.i.f. UK. Groundnut Meal Indan), 48%, c.i.f. Rotterdam through 1981; thereafter Argentine, 48/50%. Soybean Meal (U, 44% extraction, c.i.f. Rotterdam. Non-Food Cotton (Outlook 'A' Index), Middling (1-3/32'), c.i.f. Europe. Jute (Bangladesh), white D f.o.b. Chttaon Chaina. Rubber (RSS No. 1), in bes, spot New Yok Tobacco (Indian), flue-cured, average export unit value. Tmber Logs (Southeast Asian), Philippines, Lauan for plywood and veneer, length over 6.0 M, diameter over 60 CM, average wholesale price in Japan through 1976, begin 1977, Malaysian, Meranti, Sabah SQ lest Quality, sale price charged by importers, Japan. Soge (West African), Sapi, high quality, loyal and marchand, f.o.b. Cameroon. SaLnwood (Malaysian), Dark RM Meranti, select and better quality, standard density, c.i.f. French ports. Metals and Minerals Copper (LME), cash wirebars through November 1981; from December 1981 through June 1986, high grade cathodes, settlement price; subsuently, grade A. Tin (Malaysian), Straits quality, ex-smelter, Penang, official settlement price. Nickel (Canadian), electrolytic cathodes, Ni 99.9% shipping point through 1979; subsequently cathodes, minimum 99.3% purity, official morning session weekly average bid/asked price. Aluminum, indicative price of U.S. unalloyed primary ingot in the European Market through 1978; subsequently IME standard grade, minimum 99.5% purity, cash price. Lead (E), settlement price, refined lead, purity 99.97%. Zinc (LME), settlement price,good ordinary brand through August 1984; thereafter High Grade brand. Iron lan), C It sinter feed produced from 64.2 purity ore, metal content weight, contract to Germany, Federal Republic, f.o.b. reference price through 1974; from 1975 through 1985, standard sinter feed from 64% purity ore; starting 1986 Southern System (Itabirs and other southern mines) 64%; during 1988 and 1989, 64.2%; beginning 1990 64.3% purity ores. Bauxite, crude and dried, US import reference price based on imports from Jamaica through 1974; from 1975 US import price, c.1.f. US port. Gold (UK), 99.5% fine, London afternoon fixing, average of daily rates. Silver (Handy & Harman), 99.9% grade refined, New York. Fertilizers Phosphate Rock (Moroccan), 72% BPL, FAS Casablanca through 1980; from 1981, 70% TPL contract. Urea (y orri), bagged, f.o.b. N.W. Europe. TSP uperphosphate), bulk, f.o.b. US Gulf. DAP (Diammonium Phosphate), bulk, f.o.b. US Gulf. Potassium Chloride (Muriate of Potash), bulk, f.o.b. Vancouver. World Bank, International Economics Department. November 5, 1992 V111 Summary HIGHLIGHTS OF FORECASTS To 2005 Prices * Non-fuel commodity prices are expected to fall even further in real terms from the 1991 record low. No significant increase is foreseen until the latter half of this decade. * Real price declines over the next few years are expected in all commodity groups with the exception of beverages (the price index for this group has declined an extraordinary 68% in real terms since 1986) timber (which is expected to continue increasing in real terms), and vegetable oils. * Over the longer term, it is mainly the expected recovery in beverage prices which supports the upturn in non-fuel prices. * Petroleum prices are expected to average near present levels in current dollar terms for several years before increasing due to tightening supplies. Production, Consumption, and Trade * Recent developments in Eastern Europe, and particularly in the FSU, have increased the uncertainty in the outlook for most commodities. Because of their reductions in consumption, reverberations will be felt for many years in the form of reductions in imports (e.g., cocoa, coffee, tea, sugar, grains) or increases in exports (e.g., metals). * Production growth in the beverages should slow rapidly as a result of reduced new plantings and replantings and reduced inputs, setting the stage for a recovery in prices. * The main growth markets for grains imports will be the developing countries, particularly those in the Asia-Pacfic region. Industrial country exporters will supply the bulk of these imports. * Most metals markets are in surplus and prices should increase over the next few years as balance is restored. Mining, smelting, and refining are expected to continue shifting towards the developing countries. * Petroleum consumption is expected to grow at 1.3% p.a. on average but with growth being increasingly concentrated in the LMICs. * Petroleum supplies will be more concentrated in the Middle East. ix CoMMoDITY PRICE FORECASTS The historical prices and the price forecasts made in this report are brought together in constant 1990 dollars in the Summary Table 1 and in current dollars in Table 2. The various commodity price indices maintained by the World Bank are shown in Table 3 (constant dollars) and Table 4 (current dollars), with the indices based on weights for the period 1979-81. The deflator used to derive the constant dollar values in Tables 1 and 3 is the Manufacturing Unit Value (MUV) Index. This and other price indices are presented in Table 5 for the period 1948-2005. The price indices for the major commodity groups, in current and constant dollars, are graphed in the two figures below. The constant dollar, non-fuel commodity price index is expected to fall six percentage points in 1992, matching the fall in 1991, and to remain at that level over the following two years. The main reason for the decline in 1992 is the 20% decline in the beverage index. The constant dollar beverage price index has now fallen 68% since 1986. With beverage prices expected to recover somewhat in 1993, offsetting declines in the aggregate index are expected mainly to come from cereals and other foods. The turnaround in the aggregate non-fuel index after 1994 is supported by all commodity groups with the exception of vegetable fats and oils. This turnaround is conditional mainly on two assumptions: that there will be an upturn in economic activity in the industrial countries and that production growth in the perennial crops will slow fairly rapidly. A brief summary of the market outlook for the major primary commodities is provided below. For more details, readers are referred to the chapters reporting on the market outlook for each commodity. COMMoDrry MARKET OuTLooK-AGRIcuLTuRE (i) BEVERAGES Cocoa prices to increase eventually, as production growth slows. In real terms, the market outlook for the 1992-95 period is for cocoa prices to remain near present levels, given the large stocks and the continuing increases in production. After the mid-1990s, the low level of new plantings and replantings in recent years should result in a production decline in some of the major producers (Brazil, Cameroon, C6te d'Ivoire, and Malaysia) and a slowdown in most other. Only Indonesia is expected to have significant growth in production over the forecast period. Long-term prices should increase somewhat in real terms with the slowing of production growth. Consumption growth will be likely slow, averaging less than 2% p.a. Recent developments in the FSU and Eastern Europe, which have been substantial cocoa importers, increase the range of uncertainty about this market. Growth in consumption is expected from some nontraditional markets such as China, Japan, and the Republic of Korea. x Index of Non-Fuel Primary Commodity Prices (Current), 1948-2005 (1990=100) 300 250 200 150 100 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 Index of Non-Fuel Primary Commodity Prices (Constant), 1948-2005 (Deflated by MUV, 1990=100) 600 500 400- 300 200 100 0 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 Beverages Cereals Non-Food Metals & Minerals Source: World Bank, International Economics Department. xi Coffee price outlook is also dependent on production growth,; demand growth expected to be only 1%. The current low international prices are below variable production costs for many producers, dampening new plantings and replantings. Production growth should slow; with output growth projected to average only 0.6% p.a. over the forecast period. Supply prospects differ significantly between countries; output in Brazil, Colombia, and C8te d'Ivoire is expected to fall. Indonesia is expected to increase production during the forecast period because of its abundance of land and low-cost labor. World coffee demand is expected to average about 1% p.a. growth for the 1991-2005 period. Very slow population growth and already high consumption levels in the high-income countries mean faster consumption growth is unlikely. Japan and LMIC Asia and Europe are the main prospective growth areas. International coffee price prospects point to some recovery in 1993. But any possibility of a significant increase during the 1990s, absent some supply shock or re-introduction of an international coffee agreement, has been made less likely by the large stocks now held in the importing countries. The demand for robusta coffees is projected to grow more slowly than the demand for arabica coffees. The switch from robustas to arabicas in the OECD countries is expected to continue. This, together with the expected increase in robusta production in Brazil, Indonesia, and Viet Nam should lead to an increasing price differential between arabicas and robustas, which is bad news for African producers of robustas such as Cameroon, C6te d'Ivoire, and Uganda. Tea price increase expected with Kenyan production growth slowing; recovery of FSU and Middle East demand would assist. World tea prices at London auctions were at their lowest level ever in real terms in 1991. The main cause has been continuing output increases while world import demand has been stagnant. One of the key reasons for the continued growth in output in major producing countries has been depreciations in their real exchange rates. Tea prices are recovering somewhat at the end of 1992 and this should continue into 1993 as a result of reduced output in South India, Sri Lanka, and southern Africa due to drought. In the second half of the 1990s, real tea prices should increase as production growth slows in Kenya and demand increases in the FSU and the Middle East. World tea output is projected at 2% p.a. over the forecast period-a considerably slower rate than for the 1970-90 period when it averaged 4.8% p.a. (ii) GRAwNS, OILSEEDS, AND SUGAR Grain import gap in developing countries will continue to widen; to be fdled by high- income exporters. The LMICs other than Eastern Europe and the FSU are expected to continue expanding their net grain imports to satisfy the increased demand generated by increasing incomes and populations. They are projected to double their grain imports over the period to 2005. The industrial countries will be the main sources of exports-increasing exports by about 40% over the forecast period. Wheat is projected to be the fastest growing export crop. xii Forecasts for Eastern Europe and the FSU are highly uncertain but our best guess is that grain consumption will be depressed for several years, production will begin to grow more quickly than over the past two decades, and thus imports will decline-probably halving over the forecast period. Grain prices are expected to remain nearly constant in nominal dollars for the next several years with grains markets in relative surplus. However, prices are expected to rise slightly in real terms in the latter half of the 1990s given the continued fast growth projected for the developing countries. Vegetable oils/neals markets to have robust growth, but declining real prices. Over the long term, vegetable oil prices are expected to be constant to downward trending in real terms, despite vigorous growth in demand. The recent fast pace of production increases in the low-cost producing countries, especially Argentina, Brazil, Indonesia, and Malaysia, is expected to continue. Because of earlier plantings, Indonesia and Malaysia are locked onto a path of rapid expansion of palm oil output throughout this decade. In an environment of falling real prices and substantial income growth, especially in the many populous countries in Asia, vegetable oil demand should grow strongly. Demand for oilseed meals should also grow rapidly in developing countries, especially in the Asia-Pacific region, as their demand for meats rises. Sugar consumption growth expected to return to 2% p.a. after China and FSU shocks; long-term real price about C13/lb. Since 1988-89, political developments in China, Eastern Europe, and the FSU have resulted in a halving of the usually steady 2-2.5% p.a. growth in sugar consumption. Prices fell from around 415/lb in 1989 to around C10/lb in mid-1992. Long-term world sugar consumption growth is expected to average 2% p.a. with strongest growth in Asia (3.1%), Africa (2.5%), and Latin America (2.1%). Sugar production is expected to decline in Cuba, the FSU, and the United States; growth in production should slow in China and India; while growth should increase in Australia, Brazil, the EC, and Thailand. The long-term average price forecast is 012-13/lb (1990 dollars). However, price volatility is expected to remain very high. (iii) AGlmCULTURAL RAW MATERALS Cotton market to be dominated by Asia region. Cotton consumption declined in the 1990-92 period due to the poor global economic performance, particularly in the Eastern European countries and the FSU. Over the long term, the declining trend in population growth is expected to reduce the growth rate of cotton consumption below the 2% p.a. rate of the 1964-90 period. The region with the largest population and fastest expected economic growth-LMIC Asia-Pacific-is expected to see the fastest increase in cotton consumption. A large part of this increase should be in China, although China's cotton demand growth should be at a slower pace than in recent years due to competition from domestically produced synthetic fibers. The Asia region (major producers China, India, and Pakistan) is expected to continue to be the largest cotton-producing area. LMIC Europe is likely to see production declining. xiii Some recovery in prices is expected in 1993/94 as producers reduce planted area and yields fall from the record levels of 1991/92. Long term, the declining trend in real prices is expected to continue. Rubber markets' main growth to be in Asia-Pacific region; Indonesia to become leading producer. Natural rubber consumption is expected to grow fastest in the LMICs of the Asia-Pacific region. The impact of rapid income growth on rubber consumption in these countries is illustrated by the 50% increase in China's consumption from 450,000 tons to 660,000 tons during the 1986-88 period and by the 30% increase in India's consumption from 278,000 tons to 358,000 tons in the 1987-90 period. Rubber consumption in the Asia-Pacific region is expected to increase from 1.9 million tons to 3.1 million tons over the forecast period. World rubber consumption is expected to increase at 2.6% p.a. to reach 7.6 million tons in 2005. The fastest growth in the OECD countries should be in Japan with 1.7% p.a. increase. The economic reforms in Eastern Europe and the FSU should reduce demand for synthetic rubber and increase natural rubber consumption. However, the time path of this shift is highly uncertain. Of the three major producers, Indonesia is projected to become the leading producer with output growth of 3.5% p.a.-going from 1.1 million tons in 1992 to 1.9 million tons in 2005. Higher investment than previously expected in Malaysia should lead to 2.4% growth, with output increasing from 1.2 million tons in 1992 to 1.8 million tons in 2005. Because of its land constraint, growth in Thailand is expected to slow to 1.3% p.a. Fast growth is expected in the upcoming producers China, India, and Viet Nam. An upturn in real prices is expected over the 1995-2000 period, given the economic growth assumptions. But over the long run, major improvements in productivity-including shifts to lower-cost producers-are expected to cause real prices to decline. COMMODTrY MARKET OuTLOOK-METALs AND MINERALS Copper market outlook reasonably optimistic for producers. World consumption of refined copper is forecast to be relatively robust, with an average growth rate of 2% p.a. over the 1991- 2005 period. The newly industrializing countries are expected to continue to be the main growth point. Demand in the FSU and Eastern Europe is expected to remain depressed, at least in the near term, but could grow rapidly from the mid-1990s as these economies require large investments in infrastructure and equipment. In the industrial countries, the copper intensity of industrial production should decline at a slower rate than over the past two decades owing to lower energy prices and faster expansion of the capital goods sector. A tally of announced projects indicates that over the 1992-95 period world mine and refined copper capacities will each expand by as much as one million tons. Most of these increases will take place in Latin America, North America, and Asia. xiv Over the period to 1996, the market balance is expected to turn to a moderate surplus as supplies increase. Prices are likely to decline. However, the constraints of smelter capacity should persist through 1995. If the historical pattern of the investment cycle is repeated, copper prices are likely to trend upwards again in the latter part of this decade. Aluminum market should continue its recent slow growth. Aluminum consumption growth in the 1980s was a mere 1.6% p.a. Some increase in the growth rate is expected in the forecast period (to 2.2% p.a.), with the share of LMICs rising from 31% in 1991 to 36% in 2005. As aluminum prices are also expected to remain low by historical standards, smelting capacity growth should be slow. Most new smelting capacity is likely to be in Australia, Canada, the Middle East, South America, and southern Africa where bauxite and low-cost energy are in good supply. Prices of aluminum and bauxite are expected to increase in the 1992-94 period as the market balance adjusts from the surplus in 1991. After that, with declining average costs of production, aluminum prices should fall in real terms. The greatest source of uncertainty in the medium term for aluminum prices is the level of FSU exports to international markets. These will depend on the pace of domestic demand recovery, the changes in energy prices, and the renovation of antiquated smelting facilities. Steel consumption in high-income countries fell 7% in 1991 due to the global economic slowdown. Consumption in the LMICs fell 8% in the 1989-91 period-mainly because of the sharp declines in Eastern Europe and the FSU. High-income country consumption is expected to grow at only 0.7% p.a. over the period to 2005. LMIC steel consumption growth is forecast at 2.1% p.a. Steel production to continue its shifts to LMICs. World steel production is undergoing a substantial change with capacity shifting from the high-income countries to the LMICs. In 1980-91, steelmaking capacity in the high-income countries fell 120 million tons while LMIC capacity grew by 110 million tons. A further 20 million tons decline is expected in the high-income countries by 2000, which should be more than offset by a 30 million tons increase anticipated in the LMICs. Low-cost iron ore producers will increase domination. Iron ore consumption will track steel production, increasing at about 1.3% p.a. over the 1991-2005 period. About 30 million tons of additional iron ore production capacity is expected to come on-line around the mid-1990s, mainly from upgrading existing operations in major producing countries. Australia and Brazil should strengthen their dominant positions as producers. With the increasing dominance of the large low-cost producers, iron ore prices are expected to decline at an average rate of 0.7% p.a. in real terms over the forecast period. Nickel market is one of the brighter spots for producers. Long-term growth in nickel consumption should be sustained at around 2% p.a. The outlook for nickel is generally upbeat because of its use in products that have strong growth potential. Environmental protection pressures should boost xv nickel demand in the form of stainless steel and high nickel alloys used in the flue gas desulphurization in power plants. Nickel production capacity is expected to increase by at least 100,000 tons over the next five years, with major expansions in Australia, Brazil, China, Cuba, and Colombia. Some increase in real prices is expected in the latter half of the 1990s, with capacity expansions lagging demand increases because of current low prices. Lead and zinc markets to remain in excess supply for several years. New mines will lower production costs. Lead and zinc prices have been at record lows in real terms in the past year due to weak demand-particularly in the automobile sector-and to increased supplies. The excess supply situation was exacerbated by exports from the FSU and Eastern Europe. Prior to 1990, these countries had been net importers of these metals. Over the short term, lead and zinc prices are not expected to increase much, if at all, as the excess supply situation is expected to continue for the next two to three years. The market balance is expected to improve by the mid-1990s as demand catches up with production capacity. Although greenfield lead and zinc projects have moved to more unfriendly environments in recent years (e.g., Red Dog mine in Alaska), costs of production have tended to fall. New mines projected to come on-stream in the latter half of the 1990s are expected to have even lower costs. So prices over the long term are expected to average at near the currrent low levels in real terms. CoMmoDrry MARKET OUTLOOK-ENERGY Petroleum consumption will grow most mpidly in LMICs. Petroleum consumption is expected to increase, on average, by 1.3% p.a. during the forecast period. Fastest growth should be seen in the LMICs (excluding Eastern Europe and the FSU), with their share growing from 16% in 1991 to 36% by 2005. Increased use of motor transport will be the main reason for this growth. Supplies from non-OPEC producers (excluding the FSU) will contribute about one half of the incremental global output up to the mid-1990s. But beyond that time, dependence on OPEC will increase as several producing regions reach maturity. OPEC's share to increase. OPEC's share of global output is expected to increase from 38% in 1991 to around 46% in 2005. The share of Middle East producers is expected to grow from 28% to 37%. Which could mean higher prices for a period. The market outlook is for prices to decline slightly in real terms in the near term. Although industrial activity is expected to pick up after 1994, supplies should be ample to forestall price increases for some time. However, in the latter half of the decade, we expect prices to increase in real terms as production begins to decline in several OPEC and non-OPEC producers. xvi Coal prices expected to rise in long term with increased consumption and higher production costs. World coal consumption is expected to increase at 1.8% p.a. over the 1991-2005 period. Thermal coal consumption growth is forecast at 2.5% p.a. Future production increases should come mostly from Australia, China, India, South Africa, and the United States. Most European countries and Japan can be expected to phase down their coal industries due to high costs, while Colombia, Indonesia, and Venezuela are likely to become more important exporters. No increase is expected in coal prices in real terms up to 1995. Beyond that time, prices are expected to rise somewhat in real terms in line with increases in petroleum prices and with expected increases in production costs. xvii Table 1: Commodity Pricen and Prico Projections in 1990 Conatant Dollar al Act.. P.:j-c:lo- -4 ort-Trm --Long-Term- 1970 1980 1985 1988 1989 1990 1991 1992 1993 1994 1995 2000 2005 ENERGY Petroleum $/BBL 5.2 42.4 38.9 14.3 17.2 21.2 17.0 16.5 15.7 15.5 15.6 18.0 17.0 Coal $/MT N.A. 60 68 39 43 42 41 38 38 38 39 44 43 Coffe c/KO 457 478 468 318 252 197 183 130 142 164 195 226 216 Cocoa /KG 269 362 329 166 131 127 117 106 108 111 113 124 136 Tea ICG 437 310 289 188 213 203 181 193 188 182 190 198 204 Sugar $/MT 323 878 130 236 298 277 194 188 185 195 220 255 280 Bed C/KG 520 384 314 264 271 256 261 229 228 227 228 274 253 Ba-~ag $/MT 659 527 551 502 578 541 548 471 443 439 434 422 414 Orange W/MT 670 543 581 476 471 531 510 488 473 471 470 453 436 Rico /MT 574 603 315 316 338 287 308 272 261 258 260 245 237 Wheat $/MT 250 265 253 188 213 156 140 161 147 146 148 159 129 Maize $/mT 233 174 164 112 118 109 105 99 94 95 95 101 82 Grain Sorghum $/MT 207 179 150 103 112 104 103 97 92 91 91 98 79 FATS & OILS Palf Oil $/MT 1,037 811 730 459 370 290 332 371 380 353 343 303 266 Coconut Oil 8/MT 1,584 936 860 593 546 337 424 554 498 509 535 564 457 Growdnut Oil 8/MT 1,510 1,194 1,319 619 819 964 875 568 584 583 617 554 421 Soybean Oil $/MT 1,224 829 834 486 456 447 444 404 416 443 433 409 374 Soybean $/MT 466 412 327 318 291 247 235 221 224 234 234 219 233 COpra 3/MT 897 629 563 417 368 231 280 357 326 335 350 396 322 Palm Kcrnls $/Mr 670 480 424 280 265 185 215 216 214 219 234 243 227 Groundnu: Meal /mT 407 334 208 220 211 185 147 147 149 163 172 157 175 Soybean Meal $/MT 411 364 229 281 260 209 195 195 199 204 209 185 210 NON-FOOD Coaon C/KG 252 284 192 147 177 182 164 122 117 136 140 150 145 Jute $/MT 1.092 428 850 388 394 408 370 300 308 311 308 321 313 Rubber ¢/KG 185 226 135 135 118 102 99 96 96 99 103 114 112 Tobacco $/MT 3,938 3,196 2,843 2,037 1,998 1,964 2,182 1,849 1,787 1,742 1,733 1,712 1,690 T1MBER Logs (Meranti) /CM 148 271 199 245 237 210 217 236 238 241 243 258 276 Logs (Sapelli) $/CM 171 350 253 285 289 344 309 316 322 324 327 346 368 Sawnwood $/CM 370 507 403 322 446 524 462 483 484 489 493 517 543 METALS & MINERALS 8/MIT 5,634 3,032 2,066 2,730 3,009 2,662 2,291 2,173 2,153 1,865 1,704 1,974 1,840 Tin ¢/KO 1,432 2,284 1,682 740 902 609 536 577 597 640 675 620 610 Nickel $/MIT 11,348 9,058 7,142 14,457 14,061 8,864 7,987 6,759 6,876 7,195 7,527 8,377 8,566 Aluminum $/MT 2,153 2,466 1,517 2,676 2,062 1,639 1,275 1,183 1,312 1,466 1,601 1,465 1,435 Lead $/MT 1,212 1,259 570 688 711 811 546 530 543 551 597 656 539 Zine $/MT 1,176 1,057 1,141 1,303 1,753 1,513 1,094 1,220 1,131 1,110 1,107 1,173 1,034 Iron Ore $w/T 39.2 39.0 38.7 24.7 28.0 30.8 32.6 29.7 27.4 26.4 27.8 27.9 27.1 Bauxitc $/mT 47.8 44.5 52.0 31.8 36.3 34.4 33.1 30.0 29.9 30.2 31.1 30.0 30.0 Goid s/TOZ 143 845 463 459 403 384 355 324 317 335 340 360 360 Silver o/'OZ 706 2,867 895 686 581 482 396 375 353 380 389 450 450 FERTILIZERS PhosphateRock 8/LIT 44 65 49 38 43 41 42 40 40 41 42 42 41 Uret $/MT 193 309 199 163 140 157 168 134 141 148 153 169 159 TSP $/MT 169 251 177 166 152 132 130 114 110 115 120 125 123 DAP $/MT 215 309 246 206 183 171 169 136 127 135 140 148 145 Potassium alr b/ $/mT 126 161 122 92 104 98 107 105 104 108 108 107 105 N.A. - Not Availablo. a/ Coputed from unrounded data and deflated by MUV (1990-100). bl Potasium Chloridr, also known as Muriat of Potaåh. Sourc=: World Bank, International Economic Department. Novembe 9, 1992 xviii Tablo 2: Commodity Prices and Price Projectons in Current Dollar a/ ActualProjction-- -S ort-Ter - -Long-Term- 1970 1980 1985 1988 1989 1990 1991 1992 1993 1994 1995 2000 2005 Petrlum 3/BBL 1.3 30.5 26.7 13.6 16.3 21.2 17.3 17.6 17.3 17.4 18.0 24.7 26.8 Coal 3/MT N.A. 43 47 37 41 42 42 40 42 43 45 60 68 Coffeo /KG 115 344 321 303 239 197 187 139 157 185 225 310 340 Cocoa */KO 68 260 225 159 124 127 120 113 119 125 131 170 215 Tea /KG 110 223 198 179 202 203 184 206 208 205 220 272 322 Sugar $/MT 81 632 90 225 282 277 198 200 205 220 254 350 441 Beef /KG 130 276 215 252 257 256 266 244 252 256 264 376 399 Banan 3/MT 165 379 378 478 547 541 560 502 490 494 502 579 652 Orange $m/T 168 391 398 453 445 531 521 520 523 530 543 622 687 Rico $N/T 144 434 216 301 320 287 314 290 288 290 300 336 374 Wheat 3/MT 63 191 173 180 201 156 143 172 162 164 171 218 204 Mair 3/MT 58 125 112 107 112 109 107 105 104 107 110 139 130 Grain Sorghum $lT 52 129 103 99 106 104 105 103 102 103 105 134 125 FATS & OILS Paln Oil 3/MT 260 584 501 437 350 290 339 395 420 397 396 416 420 Coconut Oil 3/MT 397 674 590 565 517 337 433 590 550 573 618 774 721 Groundnt Oil 3/MT 379 859 905 590 775 964 894 605 645 656 713 760 664 Soybea Oil $/MT 307 597 572 463 432 447 454 430 460 499 500 562 590 Scybeana 3/MT 117 296 224 304 275 247 240 235 248 263 270 300 368 Copra /MT 225 453 386 398 348 231 286 380 360 377 404 544 508 Palm Kernels $/lT 168 345 291 267 251 185 220 230 237 246 270 334 358 Grou~nnatMel $m/T 102 240 143 210 200 185 150 157 165 184 199 216 276 SoybeaMeal 3/MT 103 262 157 268 246 209 199 208 220 230 241 254 331 NON-FOOD Cotton ¢/KG 63 205 132 140 167 182 168 130 129 153 162 206 229 Jute $LT 274 308 583 370 373 408 378 320 340 350 356 441 493 Rubbet 0/KO 46 162 92 129 112 102 101 102 106 112 119 156 177 Tobacco 8/LT 988 2.300 1,950 1,941 1,891 1,964 2,228 1,970 1,975 1,961 2,003 2,350 2,663 TIMBER Log ( anti) 3/CM 37 195 136 233 225 210 222 251 263 271 281 354 435 Logs (Sapelli) 3/CM 43 252 174 271 274 344 316 337 356 365 378 475 580 Sawnwood $/CM 93 365 276 307 422 524 472 514 535 550 570 710 855 METALS & MINR~L Copper $LT 1,413 2,182 1,417 2,602 2,848 2,662 2,339 2,315 2,380 2,100 1,970 2,710 2,900 Tia 0/KO 359 1,644 1,154 705 853 609 548 615 660 720 780 851 961 Nickel 3/MT 2,846 6,519 4,899 13,778 13,308 8,864 8,156 7,200 7,600 8,100 8,700 11,500 13,500 Aluminum /lMT 540 1,775 1,041 2,551 1,951 1,639 1,302 1,260 1,450 1,650 1,850 2,011 2,261 Lad 3/MT 304 906 391 656 673 811 558 565 600 620 690 900 850 Zin $/T 295 761 783 1,242 1,659 1,513 1,117 1,300 1,250 1,250 1,280 1,610 1,630 kon Or$ 3/MT 9.8 28.1 26.6 23.5 26.5 30.8 33.3 31.6 30.3 29.7 32.1 38.3 42.7 Bauxito 3/mT 12 32 35.7 30.3 34.4 34.4 33.8 32 33 34 36 41.2 47.3 Gold 3/TOZ 36 608 318 437 381 384 362 345 350 377 393 494 567 Silver M/TOZ 177 2,064 614 654 550 482 404 400 390 428 450 618 709 PERIL IE Phopa Rock $/MT 11 47 34 36 41 41 43 43 44 46 48 58 65 Urna 3/MT 48 2 136 155 132 157 172 143 156 167 177 232 251 TSP 3/mT 43 180 121 158 144 132 133 121 122 129 139 172 194 DAP 3/MT 54 222 169 197 173 171 173 145 140 152 162 203 229 Potaium Chlor b/ $LT 32 116 84 88 99 98 109 112 115 122 125 147 165 N.A. Not Availhböe. a/ Data have bua uanrm~nded. b/ Potassium Chorde, alo known a Muriate of Potah. Sourc.: World Bank, InnationalBoonomics Department. Novembr 9, 1992 xix Table 3: Weighted Index of Commodity Prices (Constant US Dollars) (1990-100) Petroleum 33 Commodities Agricult- - - Timber Metals (Excluding Total F: Non-Pood & (Weights- Energy) Total Boverages Coreal Fats & Oil Other Minerals %Share) a/ (100.0) (67.7) (53.2) (22.3) (9.4) (9.3) (12.3) (14.4) (5.2) (27.1) 1948 55.9 176.2 223.7 226.8 203.4 280.0 396.7 137.6 235.0 50.7 111.9 1949 48.1 175.7 223.8 226.1 234.8 295.5 309.7 136.1 216.2 55.7 118.1 1950 48.8 232.3 308.4 286.4 343.7 320.6 370.2 165.4 380.0 66.5 136.1 1951 42.4 242.9 317.8 2763 331.3 3013 383.5 151.5 453.2 84.9 147.1 1952 40.3 210.5 2583 245.5 3013 285.1 308.1 133.1 3003 60.7 159.5 1953 44.1 202.3 251.2 254.8 316.4 293.9 317.0 137.1 239.2 57.1 148.6 1954 47.6 224.0 285.5 299.0 458.6 279.1 300.8 141.6 241.5 80.1 148.1 1955 46.7 217.3 262.3 253.6 357.6 242.1 274.5 140.5 290.6 63.0 172.1 1956 45.1 211.5 254.1 253.5 362.0 236.4 271.6 140.3 256.1 58.6 170.1 1957 44.1 195.7 242.1 241.8 324.1 220.5 267.8 154.6 243.3 55.3 145.1 1958 41.1 179.3 220.7 220.9 2903 219.6 247.8 135.4 220.3 51.8 134.5 1959 37.0 181.5 220.8 210.2 258.9 211.8 268.0 129.6 255.5 61.9 138.7 1960 34.0 177.9 215.2 200.7 246.1 197.6 249.5 130.7 262.6 66.6 137.0 1961 33.5 166.4 199.9 193.7 229.2 208.9 248.2 120.9 2203 67.7 129.3 1962 30.6 163.4 196.4 190.8 214.1 226.2 238.3 122.8 214.6 72.8 125.5 1963 31.2 170.9 207.7 209.1 215.7 230.6 256.2 166.7 203.1 725 128.2 1964 28.5 181.4 210.9 213.3 243.6 225.9 259.6 151.3 2033 60.9 155.7 1965 28.2 184.4 201.7 203.1 231.7 219.3 283.3 124.3 197.4 69.7 178.6 1966 27.4 184.8 197.7 198.9 218.9 239.5 265.8 121.7 193.7 70.9 186.4 1967 27.0 172.1 193.3 196.7 210.7 249.2 251.7 125.0 182.0 74.9 156.0 1968 27.3 175.3 193.9 195.0 210.3 244.8 242.9 126.8 1903 77.5 163.7 1969 25.9 177.9 191.9 191.4 207.2 230.5 228.2 134.3 193.7 71.0 176.1 1970 24.4 172.9 189.7 195.6 226.6 198.4 253.9 132.7 170.5 70.6 165.5 1971 30.2 153.4 172.4 175.5 187.2 181.8 240.9 127.5 162.2 68.3 138.6 1972 31.0 148.0 1703 175.6 189.0 175.7 218.1 140.7 153.1 62.0 127.6 1973 38.0 194.1 229.2 235.4 207.5 310.0 3893 146.3 209.1 93.5 154.6 1974 129.4 2123 249.2 266.8 196.2 368.8 361.4 236.2 191.7 91.9 173.9 1975 113.3 158.9 184.7 1953 167.5 2593 218.3 176.5 150.0 62.4 134.6 1976 119.9 179.3 214.4 223.1 316.2 209.1 230.5 129.4 186.2 82.6 139.0 1977 119.4 197.0 247.8 271.0 484.8 174.8 260.1 106.5 172.2 87.4 132.5 1978 104.6 163.2 199.6 210.9 312.3 182.3 236.4 108.1 162.9 80.0 117.9 1979 133.1 167.9 195.2 202.5 285.6 168.0 238.9 116.9 171.4 123.2 130.2 1980 199.0 168.2 193.0 197.4 233.6 182.8 201.7 165.4 178.7 129.1 133.8 1981 222.9 146.6 167.9 172.0 193.6 194.4 193.7 125.8 154.7 102.4 119.2 1982 204.6 134.0 150.6 154.3 200.9 143.8 160.2 108.4 138.4 104.2 111.8 1983 189.8 144.2 1653 1673 207.8 159.1 1933 116.6 159.0 99.3 117.1 1984 189.7 148.8 174.8 182.0 245.5 155.3 232.3 105.9 151.3 116.8 110.6 1985 182.7 1313 151.0 158.7 224.4 134.7 161.4 101.8 126.1 94.4 105.1 1986 78.4 112.1 132.1 142.8 232.8 100.0 105.6 91.1 97.2 89.0 82.4 1987 90.9 102.0 109.6 109.6 139.2 85.9 111.9 90.8 109.9 118.5 85.4 1988 67.0 114.0 116.8 120.8 144.9 108.1 136.9 94.8 103.9 116.4 108.7 1989 80.9 112.8 112.2 114.5 120.4 116.3 124.3 102.3 104.6 112.9 113.8 1990 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 1991 79.6 93.9 95.5 95.1 92.2 100.0 100.8 92.5 97.0 103.2 89.2 1992 77.6 87.2 85.8 86.8 73.8 94.4 104.0 87.7 82.4 112.0 84.4 1993 73.5 86.6 84.9 863 77.5 89.5 104.1 84.9 80.6 113.1 83.8 1994 72.6 87.5 88.1 88.9 85.0 89.2 104.5 85.2 85.6 114.4 80.9 1995 73.2 90.1 92.2 93.5 96.6 89.7 105.8 86.5 87.7 115.6 81.3 2000 84.5 94.2 96.4 97.4 109.1 91.2 98.0 88.2 93.4 122.6 84.6 2005 79.9 92.2 94.1 94.9 107.6 79.6 96.9 89.1 91.6 131.2 80.9 a/ Weighted by 1979-1981 Developing Countries Export Values. Source: World Bank, International Economics Department. November 9, 1992 XX Table 4: Weighd Index of Commodity Pricus (Cune=t US Dollars) (1990-100) Petroleum 33 cömodi. gr- Timber Metals (Exc1uding Toal Non-Food a (Weigh Energy) Tota everags C Fal Fats & Oil Other Minerala %Sharo) al (100.0) (67.7) (53.2) (22.3) (9.4) (9.3) (12.3) (14.4) (5.2) (27.1) 1948 10.8 34.0 44.1 43.8 39.3 54.1 76.6 26.6 45.4 9.8 21.6 1949 8.9 32.6 41.5 41.9 43.5 54.8 57.4 25.2 40.1 10.3 21.9 1950 8.0 38.0 50.5 46.9 56.2 52.5 60.6 27.1 62.2 10.9 22.3 1951 8.0 45.7 59.8 52.0 62.3 56.7 72.1 28.5 85.3 16.0 27.7 1952 8.0 41.5 50.9 48.4 59.5 56.2 60.8 26.2 59.2 12.0 31.5 1953 8.5 38.8 48.1 48.8 60.6 56.3 60.7 26.3 45.8 10.9 28.5 1954 8.9 42.0 53.5 56.0 86.0 52.3 56.4 26.5 45.3 15.0 27.8 1955 8.9 41.5 50.1 48.4 68.3 46.2 52.4 26.8 55.5 12.0 32.9 1956 8.9 41.9 50.3 50.2 71.6 46.8 53.7 27.8 50.7 11.6 33.7 1957 8.9 39.6 48.9 48.9 65.5 44.6 54.1 31.2 49.2 11.2 29.3 1958 8.5 36.9 45.4 45.4 59.7 45.2 50.9 27.8 45.3 10.6 27.7 1959 7.5 36.8 44.8 42.6 52.5 42.9 54.4 26.3 51.8 12.5 28.1 1960 7.0 36.8 44.5 41.5 50.9 40.9 51.6 27.1 54.4 13.8 28.3 1961 7.0 35.0 42.1 40.8 48.2 44.0 52.2 25.4 46.4 14.3 27.2 1962 6.6 35.1 42.2 41.0 46.0 48.6 51.2 26.4 46.1 15.6 27.0 1963 6.6 36.0 43.7 44.0 45.4 48.5 53.9 35.1 42.7 15.3 27.0 1964 6.1 38.8 45.1 45.6 52.1 48.3 55.6 32.4 43.5 13.0 33.3 1965 6.1 39.9 43.6 43.9 50.1 47.4 61.2 26.9 42,6 15.1 38.6 1966 6.1 41.2 44.1 44.4 48.8 53.4 59.3 27.1 43.2 15.8 41.6 1967 6.1 38.9 43.7 44.4 47.6 56.3 56.8 28.2 41.1 16.9 35.2 1968 6.1 39.2 43.4 43.6 47.1 54.8 54.4 28.4 42.6 17.3 36.6 1969 6.1 41.9 45.2 45.1 48.8 54.3 53.8 31.7 45.6 16.7 41.5 1970 6.1 43.3 47.5 49.0 56.7 49.7 63.6 33.2 42,7 17.7 41.4 1971 8.0 40.6 45.6 46.4 49.5 48.1 63.7 33.7 42.9 111.1 36.6 1972 8.9 42.7 49.1 50.6 54.4 50.6 62.8 40.5 44.1 17.9 36.8 1973 12.7 64.7 76.5 78.5 69.2 103.4 129.9 48.8 69.7 311.2 51.6 1974 52.6 86.3 101.2 108.4 79.7 149.8 146.9 96.0 77.9 37.4 70.7 1975 51.2 71.8 83.4 88.2 75.7 117.2 98.6 79.7 67.8 28.2 60.8 1976 54.9 82.1 98.2 102.2 144.9 95.8 105.6 59.3 85.3 37.8 63.7 1977 60.1 99.2 124.8 136.4 244.1 88.0 131.0 53.6 86.7 44.0 66.7 1978 60.6 94.5 115.6 122.1 180.8 105.5 136.9 62.6 94,3 46.3 68.3 1979 87.3 110.1 128.0 132.8 187.3 110.2 156.7 76.7 112.4 80.8 85.4 1980 143.2 121.1 138.9 142.0 168.1 131.6 145.1 119.0 128.6 92.9 96.2 1981 161.0 105.9 121.3 124.3 139.8 140.4 140.0 90.9 111.8 74.0 86.1 1982 145.5 95.3 107.1 109.7 142.9 102.3 113.9 77.1 98.4 74.1 79.5 1983 131.9 100.2 114.9 116.3 144.5 110.6 134.4 81.0 110.5 69.0 81.4 1984 129.1 101.2 118.9 123.8 167.0 105.6 158.0 72.1 102.9 79.5 75.3 1985 125.4 90.1 103.6 108.8 154.0 92.4 110.7 69.8 86.5 64.7 72.1 1986 63.4 90.6 106.8 115.5 188.2 80.8 85.4 73.6 78.6 71.9 66.6 1987 80.8 90.6 97.4 97.3 123.6 76.3 99.4 80.7 97.6 105.2 75.8 1988 63.8 108.7 111.4 115.1 138.1 103.0 130.5 90.3 99.1 110.9 103.7 1989 76.5 106.7 106.1 108.3 113.9 110.0 117.6 96.8 99.0 106.8 107.7 1990 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 1991 81.2 95.9 97.5 97.1 94.1 102.1 102.9 94.4 99.1 105.4 91.0 1992 82.6 92.9 91.4 92.5 78.6 100.6 110.8 93.4 87.7 119.3 89.9 1993 81.2 95.6 93.9 95.3 85.7 98.9 115.0 93.8 89.1 125.0 92.6 1994 81.7 98.5 99.2 100.1 95.8 100.4 117.6 95.9 96.4 128.8 91.1 1995 84.5 104.1 106.5 108.0 111.6 103.6 122.2 99.9 101.3 133.6 94.0 2000 116.0 129.4 132.4 133.7 149.8 125.2 134.5 121.1 128.2 168.3 116.1 2005 125.8 145.3 148.2 149.4 169.5 125.5 152.7 140.4 144.3 206.7 127.5 a/ Weighted by 1979-1981 Devoping Couiis Expor Valusa. Somma: World Bank, International Economics Deparment. November 9, 1992 xxi Tabe 5: Inflation Indicct: 1948-2005 a/ - l-5 MUV bdex bl- --U$ GNP DoBar- -0-5 0NP De~ator el- 0.7 CP1 di- Ycar 1990-100 % Change 1990-100 % Chang. 1990-100 % aange 1990-100 % C!ug. 194 19.29 17.89 7.01 1949 18.54 -3.90 17.80 -0.52 13.25 1950 16.33 -11.90 18.15 2.01 12.40 -6.46 1951 18.83 15.30 19.03 4.82 13.74 10.84 1952 19.73 4.80 19.32 1.51 14.33 4.29 1953 19.18 -2.80 19.63 1.61 14.38 14.45 0.87 1954 18.76 -2.20 19.94 1.60 14.63 1.75 14.67 1.48 1955 19.11 1.90 20.58 3.24 14.94 2.16 14.72 0.38 1956 19.80 3.60 21.28 3.36 15,57 4.22 15.04 2.13 1957 20.22 2.10 22.04 3.60 16.08 3.24 15.37 2.24 1958 20.56 1.70 22.49 2.05 16.27 1.18 15.66 1.86 1959 20.27 -1.40 23.07 2.57 16.27 0.00 15.63 -0.21 1960 20.70 2.10 23.46 1.68 16.65 2.33 15.93 1.91 1961 21.05 1.70 23.68 0.96 17.21 3.41 16.30 2.36 1962 21.47 2.00 24.21 2.22 17.84 3.66 16.76 2.84 1963 21.06 -1.90 24.56 1.44 18.35 2.83 17.30 3.21 1964 21.43 1.75 24.96 1.64 18.85 2.75 17.75 2.60 1965 21.59 0.74 25.60 2.57 19.42 3.01 18.32 3.18 1966 22.35 3.50 26.50 3.50 20.05 3.25 18.94 3.39 1967 22.61 1.16 27.25 2.82 20.68 3.14 19.43 2.58 1968 22.39 -0.96 28.61 4.98 21.44 3.66 19.97 2.78 1969 23.60 5.40 30.16 5.42 22.07 2.94 20.84 4.38 1970 25.06 6.27 31.86 5.65 23.55 6.71 22.11 6.10 1971 26.44 5.42 33.64 5.59 25.44 8.03 23.60 6.71 1972 28.81 8.97 35.24 4.77 28.05 10.26 26.04 10.38 1973 33.37 15.84 37.55 6.55 31.82 13.44 29.76 14.27 1974 40.66 21.84 40.91 8.93 34.73 9.11 32.96 10.74 1975 45.21 11.18 44.96 9.91 39.28 13.11 37.03 12.36 1976 45.83 1.38 47.81 6.34 40.39 2.83 38.26 3.30 1977 50.34 9.85 51.00 6.67 44.03 9.02 42.29 10.54 1978 57.94 15.08 54.75 7.34 51.23 16.35 51.82 22.54 1979 65.62 13.26 59.56 8.79 57.10 11.46 54.84 5.82 1980 71.97 9.68 64.98 9.10 63.06 10,42 61,32 11.82 1981 72.26 0.41 71.23 9.62 62.65 -0.65 61.82 0.82 1982 71.15 -1.53 75.81 6.43 62.20 -0.72 61.04 -1.27 1983 69.53 -2.28 78.73 3.86 62.49 0.48 62.01 1.58 1984 68.05 -2.14 81.67 3.73 61.74 -1.20 61.84 -0.26 1985 68.60 0.81 84.11 2.98 63.11 2.21 63.10 2.02 1986 80.89 17.91 86.37 2.69 76.53 21.27 76.14 20.67 1987 88.84 9.84 89.20 3.28 86.32 12.78 86.01 12.97 1988 95.31 7.28 92.28 3.45 92.11 6.71 92.60 7.65 1989 94.65 -0.70 96.08 4.12 91.25 -0.94 92.18 -0.45 1990 100.00 5.66 100.00 4.08 100.00 9.59 100.00 8.49 1991 102.11 2.11 103.63 3.63 104.01 4.01 105.11 5.11 1992 106.53 4.33 111.65 6.22 1993 110.53 3.75 115.65 3.58 1994 112.58 1.86 118.37 2.35 1995 115.59 2.67 121.78 2.88 1996 119.63 3.50 126.40 3.80 1997 123.82 3.50 131.21 3.80 1998 128.15 3.50 136.19 3.80 1999 132.64 3.50 141.37 3.80 2000 137.28 3.50 146.74 3.80 2005 157.60 2.80 175.55 3.65 al Igr for M19922005 or ~ onm. bl Uni val%» ~ne ina U8 dollrterm of mmnfamme ~xprted frm the G-5 ouflntriefrai e Germny 1499c, UK, and US) wåighted proporio~al to a countri' port to dh deve ountri c/ AM are index of GNP denäatorsanu dollar teM for the G-5 couatries using SDR-b.aed ~oving weighu. dlAsurn comNsmer prico index n US dollar tema for tho G.7 countries (nad Franc, Gemany, Italy, Japan, UK and US) weghted by the cories' 1 aveage GNP in rent US dollars. Source -5 MUV Index, G-5 GNP D~fator, and 0.7 CPI - World Bank. U8 GNP Deator - aional Mon~tar Pnd. World Bank, InternationalEconomics Department, Internationul Trade Division. October 26, 1992 xxii Coffee Swnrary * World coffee prices in real terms were at their lowest annual average level ever in 1991, and a further decline was recorded in the first half of 1992. The depression of prices has been due mainly to the increased world production and exports since the suspension in July 1989 of the quota system which was operating under the International Coffee Agreement (ICA). World production in 1991 and 1992 was at near record levels. * The decline of robusta prices has been considerably greater than that of arabicas.1 Real robusta prices fell by over 70% between 1985 and 1991, while the fall in arabica prices was 62%. As a result of the price decline, world coffee export revenues declined by 38% in real terms between 1988 and 1991. This has caused great financial difficulties in many producing countries, notably the robusta-exporting countries in Africa such as Cameroon, CMte d'Ivoire, and Uganda. * Since current world prices are estimated to be below variable production costs for a large number of coffee growers, no investments are likely to be undertaken in the coffee subsectors in most producing countries if real world prices continue at present levels. Thus, while production at recent levels could continue for a few years because harvesting is a relatively low-cost operation, over the projection period 1991-2005 world coffee supply is expected to increase at only 0.6% p.a. Supply prospects differ significantly from one country to another, with Colombia, CMte d'Ivoire, and Brazil's supply projected to fall, while Indonesia is expected to increase its production during the projection period due to its abundance of land and low-cost labor. * Present market indications are that world arabica coffee prices in real terms will recover in 1993 and thereafter, but that any possibility of a significant price increase during the first half of the 1990s is likely to be dampened by the release of stocks in the importing countries. Real prices are projected to strengthen in the second half of the 1990s as world production stagnates, but they are expected to weaken in the early 2000s as demand stagnates. * World demand is projected to increase at an average rate of only 1% p.a. for the period 1991- 2005. The stagnation in world import demand is expected because of projected population growth rates of zero or less and already high per capita consumption levels in many high-income countries. * Given the projected low level of world coffee prices in real terms, producing countries should re-examine their export strategies. Consideration could be given to providing extension services and credits to farmers so that coffee growers who have potential cropping alternatives can diversify out of coffee. 1World arabica and robusta prices are proxied by the ICO Indicator Prices for "Other Milds and Robustas, respectively. Projected Coffee Production, by Region Projected Coffee Consumption, by Region 0 1970 Mo80 1910 1985 2000 2005 1970 190 1990 1995 2000 2005 SAdWealftc AWiOW = kwiwa FIJ C=] a HV, .. Coffee Prices a/, 1950-2005 Ccents/kg) 1,200 1,000 Constant 1990 $ b/ 800 600 A I' 400 200 Current $ -------------- 0 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 a/ ICO Indicator Price, Other Mild Arabicas b/ Deflated by G-5 MUV Index 2 Recent Developments Prices collapse with suspension of exporl quota system. World coffee prices in real terms recorded their lowest annual average level in 1991 and there was a further decline in the first half of 1992. In terms of nominal US dollars, the average of the ICA "Other Milds" Indicator Price in the first quarter of 1992 was about one half its annual average in 1988. The reasons for the falling prices since 1989 include: (a) The release of the large stocks which had accumulated in producing countries. During most of the 1980s, when the export quota system was in force, most producing countries were forced to accumulate large stocks, so that by the end of 1988, total producers' stocks were over 47 million bags. Since the collapse of the system, producing countries have exported substantial amounts of these stocks and by the end of 1991 stocks in these countries were estimated to be less than 36 million bags. One important reason for the large increase in exports was that producing countries wanted to establish evidence of higher exports so that they would be able to obtain larger quotas if the quota system were reintroduced. (b) Slow supply response to the reduction in world prices. In spite of the very low world prices since 1989, world coffee production in 1990 and 1991 was almost at a record. The reasons for the slow response include: (i) being a tree crop, coffee supply does not respond to prices in the short run; (ii) many producing countries reduced their exchange rates and also export taxes to try to maintain real producer prices; and (iii) productivity has increased significantly in a number of producing countries. (c) Stagnant world demand. Import demand in the main consumers, the high-income countries, has been stagnant partly due to slower growth or recession. The decline in imports by the FSU has also been a negative factor. Export revenue declines serious. As a result of the sharp fall in coffee prices, coffee- exporting countries have experienced a sharp decline in export revenues. As shown in Table 1, nominal world coffee export revenue declined by about 30% between coffee years 1988/89 and 1990/91. (The international coffee year is from October 1 to September 30.) In real terms, i.e., nominal US dollars deflated by the MUV, the decline was 38%. The decline was considerably larger for robusta-exporting countries as the decline in robusta prices was much steeper than in arabica prices-export revenues in nominal US dollars declined by 30% for washed arabica producers, 21% for natural arabica producers (Brazil and Ethiopia combined), and 42% for robusta producers. There was wide divergence in rates of changes in coffee export revenues among exporting countries. A number of countries compensated for the price decline by increasing volume. Colombia's export revenue declined by only 20% between 1988/89 and 1990/91 as it increased export volume by 20%. Brazil increased export volume by 17%. Ethiopia, on the other hand, suffered a 54% decline in coffee export revenues as its export volume declined sharply-by 39%. The sharp reduction in coffee export revenues caused serious difficulties for countries that are heavily dependent on coffee as a source of foreign exchange revenue. These include Burundi, C6te d'Ivoire, Ethiopia, Rwanda, and Uganda. Local producer prices cushioned against fals. Producing countries attempted to alleviate the impact of the world price decline on producer prices in various ways. Table 2 shows the development of producer prices in terms of real local currencies (deflator used was the CPI) in major coffee-producing countries-the average decline between 1988 and 1991 was about 30%. This figure is considerably less 3 Table 1: Coffee Export Revenues of Selected Coffee-Exporting Countries, 1985/86-1990/91 1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 (million US current dollars) Total of all Totalcof ael 14,234 10,656 8,882 9,162 6,623 6,488 ICO members Brazil 2,414 2,348 2,165 1,878 1,221 1,568 Colombia 2,903 2,075 1,525 1,720 1,401 1,386 El Salvador 615 359 322 283 261 212 Mexico 862 573 404 531 430 385 Ethiopia 346 206 267 258 170 118 Cameroon 333 212 197 167 155 114 C6te d'Ivoire 781 458 515 375 291 309 Kenya 468 297 241 267 207 194 India 325 232 202 244 176 137 Indonesia 835 636 518 596 356 375 Source: ICO. Table 2: Index of Real Producer Prices in Selected Countries, in September, 1987-91 (Base Jkne 1989= 100) 1987 1988 1989 1990 1991 Average for all ICO members 100 107 72 69 73 Brazil 69 84 52 50 67 Colombia 102 93 96 90 90 El Salvador 108 113 93 97 83 Mexico 75 72 97 69 53 Ethiopia 89 118 65 94 48 Cameroon 102 102 103 40 34 COte d'Ivoire 106 100 99 49 47 Kenya 130 130 99 90 94 India 93 117 95 91 66 Indonesia 208 155 84 93 80 Source: ICO. 4 than the 42% decline in deflated world arabica prices (US dollar prices deflated by the MUV) during the same period. The difference stems mainly from changes in the deflators, exchange rates, and taxes. To evaluate the extent of changes in taxes, Table 3 shows the differences between the unit value of exports and producer prices in major producing countries in recent years. These differences consist of taxes, subsidies, processing costs, and domestic marketing costs. For the average of all International Coffee Organization (ICO) members, the difference became substantially smaller between 1988 and 1991, suggesting large reductions in export taxes or increases in subsidies. Table 4 shows the changes in real producer prices in major exporting countries and the components or breakdown of the changes. For example, Brazil's real coffee producer prices declined by 32%. This was caused by a 41% decline in export unit value, a 37% decline in the real value of the US dollar in terms of real local currency, and tax and domestic marketing cost reductions which contributed to increasing real producer prices by 46%. As Table 4 shows, Brazil, Colombia, El Salvador, Mexico, and Ethiopia reduced taxes and domestic marketing costs substantially to alleviate the impact of low world prices on real producer prices. However, in Brazil, Mexico, and Ethiopia there was considerable currency appreciation which reduced real producer prices. Kenya and India cushioned the impact by real exchange rate depreciation but taxes and/or marketing costs increased. Importers' retail prices largely unffected. Table 5 shows retail prices of roasted coffee in selected coffee-importing countries. A notable feature of the retail price data is that the decline in retail prices was much smaller than that in world prices. While international arabica prices declined by about 40% between 1988 and 1991, the decline in retail prices in terms of nominal US dollars was only 5% in the United States and France, 7% in Germany, and an increase of 18% in the United Kingdom. Sharp differences in the changes between world and retail prices are caused by taxes, marketing costs, and profits. In fact, unit import values of coffee constituted only a small fraction of the retail prices of roasted coffee in major importing countries in 1990-26% in the United States, 25% in France, 18% in Germany, and 9% in Japan. For this reason, and because of the low price elasticities of coffee demand in these countries, the fall in world coffee prices had a small impact on consumption demand. Consuming country stocks dampen recovery prospects. An important development in the world coffee market has been the sharp increase in the stocks held in consuming countries as world prices have fallen. These stocks are estimated by the ICO to have increased from 8.5 million bags at the end of 1988 to about 17 million bags by the end of 1991, an accumulation which causes concern among producing countries because it is likely to keep world prices at low levels. 2Real producer price can be expressed as PP EXCH* CPI CPI where PP = Producer Price; XUV = Export Unit Value; EXCH = Exchange Rate: TXR = Tax and Domestic Marketing Cost Rate. So a percentage change in PP/CPI can be broken down to the percentage changes of its component XUV, EXCH/CPI and TXR. 5 Table 3: Difference Between Unit Value of Exports and Producer Prices in Selected Countries, in September, 1987-91 1987 1988 1989 1990 1991 (USO/lb) Average for all ICO members 31.3 39.3 15.0 16.9 16.7 Brazil 43.2 41.6 15.5 4.6 9.9 Colombia 27.5 60.2 5.7 13.8 14.1 El Salvador 13.6 19.6 12.5 14.3 29.4 Mexico 49.7 63.0 15.4 13.9 27.7 Ethiopia 70.4 133.7 18.6 55.2 71.3 Cameroon 20.9 26.9 9.0 29.2 17.3 C6te d'Ivoire 44.9 34.5 43.4 27.3 12.6 Kenya 12.0 55.7 15.6 25.5 44.6 India 18.0 10.6 -0.2 9.9 22.9 Indonesia 21.0 35.1 18.4 7.1 11.6 Source: World Bank, International Economics Department. Table 4: Changes in Real Producer Prices and Their Components in Selected Countries between September 1988 and September 1991 Change in Real Export Unit Exchange Rate Taxes and Country Producer Price Value a/ and CPI b/ Marketing Costs c/ (in percentages) Brazil -32 -41 -37 +46 Colombia -3 -37 -2 +36 El Salvador -27 -45 -5 +23 Mexico -26 -29 -26 +29 Ethiopia -59 -40 -35 +16 C6te d'Ivoire -53 -52 -10 +9 Kenya -28 -35 +11 -4 India -44 -41 +33 -36 Indonesia -48 -49 -9 + 10 a/ Percentage change in export unit value. b/ Change in the value of nominal US dollar in terms of local currency deflated by CPI. c/ Effects of changes in taxes and domestic marketing costs on real producer prices. Source: World Bank, International Economics Department. 6 Table 5: Retail Prices of Roasted Coffee in Selected Importing Countries, September, 1987-91 1987 1988 1989 1990 1991 (USC/1b) United States 282 284 310 303 269 France 280 259 262 273 246 Germany 452 439 411 462 410 United Kingdom 1000 863 1019 1099 1017 Sweden 331 357 344 353 319 Japan 968 1029 938 979 N.A. Source: ICO. We undertook an analysis of the behavior of these stocks. The analysis suggests that: (a) The demand for stocks in consuming countries is considerably more price elastic than demand for consumption. While the price elasticities of demand for consumption in the major consuming countries range from 0.1 to 0.3, for stocks they range from 0.4 to 1.0. This implies that the aggregate price elasticity of world import demand has increased. (b) Stocks in consuming countries increased sharply, by almost 4 million bags, with the suspension of the quota system. The reason for this increase is the perception by importers and roasters of increased uncertainty in world coffee prices in the absence of the quota system. (c) If the quota system were reintroduced, these stocks would be released and the initial quota allocation would have to be small to allow for absorption of the stock release. Another significant development since the collapse of the quota system has been the divergence of prices between arabicas and robustas. As shown in Figure 1 and Table 6, in the early 1980s when the quota system was in force, robusta prices were 4% to 20% lower than arabica prices. The gap increased to 40% and 43% in 1990 and 1991, respectively. Statistical analysis suggests two factors behind this increasing gap-the faster increase in robusta production and changes in tastes favoring arabicas. Large increases in robusta production in recent years in Brazil, Indonesia, and Viet Nam have contributed significantly to the changing relative prices. Prospects for Supply and Exports World production stagnates. It is estimated that even the most efficient coffee producers are facing difficulties in covering variable production costs at the current low level of world prices. In most countries, export taxes on coffee have been reduced sharply or eliminated, as discussed above. If prices continue at these levels, no country is expected to increase production substantially in the near future. In fact, world production is expected to stagnate in the first half of the 1990s and to increase thereafter, such that the average rate of growth for the period 1991-2005 should be 0.6%. 7 Arabica and Robusta Prices, 1980-2005 (Current Dollars) 5 4 11 'n , k 1980 19 5 1990 1995 Table 6: Developnmt of Arabica and Robust Prices, 1980-91 Year Arabica Prices a/ Robusta Prices b/ Ratio c/ -US¢/kg) -- 1980 340 324 95 1981 282 227 80 1982 308 245 79 1983 290 274 94 1984 318 305 96 1985 323 268 83 1986 430 325 76 1987 251 226 90 1988 303 210 70 1989 240 166 70 1990 197 119 60 1991 187 107 57 a/ ICO "Other Milda" Indicator Price. b/ ICO Robusta Indicator Price. c/ (Robusta Prices/Arabica Prices) x 100. Source: ICO. 8 An examination of recent events in the four largest producing countries highlights the effects of the low prices on world production capacity. Brazilian farmers are reported to be uprooting millions of coffee trees, especially in the states of Parana and Sao Paulo where there are alternative crops to be grown. It is reported that the total number of coffee trees in Brazil has declined from 4.2 billion to 3.2 billion since 1988. Colombia was able to subsidize its coffee farmers until recently from the stabilization fund-National Coffee Fund (FNC). However, with the continued low prices, the FNC has been depleted and real producer prices are expected to decline sharply from this year. Real producer prices in COte d'Ivoire are estimated to be about one third of what they were in the late 1980s and this hardly covers the variable production costs of many coffee producers. Indonesia's production has been increasing over the past four years at a much slower rate than in the 1970s and 1980s, mainly due to the low world prices. Indonesia has been having difficulty in exporting its coffee as world demand has shifted to the milder arabicas. Key factors that will determine future supply for coffee producers are real exchange rates, export taxes, labor costs, and marketing and production efficiency. Production in countries such as Colombia and Costa Rica is expected to suffer from rising labor costs although their marketing and production efficiency are considered to be very high. Production in C6te d'Ivoire and Cameroon is likely to be adversely affected by the country's exchange rate. Indonesia is expected to increase production given its low-cost labor, abundance of land, and competitive exchange rate policy. Projections of supply in major coffee-producing countries are discussed below. No major changes in real exchange rates, export tax rates, and yield trends are assumed for these countries. Brazil's exports to dedine. Production in BRAZH is expected to be 19 million bags in 1993. This low figure is mainly due to the fact that 1993 will be an "off-year" in the bi-annual coffee cycle. Between 1993 and 2005, production should average around 24-26 million bags. The share of arabicas in Brazil's production is expected to decline as farmers in the arabica-producing states of Parana and Sao Paulo are expected to switch from coffee to crops such as citrus, pasture, and sugarcane. In mountainous parts of the states of Minas Gerais and Espirito Santo, where robustas are grown, labor is considerably cheaper than in the southern states and there are limited alternative crops to grow. Hence, robusta production there should increase at a moderate rate. Brazil's exports in the 1991/92 season were at the very high level of almost 19 million bags. With stagnancy in production in the 1993-2000 period, Brazil's exports are projected to decline at 2.4% p.a. and domestic consumption to increase from 9.8 million bags in 1992 to 10.4 million bags by 2005. Colombia's high export levels to continue to mid-1990s. Production in COLOMBIA increased significantly over the past two years as the trees planted under the replanting program in the late 1980s began to produce. Production is expected to reach 17 million bags in the mid-1990s. Colombia was able to maintain relatively high real producer prices during the past three years because of the availability of money in the FNC. As the FNC is now exhausted, real coffee producer prices in Colombia are expected to decline-by more than 20% in the 1992/93 season. Because most coffee grown in Colombia comes from high-yielding varieties, supply is considerably more sensitive to producer prices than in other countries. If real producer prices are lower over the next few years, this should cause production to stagnate in the second half of 1990s. Colombia's production is therefore projected to fall to about 14 million bags in the late 1990s-from the current level of over 16 million bags-and to increase 9 by 2005 to 16.7 million bags. In the past two seasons Colombia's exports have been at historical highs of over 13 million bags. The increase in exports was due not only to the historically high production but also to reduced domestic consumption as retail prices in real terms increased sharply. Colombia's exports are expected to be about 14 million bags throughout the 1990s, with part of this coming from accumulated stocks. Output expands steadily in Indonesia. boNEsm's production capacity reached over 7 million bags in 1990, double what it was 15 years ago. With abundant land and low-cost labor, Indonesia is one of the few countries expected to increase production substantially in the 1990s--to almost 9 million bags in 2000 and close to 10 million bags by 2005. Indonesia's annual exports increased by about 2 million bags after the suspension of the quota system. This was achieved by increased production and a drawdown of stocks. Indonesia's stocks are estimated to have declined from 2 million bags in 1989 to about 300,000 bags in 1992. With stocks reduced, Indonesia's exports are projected to be slightly over 6 million bags in the first half of the 1990s and to increase steadily to over 8.2 million bags by 2005. Most Afcan producers' outlook poor. C&rE D'IVORE's production is projected to decline throughout the projection period-from 4 million bags in 1991 to 3.3 million bags by 2000--due to the lower real producer prices expected throughout most of the 1990s. Real producer prices in 1992 are estimated to be about a third of their level in the first half of the 1980s. Also, the marketing system has been disrupted by the depletion of the funds accumulated by the Caisse de Stabilisation. As most coffee production is exported, exports are also projected to decline in line with production. CAMEROON's production is projected to remain at about 1.4 million bags during the 1990s and to decline further to 1.2 million bags by 2005, substantially below the production level in the mid- 1980s of over 2 million bags. The impact of the fall in world prices was considerable in Cameroon. In real terms, producer prices are estimated to have fallen by about two thirds in the past four years. This caused farmers to stop applying chemical inputs and to reduce hired labor. The low producer prices are expected to have a long-term negative impact on production. A complete reorganization and privatization of the marketing system is underway. ETmoPiA is, at the time of writing, still suffering severe social and political uncertainties. As a result, production and marketing infrastructure is deteriorating. Production is therefore expected to stagnate for the next few years. Over the long run, a slight increase in production is projected, assuming improved political and economic stability. Problems ahead for Kenyan production. KENYA's real producer prices suffered considerably less than other countries from the sharp decline in world prices (see Table 2) as Kenya undertook a real depreciation of the currency and as Kenyan coffee fetches considerably higher prices than most others due to its quality. The export unit value for Kenyan coffee in September 1991 was almost USC100/lb compared with USc72/lb for "Other Milds" and USC40/lb for robustas. However, real producer prices were still substantially lower than in the recent past and, as a result, production is expected to stagnate at the level of 1.7 million bags in the 1990s and recover to 2 million bags by 2005. An additional constraint on production in Kenya is a reduction in agricultural land availability as population is increasing at almost 4% p.a. 10 A critical problem facing Kenya's coffee industry is its payments system. A new system for paying coffee farmers, the Cherry Advance Payment System, is being implemented, although not uniformly because farmers in some provinces opted to continue receiving payment under the old system. This situation, combined with the news that some politicians are abusing the system, has made farmers lose confidence in it-a re-examination of the payments system is urgently needed. MExco's production is projected to decline to 4.6 million bags by 1995 due to low world prices and increasing domestic costs including labor costs. With the projected recovery in world prices, production is expected to increase after 1995 to about 5.1 million bags by the early 2000s. Vur NAM's production has been increasing at a very fast rate-from less than 500,000 bags in the mid-1980s to well over 1 million bags in 1992. The increase was due to large investments by the FSU. This source of investment has now dried up but production should continue to increase, though at a slower rate, as the trees mature. Prospects for Demand and Imports Low growth of coffee consumption. World coffee consumption is projected to increase at 1% p.a. for the period 1991-2005. The increase in consumption is expected to come mainly from countries in which per capita consumption levels are still low-Japan, LMIC Europe and Asia, and producing countries. Demand in the United States is projected to decline by 0.2% p.a. and that in the EC to increase by 0.7% p.a. World imports are also projected to increase 1% p.a. during this projection period. Imports by high-income countries are projected to increase at 1% p.a. while those by LMICs at 1.3% p.a. FSU market decline significant for some producers. Imports by the FSU declined from 2.7 million bags in 1989 to 1.2 million bags in 1990 and about 1 million bags in 1991. Considering that the FSU was importing less than 1 million bags in the early 1980s and that 1 million bags constitutes only about 1% of world consumption, recent developments in the FSU have not had a significant impact on the world coffee market. However, for some exporting countries the impact was significant. The FSU was one of the largest markets for Brazil's soluble coffee exports, importing about one third of Brazil's total soluble coffee in recent years. The FSU stopped importing Brazilian soluble coffee in mid-1991. India exported about 1 million bags of coffee to the FSU in 1990 and about 700,000 bags in 1991. Because the FSU's imports constituted about 50% of India's total exports, India's short-run export prospects depend critically on developments in the FSU. Other exporting countries hurt by the declining import demand in the FSU are Viet Nam and Laos. Little growth in US and EC markets. There are signs that the long-term decline in US demand has stopped. Trend analysis indicates that US consumption declined until the mid-1980s and then increased. An important factor behind this reversal in the trend has been the real price of coffee. Retail prices of coffee in real terms are about 20% below their level in the mid-1980s. With the price elasticity of demand in the United States estimated to be about 0.4, this decline in real retail prices is estimated to have caused an 8% increase in consumption. However, as retail prices are projected to increase, demand in the United States is expected to decline at 0.2% p.a. over the projection period. Among the EC countries, demand is expected to increase where per capita consumption is still comparatively low, such as in the United Kingdom and Spain. Germany should also increase 11 consumption with the increase in incomes in the former East Germany. The economic integration of the EC at the end of 1992 is not likely to affect total EC coffee demand very much. At present, the EC's tariff on coffee imported from non-ACP countries is 5%, while imports from ACP countries are duty free under the L6me Convention. Even if the tariff is reduced to zero at the end of 1992, the impact on consumption should be small given the low price elasticity of demand for coffee in the EC. Recent developments in "gourmet" markets in the United States and the EC suggest that, in spite of the general stagnancy in coffee consumption in these countries, there is scope for high-quality and specialized coffee demand to increase. Gourmet coffee is usually handled by small roasters who customize their output to market demands. Not only are these particular markets growing but also the prices paid for the coffees sold are substantially higher than for "average" coffees. Japanese growth weaker. Japanese consumption is expected to increase at 2.6% p.a. during the 1991-2005 period, which is considerably lower than the 7.6% p.a. rate of growth over the past two decades. The major reasons for the slowdown are the higher per capita consumption level at present compared with the 1970s and 1980s and the slower population growth-which is expected to be almost zero by the late 1990s. The aging of the population is also a negative factor. Another factor is that Japanese economic growth is expected to average 3.5% p.a. during the 1990s, considerably lower than the average for the past two decades. The demand for robusta coffee is projected to decline relative to arabica coffee. In addition to the switching of demand from robustas to arabicas in the OECD countries, the expected increase in robusta production in Indonesia, Viet Nam, and Brazil should depress robusta prices. Also, the reduced imports by the FSU, which were mainly robustas, puts additional pressure on robusta prices. The impact of low robusta prices is and will be significant in African producing countries as many of them depend heavily on coffee exports as a source of foreign exchange. Price Outlook Prices to strengthen after 1995 as supply declines. In the short run, world coffee prices depend critically on what happens to Brazil's production. Brazil's 1992/93 crop is projected to be about 19 million bags. Prices should start recovering from late 1992 as long as Brazil's 1992/93 crop is not very much higher than the projected figure. Prices are expected to recover slowly from the recent very depressed levels in the first half of the 1990s because of large world production and the large stocks held in importing countries. They are projected to increase to over USC200/kg in the second half of the 1990s as production stagnates or even declines in many countries due to the very low prices in the first half of the 1990s. Even with this increase, the projected price in 2000 is about one half the early 1980s. In the 2000-2005 period, prices are projected to weaken as demand continues to grow slowly, while supply growth is projected to quicken as a result of the higher prices received in the second half of the 1990s. Expected effects of large consumer stocks. There is great concern and some confusion among producing countries about the price-depressing effects of the large stocks held in importing countries. The current level of stocks in importing countries, estimated to be between 17 and 19 million bags, appears to be very large but one of the reasons for these large stocks is the suspension of the quota system. We estimate the suspension to have caused stocks to increase by 4 million bags (see discussion 12 above). In the early 1980s when the quotas were in force and when prices were about US$0130/lb, there were on the average about 7 million bags of stocks in importing countries. So we conclude that there are between 6 and 8 million bags of stocks being held for speculative purposes. These stocks are likely to be released quickly once prices increase. A stock release of 1 to 2 million bags is likely in the 1992/93 season when Brazil's crop is expected to fall between 18 and 20 million bags. After 1992/93, these stocks are likely to be released in years when world production is below 100 million bags and to be dissipated by 1995. While these stocks exist, large price increases are not likely to occur even were world supply to fall sharply. An important characteristic of these speculative stocks is that their accumulation and release is price elastic and the price elasticity increases as price declines. In other words, the price elasticity of demand for stocks when prices are at US0l50/kg may be about 0.8, but at US0l20/kg price elasticity would be 1.1. Hence, had stocks not accumulated in importing countries, world coffee prices in 1991 and 1992 would have been even lower. The price differential between arabicas and robustas narrowed in late 1992 and is expected to be about 30% in the near term as Cte d'Ivoire, Brazil, and Indonesia reduce exports of robustas. However, the projected prices for robustas are much lower than for arabicas in the long run, as shown in Figure 1 and Table 7, and the price differential is increasing. The main reason is the change in taste in consuming countries. The other factor which determines the relative price, the ratio of export availability of robustas to washed arabicas, is projected to be relatively stable during the projection period. Policy Issues International Coffee Agreement (ICA) unlikely. The suspension of the export quota system under the ICA in July 1989 caused world coffee prices to decline sharply which, in turn, caused great financial difficulties in many coffee-exporting countries. Discussions have been taking place in London since the collapse of the agreement to negotiate a new one. In spite of the strenuous efforts by a number of producing countries, ICA members have yet to come to an agreement. There are several factors which make an agreement unlikely in the near future. They include: (i) there is now a freer environment for coffee trading in many exporting countries because commodity board-type organizations have disappeared in several countries, including Mexico, Nicaragua, El Salvador, and Brazil and hence, it would be difficult to control exports from these countries; (ii) the allocation of quotas among producing countries is likely to be difficult given the changes in exports that have taken place since the expiration of the last agreement; and (iii) the global trend to a freer trade environment could make it more difficult to obtain cooperation from importing members, especially if the scheme aims to raise prices substantially or to deprive consumers of choices among varieties of coffee. Even if all the issues are agreed upon soon, the earliest possible introduction of the quota system would be October 1994. Some diversification out of coffee desirable. Given that the reintroduction of some international price-support mechanism is unlikely, world coffee prices are projected to average much lower than in the period of the ICA agreements. So producing countries, especially those producing robustas, should consider encouraging inefficient coffee farmers to diversify. Such diversification is already underway in Brazil and Colombia. Diversification, however, often requires training of farmers through extension services and the provision of credit, both of which many countries lack. 13 Table 7: Projected Robusta Prices, 1992-2005 (1990 Constant $) Year Arabica Prices a/ Robusta Prices b/ Ratio c/ 1992 130 90 69 1993 142 104 73 1994 164 115 70 1995 197 134 68 2000 226 147 65 2005 215 135 63 a/ ICO "Other Milds" Indicator Prices. b/ ICO Robusta Indicator Prices. c/ (Robusta Prices/Arabica Prices) x 100. Source: World Bank, International Economics Department. Weakness of fixed producer price systems. The recent decline in world prices caused especially serious financial problems in producing countries which had fixed producer price systems such as Cameroon, CMte d'Ivoire, and Rwanda. With little prospect of an export quota system forthcoming to stabilize world coffee prices, it seems desirable that producing countries implement "free market" prices in their domestic markets. Recent developments in C8te d'Ivoire and Cameroon suggest that fixed producer price systems can cause considerably more difficulty for both government and farmers than a free market pricing system when there are abrupt changes in world prices. For a free market pricing system to work, dissemination of information to farmers is essential. Experience in Ethiopia has shown that such a system can work well even where the levels of farmer education and infrastructure are weak. Excessive producer price fluctuations can be mitigated to a great extent by a progressive export tax system. This may cause large fluctuations in government revenues but these, in turn, can be alleviated by the government using commodity risk management tools such as futures and/or options. Producers could develop gounnet market. Over the past few years, roasters have expressed frustrations at their difficulties in obtaining good quality coffee. Judging from the price of some Kenyan coffee (US050/1b above standard washed arabicas) and Hawaiian Kona coffee, demand for good quality coffee is strong. These coffees are usually processed and sold by small roasters in consuming countries, so exporters could do well by increasing their contacts with these roasters and jointly developing high quality, customized brands. 14 Table Al: Coffee - Production By Main Countries and Economic Regions Actual Projected Growth Rates a/ Averages Countries/ ----------------- 1991- Economies 1969-71 1979-81 1990 1991 b/ 1992 1993 1994 1995 2000 2005 1961-90 1970-90 2005 ..------------------ -------------('000 60 kg Bags)------------------------------------- --------(% p.a.)-------- High-Income 255 230 279 285 290 300 300 300 300 300 0.6 1.4 0.4 LMICs 65,962 84,642 97,133 100,874 100,518 94,810 100,650 97,930 101,670 109,510 1.4 2.0 0.6 Asia & Pacific 5,554 10,406 13,491 14,474 14,751 14,320 14,450 14,620 16,600 18,460 5.1 5.8 1.8 Indonesia 2,882 5,218 7,100 7,480 7,350 7,500 7,550 7,700 8,770 9,770 5.2 6.2 1.9 India 1,457 2,105 2,150 2,970 3,170 2,500 3,820 3,790 3,630 3,750 3.8 3.7 1.7 Africa 21,194 19,479 20,529 19,463 18,920 18,890 19,500 19,510 20,400 21,000 0.8 -0.2 0.5 Cote d'Ivoire 4,025 4,964 4,734 4,000 3,583 4,000 3,970 3,820 3,450 3,300 1.0 -0.8 -1.4 Ethiopia 2,873 3,207 3,400 3,500 3,000 3,000 3,200 3,320 3,430 3,560 1.8 1.3 0.1 Uganda 3,469 1,867 2,500 2,700 3,000 3,000 3,070 3,140 3,520 3,940 0.2 ERR 2.7 Kenya 905 1,446 1,740 1,502 1,650 1,600 1,720 1,740 1,880 2,000 4.4 3.6 2.1 Zaire 1,281 1,378 2,000 1,695 1,500 1,300 1,300 1,500 1,700 1,800 2.8 1.8 0.4 Cameroon 1,189 1,717 1,440 1,365 1,420 1,350 1,330 1,300 1,200 1,200 3.0 1.5 -0.9 America 38,787 53,892 63,113 66,937 66,847 61,600 66,700 63,800 64,670 70,050 1.2 2.3 0.3 Brazil 19,943 24,590 26,000 31,000 28,100 18,840 26,750 23,600 24,500 25,400 0.2 2.4 -1.4 Colombia 8,050 12,477 13,300 14,500 15,900 16,500 17,240 17,000 14,630 16,700 2.3 2.7 1.0 Costa Rica 1,315 1,804 2,453 2,565 2,530 2,500 2,535 2,620 2,770 3,000 3.5 3.6 1.1 El Salvador 2,323 2,924 2,787 2,402 2,500 2,600 2,750 2,880 3,300 3,650 1.3 -0.4 3.0 Guatemala 2,076 2,762 3,472 3,282 3,450 3,300 3,240 3,320 3,620 3,800 2.3 2.2 1.1 Mexico 3,049 3,828 5,100 4,550 4,850 4,200 4,400 4,600 4,800 5,100 2.8 2.4 0.8 World 66,217 84,872 97,412 101,159 100,718 95,010 100,850 98,130 101,870 109,710 1.7 2.0 0.6 a/ Least squares trend for historical periods (1961-90); end-point for projected periods (1991-2005). b/ Estimate. Sources: USDA Foreign Agricultural Circular, International Coffee Organization (actual); World Bank, International Economics Department (projected). Table A2: Coffee - Apparent Consumption By Main Countries and Economic Regions --------------------------------------------------------------------------------------------------------------------------------------- Actual Projected Growth Rates a/ Averages Countries/ ----------------- 1991- Economies 1969-71 1979-81 1990 1991 b/ 1992 1993 1994 1995 2000 2005 1961-90 1970-90 2005 -- --------------------------------('000 60 kg Bags)-------------------------------- --------(% p.e.)-------- High-Income 47,508 53,498 63,454 62,072 67,274 66,716 66,864 66,972 67,404 70,899 1.2 1.1 1.0 OECD 47,208 53,168 63,064 61,670 66,860 66,290 66,425 66,520 66,880 70,320 1.2 1.1 0.9 United States 20,914 18,141 21,890 18,710 19,500 18,700 18,600 18,500 17,500 18,100 -0.1 -0.8 -0.2 Japan 1,289 3,299 5,236 5,783 6,160 6,270 6,400 6,530 7,320 8,300 10.1 7.6 2.6 EC-10 18,817 24,292 28,995 31,075 32,300 32,470 32,580 32,600 33,000 34,400 2.8 2.3 0.7 Other Western Europe 4,282 4,928 5,735 5,800 5,780 5,750 5,720 5,740 5,750 5,900 1.5 1.1 0.1 LMICs 26,328 27,441 33,022 33,530 32,830 32,900 32,675 33,230 35,300 39,110 1.3 1.8 1.1 Americas 14,890 15,130 18,260 18,730 18,230 17,700 17,300 17,600 19,000 20,800 1.0 1.1 0.8 Brazil 8,793 8,000 9,900 9,760 9,900 9,760 9,730 10,010 10,260 10,410 0.2 1.2 0.5 Europe 3,879 5,197 5,181 5,060 4,930 5,000 5,020 5,050 5,260 5,670 4.5 2.7 0.8 FSU 700 735 1,223 1,000 1,170 1,180 1,180 1,180 1,190 1,350 4.6 4.0 2.2 World 73,836 80,939 96,476 95,602 100,104 99,616 99,539 100,202 102,704 110,009 1.3 1.4 1.0 a/ Least squares trend for historical periods (1961-90); end-point for projected periods (1991-2005). b/ Estimate. Sources: USDA Foreign Agricultural Circular, International Coffee Organization (actual); World Bank, International Economics Department (projected). Table A3: Coffee - Gross Exports By Main Countries and Economic Regions Actual Projected Growth Rates ./ Averages Countries/ --- r------- 1991- Economies 1969-71 1979-81 1990 1991 b/ 1992 1993 1994 1995 2000 2005 1961-90 1970-90 2005 -------------------------------------------------------------------------------------------------------------------------------- --- ----------------------------- ---('000 60 kg Bags)-------------------------------- --------(% p.a.)------ LMICs 54,356 60,820 81,155 73,450 81,220 75,980 76,110 76,580 77,040 82,000 1.7 1.6 0.8 Africa 16,453 14,992 18,674 17,843 19,200 18,100 17,700 17,500 17,700 18,100 -0.4 -0.3 0.1 Cote d'Ivoire 3,432 3,921 3,233 3,980 4,680 4,320 4,110 3,910 3,470 3,360 1.3 0.0 -1.2 Cameroon 1,036 1,618 2,339 1,857 1,050 1,240 1,300 1,280 1,150 1,150 3.0 1.4 -3.4 Uganda 3,123 2,354 2,365 2,000 3,000 3,200 3,100 3,100 3,390 3,800 0.0 -1.1 4.7 Kenya 841 1,198 2,020 1,649 1,850 1,630 1,650 1,680 1,800 1,900 4.2 3.2 1.0 Zaire 1,098 1,083 2,127 1,349 1,360 1,400 1,410 1,450 1,460 1,480 2.3 1.3 0.7 Ethiopia 1,366 1,354 1,382 849 1,500 1,630 1,580 1,510 1,510 1,450 0.7 0.7 3.9 Americas 35,419 39,401 47,686 50,508 50,200 47,290 47,490 47,930 46,290 49,400 1.2 2.3 -0.2 Brazil 18,333 15,267 17,339 19,339 18,750 15,300 15,050 15,300 13,800 13,800 -0.1 0.1 -2.4 Colombia 6,564 9,854 13,738 12,760 15,000 15,000 15,100 14,800 13,000 14,400 2.6 3.0 0.9 Costa Rica 1,066 1,472 2,377 2,412 2,280 2,300 2,280 2,320 2,450 2,670 3.4 3.8 0.7 El Salvador 1,885 2,451 2,591 2,014 2,300 2,520 2,550 2,640 3,100 3,450 1.4 0.0 3.9 Guatemala 1,687 2,145 3,491 2,803 2,450 3,000 2,930 3,000 3,250 3,380 3.4 3.7 1.3 Mexico 1,539 2,437 4,389 3,507 3,170 2,450 2,580 2,640 2,850 3,000 3.4 3.7 -1.1 Asia & Pacific 2,484 6,427 11,473 10,474 11,820 10,590 10,920 11,150 13,050 14,500 8.3 8.3 2.4 Indonesia 1,403 3,705 6,722 6,343 6,640 6,200 6,300 6,400 7,420 8,190 8.2 8.5 1.8 India 522 1,217 2,026 1,504 1,340 1,400 1,620 1,680 2,030 2,200 5.6 5.8 2.8 World 54,356 60,820 81,155 73,450 81,220 75,980 76,110 76,580 77,040 82,000 1.7 1.6 0.8 a/ Least squares trend for historical periods (1961-90); end-point for projected periods (1991-2005). b/ Estimate. Sources: USDA Foreign Agricultural Circular, International Coffee Organization (actual); Vorld Bank, International Economics Department (projected). Table A4: Coffee - Gross Imports By Main Countries and Economic Regions Actual Projected Growth Rates a/ Averages Countries/ ----------------- 1991- Economies 1969-71 1979-81 1990 1991 b/ 1992 1993 1994 1995 2000 2005 1961-90 1970-90 2005 ----------------------------------('000 60 kg Bags)-------------------------------- --------(% p.a.)------- High-Income 47,507 53,498 64,231 61,997 71,684 67,066 67,144 67,202 66,964 71,059 1.3 1.2 1.0 OECD 47,207 53,168 63,841 61,595 71,270 66,640 66,705 66,750 66,440 70,480 1.3 1.2 1.0 United States 20,914 18,141 20,189 20,000 21,600 19,100 18,800 18,650 17,300 18,100 -0.9 -0.7 -0.7 Japan 1,289 3,299 5,486 5,450 6,600 6,340 6,380 6,550 7,300 8,310 10.1 7.3 3.1 EC-10 18,817 24,292 31,346 30,550 33,900 32,300 32,600 32,680 32,830 34,540 2.8 2.0 0.9 other Western Europe 4,282 4,928 5,970 5,900 5,900 5,800 5,800 5,720 5,700 5,910 1.6 1.3 0.0 LMICs 5,770 7,413 9,061 9,188 8,976 9,124 9,216 9,378 10,076 10,941 5.3 3.5 1.3 Europe 1,159 1,477 5,181 5,060 4,930 5,000 5,020 5,050 5,260 5,670 4.5 2.7 0.8 FSU 700 735 1,223 1,000 1,170 1,180 1,180 1,180 1,190 1,350 4.6 4.0 2.2 World 53,277 60,911 73,292 71,185 80,660 76,190 76,360 76,580 77,040 82,000 1.7 1.5 1.0 at Least squares trend for historical periods (1961-90); end-point for projected periods (1991-2005). b/ Estimate. Sources: USDA Foreign Agricultural Circular, International Coffee Organization (actual); World Bank, International Economics Department (projected). Table AS: Coffee - Prices, ./ 1950-91 (Actual) and 1992-2005 (Projected) Current S 1990 Constant $ -- G-MUVb/ G-7 CPI c/ Actual 1950 111 677 895 1951 129 686 939 1952 126 637 879 1953 125 653 865 1954 170 907 1,159 1955 133 695 904 1956 151 763 1,004 1957 134 664 872 1958 109 529 696 1959 93 459 595 1960 92 446 578 1961 90 425 552 1962 83 388 495 1963 81 382 468 1964 101 471 569 1965 100 465 546 1966 93 415 491 1967 86 382 443 1968 87 387 436 1969 88 372 422 1970 115 457 520 1971 99 375 419 1972 110 383 422 1973 137 411 460 1974 145 357 440 1975 144 319 389 1976 315 687 823 1977 517 1,027 1,223 1978 359 620 693 1979 382 582 697 1980 344 478 561 1981 282 390 456 1982 309 434 506 1983 290 417 468 1984 318 467 514 1985 321 468 509 1986 429 531 563 1987 251 282 292 1988 303 318 327 1989 239 252 259 1990 197 197 197 1991 187 184 178 Proiected 1992 139 130 124 1993 157 142 136 1994 185 164 156 1995 225 195 185 2000 310 226 211 2005 340 216 194 a/ ICO Indicator Price, Oder Mild Arabicas. b/ Deflated by 0-5 Manufacturing Unit Value (MUV) Index. c/ Deflated by 0-7 Consumer Price Index (CPI). Sources: 1CO, Cmlo Cof ovenn (actua; World Buak. Irnational Economics Dpartment (propo1ed). 19  Cocoa SWnWy * Despite drier-than-normal weather during the summer of 1992, world cocoa production is expected to increase in 1993. Further growth is expected in the period 1993-95, although it will be much slower than in the recent past. This growth will be based on the coming into maturity of new plantings from the mid- to late 1980s, although yields from these plantings will be reduced because low producer prices in the interim have led to poor farm care. * After 1995, the low level of new plantings and replantings of recent years should result in a production decline in some countries (Brazil, Cameroon, C6te d'Ivoire, and Malaysia) and slowing down in production growth in others (Ecuador, Ghana, and Nigeria). Only Indonesia, whose costs of production are low, is projected to show significant growth. In aggregate, production will increase at only 0.7% p.a. over the 1995-2005 period. * In the short to medium term, world consumption growth will be around 2% p.a., but will slow in the longer run as cocoa prices increase. World consumption developments during this period will be significantly affected by the pace of recovery in the FSU and Eastern Europe. Increases in cocoa consumption are expected to come from Asia, particularly China, Japan, and the Republic of Korea. * In real terms, the market outlook is for prices to remain almost unchanged during the 1992 to 1995 period due to the existence of record large stocks. In the medium to long run, we expect a slow price increase-in real 1990 US dollars going from $1,060/ton in 1992 to $1,240/ton in 2000, and to $1,360/ton in 2005. Note that for the period 1985 to 1990 the average real price of cocoa was $2,055/ton. Cocoa Prices a/, 1950-2005 ccents/kg) 00 600 Constant 1990 S b/ II 40 200 -Current $ V ,-* 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 a/ ICCO average daily prr ce b/ Deflated by G-5 IN Index 20 Projected Cocoa Bean Production, Projected Cocoa Bean Consumption, by Major Producer by Major Consumer 2000 00 00 1400 1400 1200 001200 10000 9800 go- M~,i -Is u.n wp ih tl 600 -MEg 20040 2000 1970 1980 1990 1995 2000 2005 0 . . . . It0? 98 1990 1995 2000 2005 Recent Developments Stocks build up and pdces plwwuet. Since the mid-1980s, cocoa production has increased by about 1 million tons and cocoa consumption by about 600,000 tons, resulting in significant stock growth and sharp price declines. Over the past two years, production has exceeded consumption by a cumulative total of 350,000 tons. Prices fell from $1,585/ton in 1988 to $1,195/ton in 1991. During the second quarter of 1992, cocoa prices, in current dollars, were at an 18-year low. In more detail the reasons for the continuous fall in prices were: (a) Slow supply response to the price decline. This can be attributed to the high level of new plantings during the 1980s, plantings that are now coming to maturity. These have more than offset the effects of poorer crop maintenance due to the low prices. (b) While cocoa consumption in the United States and Western Europe increased more quickly due to the low prices, cocoa consumption in the FSU dramatically declined. (c) Even though consumption increased during the past two years at 5% p.a., cocoa production in absolute levels was higher than consumption. The 1990/91 crop was particularly large for major producers such as Brazil, C6te d'Ivoire, Indonesia, and Nigeria. The decline in world cocoa prices has been evident in export revenues from cocoa (beans and products).' Figure 1 shows cocoa export revenues, in terms of nominal US dollars, for three I In 1990, export revenues from cocoa represented 1.6% of the total export revenues from non-fuel primary commodities of all developing countries. 21 geographical regions during the years 1981/82, 1985/86, and 1989/90. The biggest losses were recorded by African producers: US$760 million less in 1989/90 compared with 1985/86 and US$260 million less in 1989/90 compared with 1981/82. Latin American cocoa producers saw reductions of US$140 million and US$86 million over these two periods. However, Asian cocoa producers recorded gains of US$37 million and US$219 million, respectively. Low cocoa prices have prompted producing countries to seek a revival of the economic clauses of the international cocoa agreement. However, to date these efforts have been unsuccessful. Although the main consuming countries, in general, oppose market intervention, there are pressures to show some political will to assist producer countries. In addition, chocolate makers in consuming countries are concerned that the persistence of very low prices will lead to deterioration in quality of the beans and threaten the viability of cocoa production. Supply Prospects Production falls, expected recovery slow. World production of cocoa beans is expected to decline by about 10% this year (1991/92). To a great extent, the decline is due to adverse weather and, to a lesser extent, to the short-run price elasticity of cocoa supply. In Africa, the very wet spring of 1991 followed by a very dry summer is causing crop reductions in Ghana, COte d'Ivoire, and Nigeria. Similarly, the excessive rain and the occurrence of black pod disease will have a significant effect on the Brazilian crop. In Indonesia and Malaysia, the coming to maturity of new plantings has offset the adverse weather effects on production. The supply response to low prices was most significant in Brazil and Malaysia, two relatively high-cost producers. In both cases, low prices were responsible for a lack of crop husbandry and lower application of fertilizers and pesticides. Also, new plantings have been severely affected by the low prices. According to USDA reports, the total area planted during the past three years declined by 20,000 ha in Cameroon, by 10,000 ha in Ecuador and by 19,000 ha in Malaysia. In Brazil and Ghana, total area has remained unchanged, while it increased by 8,000 ha in C6te d'Ivoire. Figure 1: Export Revenues from Cocoa, 1981/2 to 1989/90 1. 1.2 0.8 0.4 0.2 Africa Latin Amfer Ica Asia 1 9 1/ 8 2 = 1 9 8 5/ 8 6 19 8 9 / 9 0 __ 22 Given normal weather conditions, production could grow by 8% between 1992 and 1993. However, the summer of 1992 was drier than normal in West Africa which is expected to negatively affect 1992/93 crop developments in Cameroon, COte d'Ivoire, and Ghana. Brazil's crop is also expected to be affected by bad weather and the spread of disease. Given the adverse weather, world production is projected to increase by only 3% between 1992 and 1993. After 1993 the projections assume normal weather conditions. Thus, the projected 6% growth between 1993 and 1994 reflects mainly the restoration of normal weather conditions. Between 1994 and 2005, production is expected to grow by only 0.7% p.a. as recent and current prices are resulting in no investment in cocoa plantings. The slow recovery of prices expected over the longer term will have some positive effects on supply due to better farm care and, with a lag, to new plantings. Details of projections for the major producers are given below. Production in Brazil, Cameroon, Cte d'Ivoire, and Malaysia is projected to decline in the long run, while production in Ecuador, Ghana, and Nigeria is projected to register small increases. The only significant growth in production is projected for Indonesia. Low psices dampen investment and production in C6te d'Ivoire. In COTE D'IVOIRE, production in the medium term is projected to grow only slowly from 741,000 tons in 1992 to 780,000 tons in 1995. The new plantings of the mid- to late 1980s will be coming to maturity and are expected to offset the decline in yields resulting from poor farm maintenance while prices are low. Farmers claim that current producer prices are insufficient to meet basic farm operating costs. Producer prices in COte d'Ivoire are one half of what they were in the 1980s (see Figure 2). Given the low level of world prices, it is doubtful that the CFA 200/kg producer price will change soon. The government has decided to maintain crop area at current levels-1.5 million ha-and to discourage further expansion. During the second half of the 1990s, the low investment in the cocoa sector in the early 1990s will negatively affect production growth, but the expected recovery in world cocoa prices after 1995 should have a positive effect on production, both in the short and longer term. Production is projected at 748,000 tons by 2000, increasing to 765,000 tons by 2005. The government is taking several measures towards reforming the domestic marketing system. Purchasing agents will no longer need government approval and exporters will be able to appoint as many agents as desired to buy any quantity of beans, and with no restrictions on the amount that can be exported. However, the government has increased the required capital of cocoa exporters from 30 to 100 million CFA and increased the required deposits from 15 to 50 million CFA. This measure is intended to ensure adequate working capital and to protect farmers' interests. Production dedine in Cameroon. In CAMEROON, production is expected to show a steady decline because there were no new plantings or replantings of any significance during the 1980s. Further, the prevailing producer prices do not justify investment in cocoa production USDA reports indicate abandonment of farms and reduction in the area planted as younger farmers are being encouraged by the government to plant food crops which provide a steady year-round income, and the government is in arrears in payments to farmers of 200,000 CFA/ha of new cocoa plantings which should have been made under a government program. In light of these factors and low farmgate prices, production is projected to decline from 102,000 tons in 1992 to 100,000 tons by 2000 and to 95,000 tons by 2005. 2 As in the case of Cte d'Ivoire, real producer prices are one half of what they were in the 1980s (see Figure 2). 23 Figure 2: Real Producer Prices for Cameroon, Cote d'Ivoire and Ghana, 1975-90 1.4- 1.3- 1.2- 0.9- 0.8- 0.7- 0.6- 0.5- 0.4- 0.3- a GHA + CIV OCR Real prices higher so production to increase in Ghana. GHANA's cocoa production is expected to decline in 1992 mainly due to the adverse weather. Subsequently, production should show a very gradual increase up to the year 2000-from 250,000 tons in 1992 to 315,000 tons by 2000. For the period 2000 to 2005, a somewhat faster production increase (2.7% p.a. vis-a-vis 1.4% for the period 1992-2000) is projected due to the effect of higher prices on production. By 2005 production is expected to reach 348,000 tons. Despite the increases in nominal cocoa producer prices recently, real prices have been declining, although they are still double what they were in the first half of the 1980s (see Figure 2). Up until 1990, the Ghana Cocoa Board provided subsidies on insecticides. Since the subsidy was withdrawn, farmers have reduced the application of insecticides, which may increase the impact of disease. For Ghana, an important factor will be the impact of the recent reform of the cocoa marketing system. The Ghana Cocoa Board has stated that private companies will be allowed to buy cocoa from farmers although the Cocoa Marketing Company (CMC) will still control export sales. The objective of the privatization is to introduce competition in the internal marketing of cocoa and thus improve the efficiency of the sector. It is likely that the increased marketing efficiency will result in higher prices to farmers. Little investment in cocoa in Nigeria. In 1992, NIGERIAN cocoa production is expected to fall by 55,000 tons to 105,000 tons mainly due to adverse weather. Both yields and quality of the 1991/92 crop were hurt by the extended rainy season which resulted in a higher incidence of black pod disease and drying problems after harvest. After 1992, production is expected to recover and show a gradual increase over the period 1993 to 2005, with a projected increase from 145,000 tons in 1993 to 175,000 tons by 2005. Production growth, particularly after 2000, will be constrained mainly due to the lack of any significant new planting during the late 1980s and 1990s. After the 1986 marketing reforms, producer prices rose from 1.5 naira/kg to 4.4 naira/kg in 1987-88 (prices expressed in real 1985 nairas). Due to this price increase, farmers rehabilitated plantations, increased their productivity, and planted new trees. However, after 1988 prices fell to about 2.5 1985 naira/kg, discouraging investment in cocoa- even replacement of trees burned by the bush fires in 1989 has been limited. Not only are low cocoa 24 prices resulting in low levels of investment, but in addition, they are having a direct effect on production due to reduced farm maintenance. The poor quality of Nigerian beans remains a problem in the post- 1986 market liberalization period. Because of their poor quality, Nigerian beans sell at significant discounts below Ghanaian beans.' Low prices squeeze producers and long-tern decline likely. In BRAziL, cocoa production is facing serious problems. Domestic cocoa prices are at historical lows. Production costs are around $1,000/ton which puts the break-even f.o.b. price at around $1,400-1,500/ton. Brazil's planted cocoa area has remained unchanged at 630,000 ha since the mid-1980s when the cocoa area expansion program was halted. (In the period 1975 to 1985, 400,000 ha were planted and Brazil's production potential increased from 250,000 tons to 400,000 tons.) For 1992, production is expected to drop to 305,000 tons- down from 370,000 tons in 1991. This sharp decline is mainly due to weather conditions which favored outbreaks of pod rot and witches broom fungus. The low domestic cocoa prices and the increasing costs of fertilizers and pesticides mitigate against controlling crop diseases. If prices remain low, therefore, crop volatility is likely to increase. In the medium term (1994-97), production should recover somewhat to 320-330,000 tons, assuming weather conditions return to normal. In the longer run, however, due to the high cost of production, poor farm care, and aging tree population, cocoa production in Brazil is likely to decrease steadily-reaching 295,000 tons by 2000 and 268,000 tons by 2005. High costs and low prices cause diversification out of cocoa. In MALAYSIA, the scarcity of farm labor and increasing wages are expected to cause large estates to reduce farm care or even diversify out of cocoa as production costs are not covered by prices. Production costs for estates are about $1,000/ton, which puts the break-even f.o.b. price at around $1,500/ton. The Malaysian Government is encouraging plantation companies to venture into fruit and vegetable cultivation as an alternative to cocoa. Total area under cocoa has already declined from a peak of 410,000 ha in 1989 to 380,000 ha in 1992. With the low level of new plantings in the early 1990s, the diversification away from cocoa, and the projected low world prices, we project a decline in production to 220,000 tons by 2000 and to 215,000 tons by 2005. Reports indicate a reduction in the use of fertilizers and chemicals, poor farm care by smallholders and the smaller estates, and some diversification from cocoa to oil palm by larger estates, all of which contribute to reduced output. As a result of reduced farm care, yields have dropped by over 20%-from over 900 kg/ha in the late 1980s to 700 kg/ha in 1991-92. Production is projected to increase until the mid-1990s as the significant area of new plantings in the mid-1980s-around 150,000 ha-will be coming to maturity. The production from these plantings will have a greater effect on the output than the negative effects of reduced farm husbandry. However, while production is expected to increase to 235,000 tons by 1995, this is well short of the 339,000 tons target set by the Sixth Malaysian Economic Plan. Low-cost Indonesia expands production. INDONESIA may be the only country with the potential for expansion, even at today's low prices. Indonesian smallholders are among the lowest-cost cocoa producers. Production costs are around $300-500/ton. Labor costs are low, and new areas are opening. Quality is also improving which cushions price declines. Reports indicate a large area of new - Before liberalization, Nigerian beans were selling at f10-20/ton below Ghanaian beans. Now they are selling at about 50-70/ton below. 25 plantings in the late 1980s and early 1990s. We are projecting a significant and continuous increase in production for the period 1992-2005. The projected average rate of growth is 6% :p.a. which, incidentally, is about one fourth of what it was during the 1980s. Production is projected to increase to 325,000 tons by 2000 and to 390,000 tons by 2005. Elsewhere production stagnates with low prices. ECUADOR's cocoa production is projected to decline to about 90,000 tons in 1992-well down from two consecutive crops above 100,000 tons in 1990 and 1991. The main reasons for the decline are the very cool weather of last August (1991) which affected crop development (budding stage), and the decline in yields due to low prices. Over the next three to five years, cocoa production is expected to stagnate as a result of low prices and lessened farm care. Over the longer run, production growth will be constrained because presently no cocoa trees are being planted. In addition, some farmers are switching to more profitable crops such as bananas, corn, and fruits and vegetables. We project production not to exceed 100,000 tons even by 2005. No significant growth in production is projected for COLOMBIA, the DOMINIcAN REPUBLIC, MExco, and PAPUA NEw GUINEA-in the short or long run-for the same reasons as in Ecuador. Conswption Prospects Key uncertainty is income growth in Eastern Europe and the FSU. World cocoa consumption is expected to remain almost unchanged between 1991 and 1992. The projected growth of 0.3% is well below the average rate of growth during the past four years of over 5%. The price increase in chocolate confectionery products in the later half of 1990 by US chocolate makers and the slowdown in economic activity in both the United States and Western Europe contributed to the sharp reduction in the consumption growth. In the FSU, cocoa grindings are below one third their level in the 1980s due to the foreign exchange shortage. Cocoa consumption in the FSU is projected not to show any significant recovery for the next three to four years. The outlook for Eastern Europe, which is discussed in a special section below, is more promising. Consumption temporarily declined from its mid-1980s levels but is now showing signs of an upturn. Ultimately, there is good potential for demand expansion in Eastern Europe and the FSU as per capita cocoa consumption is about one-third of that in Western Europe (see Figure 3). We believe that the key uncertainty in the long-run cocoa consumption projection lies with the prospects for income growth in Eastern Europe and the FSU. Over the period 1992 to 2005, consumption growth in Eastern Europe is projected to be 2% p.a. For the FSU, consumption is projected to remain at about the 1992 level for the next three to four years, but subsequently to rise as economic activity recovers. By 2005, consumption is projected to be 150,000 tons-roughly the average consumption level during the 1980s. In Western Europe and the United States, long-term consumption growth will be constrained by the projected increases in real cocoa prices. The introduction of cocoa butter substitutes due to changing regulations in Europe will also hamper growth in Western Europe, as discussed in the next paragraph. For the United States and Western Europe, the average rate of consumption growth over the next three to five years is projected to be 2.5% p.a. and 2% p.a., respectively. With prices showing recovery after the mid-1990s, growth is expected to slow. Over the period 1992 to 2005 the average consumption growth for the United States and Western Europe is projected to be 1.4% p.a. and 1.1% p.a., respectively. The lower rate of growth for Western Europe after 1995 also reflects the substitution of cocoa butter by cocoa butter alternatives, an issue that is analyzed below. 26 An issue that is of concern to producing countries is the substitution of cocoa butter substitutes (vegetable fats) for cocoa butter, due to changing regulations in the EC. Currently, in all EC countries with the exception of the Denmark, Ireland, and the United Kingdom, chocolate products cannot use alternatives to cocoa butter (Denmark, Ireland, and the United Kingdom currently allow up to 5% cocoa butter alternatives). With the harmonization of regulations in Europe on January 1, 1993, other European chocolate makers will lobby to be allowed to use cocoa butter alternatives to the same extent in order to compete, particularly with UK manufacturers. Even through the low level of current and projected cocoa prices should constrain the expansion of the use of substitutes for cocoa butter, industry analysts have estimated that by the mid- to late 1990s, 50-75,000 tons of cocoa may be displaced by vegetable fat substitutes. This substitution is more likely to affect cocoas of lower quality, such as Brazilian, Indonesian, and Malaysian, rather than higher-quality cocoas such as those from Cameroon and Ghana. Cocoa consumption developments in East Asia are beginning to assume some importance as a result of the rapid income growth. Per capita consumption is presently about 0.2 kg, one tenth that of Western Europe (see Figure 3). But statistics show that it is growing, albeit from a small base (see Table 1). Cocoa Conswnption and Imports in Eastern Europe and the FSU FSU market recovery uncedain. In earlier years the FSU accounted for 8-9% of world cocoa consumption. However, since 1990 its share has fallen to 3-4%. Grindings averaged 121,600 tons in the 1970s and 146,000 tons in the 1980s. However, by 1990/91 average grindings had fallen to 83,000 tons (see Table 2 and Figure 4). Preliminary projections give FSU grindings at 25,000 tons for 1991/92. The effect of the recent reduction in FSU consumption on the world cocoa market was significant. Had the FSU imported and consumed as much cocoa as during the 1980s, the 177,000 tons world production surplus of 1990/91 would have been halved, and the projected production deficit of 83,000 tons for 1991/92 would have been virtually doubled. A rough estimate indicates that world cocoa prices for 1992 could have been about 8-10% higher had the FSU consumed as much cocoa in 1992 as the yearly average of the 1980s. Table 1: Cocoa Consumption in East Asia, 1976-91 1976 1981 1986 1991 ('000 tons) China 5.2 7.4 15.1 30.0 Indonesia 2.0 2.5 5.9 5.2 Japan 64.5 74.6 79.7 133.0 Korea, Rep. of N.A. 4.7 5.4 9.5 Malaysia 1.0 2.3 3.6 9.0 Philippines 6.7 6.1 1.9 10.3 Source: World Bank, International Economics Department, and ICCO. 27 Figure 3: Per Capita Cocoa Consumption, 1989 2.5 - . p 1 .5 - ------------- ....... .......... 0.5 - .... ..... N. EuropeE. Europe USA S. America China Australia S. Europe FSU Canada Japan Korea In Eastern Europe cocoa grindings and consumption have not been affected nearly as much as in the FSU (see Table 2 and Figure 5). Final cocoa consumption averaged 92,000 tons per year during the 1980s, declined to 90,000 tons in 1990 and increased to 104,000 tons in 1991-as high as any time during the past 20 years. A major part of the increase in final cocoa consumption has been the huge increase in chocolate imports. During the 1980s they averaged 5,600 tons, or roughly 2,300 tons in cocoa bean equivalents.' In 1990 chocolate imports increased to 21,800 tons and in 1991 to 42,400 tons. Eastern European grindings have not been reduced as much as those in the FSU due to major investments by Western European and US companies in the chocolate industry in Czechoslovakia, Hungary, and Poland, as well as less serious foreign-exchange problems in Eastern Europe, compared with the FSU. Price Prospects Stock overhang depresses market to 1995. The 1992 crop year is the first year of production deficit following seven consecutive years of surpluses. By 1991, stocks exceeded 1.5 million tons, the equivalent of nine months of consumption, the highest level in the post World War II period. The 1992 deficit, which is projected to be between 85,000 and 95,000 tons, has had hardly any effect on prices due to the existence of such large stocks. For 1993, a deficit of about 70-90,000 tons is projected, mainly due to adverse weather conditions in the major producing countries. The two consecutive deficits are expected to help prices recover somewhat; however, the existence of such large stocks will restrain price increases for some time. During the next two to three years cocoa prices in real terms are expected to experience a slow recovery in the absence of a severe production shortfall, again because of large stocks. By the mid-1990s, production growth will begin to be reduced by the lack of investment in the late 1980s-early The conversion factor between cocoa beans and chocolate is between 0.4 and 0.5. 28 Table 2: Eastern Europe and FSU: Cocoa Consumption and Grindings, 1975/76 to 1990/91 1975/76 1981/82 1984/85 1987/99 1988/89 1989/90 1990/91 (10tons) Eastern Europe Grindings 109 54 77 73 84 78 78 Consumption 113 82 85 89 98 90 104 FSU Grindings 140 132 165 132 201 106 83 Consumptions 168 146 216 160 245 134 93 Source: World Bank, International Economics Department, and ICCO. M1gure 4: Consumption and Grindings in the FSU, Figure 5: Consumption and Grindings in 1981-91 Eastern Europe, 1981-91 300 100 90 250 - 2000 200 -s 50 1931 1982 1983 1984 1985 1986 1987 1BB8 1989 1990 1991 ______1_0 198 011f98 BMtI 10 = gindinge conauption 11M1 IM2 119 118 1180 IS1 18 IW7 IM 1i1 I8i rindings aption 1990s. Consumption growth should also show improvement with more robust economic growth in the western world and some improvement in the FSU and Eastern Europe. If the rates of growth in consumption in the United States and Western Europe return to levels of recent years of around 5-6% p.a., then a faster price recovery can be achieved. In the medium to longer run (next four to ten years) developments in the FSU and Eastern Europe will most likely be the demand-side factors which are most important. The expected average rate of real price increases over the forecast period is 2%. 29 Policy Issues Local processing offers few advantages. There are three policy issues of concern to cocoa producers. First, producing countries are examining proposals to expand local processing of cocoa beans. A number of factors should be taken into account in evaluating local processing: (a) since cocoa product prices follow the same path as bean prices, processing does not help in diffusing the price exposure; (b) the quality of the products produced in developing countries is often poor, so that instead of exporting good beans and receiving a premium, they export poor products at a discount; (c) there is tougher competition for cocoa products than for beans; (d) the technology is relatively capital-intensive; and (e) because local processing relies on local beans only it may not achieve a blend desirable to the market. In several cocoa-producing countries, cocoa processing facilities operate well under capacity, for example, in Nigeria where cocoa processing facilities operate at around 15% of their capacity and in Ecuador where capacity utilization is about 33%. In most cases, the lack of skilled personnel, inadequate financing, and shortages of spare parts plague the industry. Malaysia may provide the only example of a thriving downstream processing operation in a producing country. This is due to the expanding domestic market and also to successful marketing efforts in East Asia where Malaysia does not face much competition for cocoa products. Marketing systems affect producer prices. Second, cocoa producers are concerned about maintaining international competitiveness. The main avenues are via increases in yields (introduction of new technology), improvements in quality, and importantly, streamlining the domestic marketing system. The first two avenues-yields and quality-may apply more to Indonesia and Malaysia. Improving the efficiency of the marketing system applies most to West African producers. West African cocoa farmers are low-cost producers. However, the internal cocoa marketing systems are high-cost. Figure 6 shows for major producing countries the domestic marketing costs (lower shaded area) and producer prices (upper shaded area) as a percent of the f.o.b. price in 1991.s The figure indicates that in the essentially free market systems (Brazil, Indonesia, Malaysia, and Nigeria) domestic marketing costs are at least 30% lower than in countries with marketing board systems (Cameroon, CMte d'Ivoire, and Ghana). In the former, producer prices as a percentage of the f.o.b. price are also higher. Despite the fact that Cameroon, Cte d'Ivoire, and Ghana receive higher f.o.b. prices due to the higher quality of their beans, producers in Brazil, Indonesia, Malaysia, and Nigeria received higher absolute prices in 1990/92.' The low prices of recent years led West African producers such as Cameroon, C6te d'Ivoire, and Ghana to adopt measures leading to streamlining of marketing operations and to the privatization of parts of the marketing chain. Nigeria moved to a free marketing system in 1986. For COte d'Ivoire and Ghana, the reforms of the internal marketing systems should improve efficiency and reduce the impact of low cocoa prices on their economies and on cocoa farmers. Producers need range offinancial instruments and sound policies. Third, while cocoa- producing countries should see that producer price movements reflect world price movements, at the same time they should have the opportunity to hedge against short-term price volatility. This means that exporters, traders, and producers should have access to financial instruments such as futures and options. * When the two percentages do not add up to 100, there is a tax. 'In that period, no significant taxes or subsidies existed in these countries, perhaps with the exception of Ghana (about 20% to 25% tax). 30 Fgure 6: Producer Prices and Marketing Costs (percent of f.o.b. price) 70 50 WM 011WIE W1 C01101I MIGIA MtLAYSIA IlliIIA IMIL In addition, export tax and exchange rate policies should keep the cocoa sector internationally competitive. The use of export taxes is a complicated issue in respect of perennial crops such as cocoa. Current levels of export taxes affect future production as well as current production.! In the case of Ghana, the reduction of the export tax on cocoa and the devaluation of the 1983-84 period led to an increase in production by about 50% between 1984 and 1990, so that government revenues and cocoa producers' welfare increased as a result. 7 See, P. Trivedi and T. Akiyama, "A Framework for Evaluating the Impact of Pricing Policies for Cocoa and Coffee in C6te d'Ivoire, " World Bank Economic Review, Vol. 6, No. 2, May 1992, pp. 307-330. 31 TabLe Al: Cocoa Beans - Production By Main Countries and Economic Regions ActuaL Projected Growth Rates a/ Averages Countries/ ----------------- 1991- Economies 1969-71 1979-81 1990 1991 b/ 1992 1993 1994 1995 2000 2005 1961-90 1970-90 2005 -.----------------------------------.('000 Tons) ---------------------------------- --------(% p.a.)------- High-Income LMICs 1,392 1,601 2,409 2,541 2,281 2,352 2,490 2,526 2,588 2,702 2.5 2.8 0.4 Africa 994 961 1,341 1,442 1,255 1,304 1,381 1,386 1,383 1,443 1.5 1.5 0.0 Ghana 430 264 295 295 250 270 285 290 315 348 -1.4 -1.9 1.2 Nigeria 261 155 170 170 108 145 155 160 165 175 -0.5 -2.1 0.2 Cote d'Ivoire 195 365 710 822 750 741 788 780 748 765 7.2 6.7 -0.5 Cameroon 127 117 125 117 102 103 106 106 100 95 1.8 -0.1 -1.5 Americas 358 554 652 663 569 562 587 595 585 572 2.7 3.0 -1.0 Brazil 209 319 352 370 300 297 320 320 295 268 3.7 2.6 -2.3 Ecuador 57 87 101 106 90 87 87 90 95 97 3.1 2.9 -0.6 Asia & Pacific 40 86 418 436 457 486 522 545 620 687 11.2 12.4 3.3 MaLaysia 3 36 241 225 220 225 232 235 220 215 20.8 24.5 -0.3 Indonesia 2 10 115 155 180 200 225 240 325 390 17.8 22.5 6.8 World 1,392 1,601 2,409 2,541 2,281 2,352 2,490 2,526 2,588 2,702 2.5 2.8 0.4 a/ Least squares trend for historicaL periods (1961-90); end-point for projected periods (1991-2005). b/ Estimate. Sources: FAO, Production and Trade Yearbook Tapes; GiLL and Duffus (actuaL); WorLd Bank, InternationaL Economics Department (projected). Table A2: Cocoa Beans - Apparent Consumption By Main Countries and Economic Regions -------------------------------------------------------------------------------------------------------------------------------------- Actual Projected Growth Rates a/ Averages Countries/ -----------------1991- Economies 1969-71 1979-81 1990 1991 b/ 1992 1993 1994 1995 2000 2005 1961-90 1970-90 2005 -------------------------------------------------------------------------------------------------------------------------------------- ---- ---------------------------- ------(000 Tons)---------------------------------- --------(% p.a)------- High-Income 983 1,043 1,624 1,747 1,776 1,811 1,845 1,880 1,945 2,010 1.6 2.5 1.0 Europe 512 562 865 972 983 1,002 1,022 1,043 1,080 1,120 2.5 2.7 1.0 United States 365 359 556 565 571 585 598 610 640 670 1.8 2.1 1.2 LMICs 391 472 593 598 574 591 607 620 710 770 2.9 2.1 1.8 Europe 84 120 90 104 106 109 112 115 128 140 3.2 0.3 2.1 FSU 126 136 134 93 47 48 53 55 115 150 4.6 0.3 3.5 World 1,374 1,515 2,217 2,345 2,350 2,402 2,452 2,500 2,655 2,780 2.7 2.4 1.2 -------------------------------------------------------------------------------------------------------------------------------------- a/ Least squares trend for historical periods (1961-90); end-point for projected periods (1991-2005). b/ Estimate. Sources: FAD, Production and Trade Yearbook Tapes; Gill and Duffus (actual); World Bank, International Economics Department (projected). Table A3: Cocoa Beans - Gross Exports By Main Countries and Economic Regions ------------------------------------------------------------------------------------------------------------------------------- Actual Projected Growth Rates a/ Averages Countries/ ----------------- 1991- Economies 1969-71 1979-81 1990 1991 b/ 1992 1993 1994 1995 2000 2005 1961-90 1970-90 2005 ------------------------------------------------------------------------------------------------------------------------------- --- -----------------------------------('000 Tons) ---------------------------------- --------(% p.a.)--------- High-Income 339 615 1,002 1,077 1,000 1,030 1,060 1,100 1,200 1,300 6.2 5.6 1.4 LMICs 1,299 1,437 2,188 2,264 2,073 2,144 2,275 2,301 2,348 2,462 2.4 2.6 0.6 Africa 979 907 1,298 1,382 1,255 1,304 1,381 1,386 1,383 1,443 1.2 1.4 0.3 Ghana 378 221 255 330 250 270 285 290 315 348 -2.3 -1.9 0.4 Nigeria 238 167 143 147 108 145 155 160 165 175 -1.6 -2.5 1.3 Cote dOIvoire 170 357 740 805 750 741 788 780 748 765 8.0 7.6 -0.4 Cameroon 98 100 124 118 102 103 106 106 100 95 0.8 1.2 -1.5 Americas 281 451 491 474 379 372 392 395 375 352 3.4 2.8 -2.1 Brazil 165 295 276 284 225 222 240 240 210 178 4.0 2.6 -3.3 Ecuador 45 83 105 103 85 82 80 83 85 87 5.0 4.3 -1.2 Asia & Pacific 39 79 399 408 439 468 502 520 590 667 19.0 12.3 3.6 Malaysia 3 35 229 215 210 213 219 221 204 197 26.5 24.2 -0.6 Indonesia 1 10 103 133 170 190 214 229 313 378 33.9 26.1 7.7 World 1,638 2,052 3,190 3,341 3,073 3,174 3,335 3,401 3,548 3,762 3.2 3.4 0.9 a/ Least squares trend for historical periods (1961-90); end-point for projected periods (1991-2005)./wir b/ Estimate. Sources: FAO, Production and Trade Yearbook Tapes; GiLl and Duffus (actual); World Bank, International Economics Department (projected). Table A4: Cocoa Beans - Gross Imports By Main Countries and Economic Regions Actual Projected Growth Rates a/ Averages Countries/ ----------------- 1991- Economies 1969-71 1979-81 1990 1991 b/ 1992 1993 1994 1995 2000 2005 1961-90 1970-90 2005 ----------------------------------('000 Tons) ---------------------------------- ---------(% p.a.)------- High-Income 1,319 1,612 2,667 2,803 2,588 2,673 2,809 2,864 2,988 3,169 3.3 3.6 0.9 Europe 824 1,096 1,754 1,888 1,743 1,801 1,892 1,929 2,013 2,134 3.8 3.8 0.9 United States 378 384 676 667 616 636 668 682 711 754 2.2 2.9 0.9 LNICs 306 417 502 525 485 501 526 537 560 593 3.7 2.5 0.9 95 159 278 328 332 344 361 367 317 303 5.5 -0.6 Europe 85 122 90 104 106 109 112 115 128 140 3.2 0.3 2.1 FSU 126 136 134 93 47 48 53 55 115 150 4.6 0.3 3.5 World 1,625 2,029 3,169 3,328 3,073 3,174 3,335 3,401 3,548 3,762 3.2 3.4 0.9 a/ Least squares trend for historical periods (1961-90); end-point for projected periods (1991-2005). b/ Estimate. Sources: FAD, Production and Trade Yearbook Tapes; Gilt and Duffus (actual); World Bank, International Economics Department (projected). Table AS: Coco eans - Pricca, a/ 1950-91 (Actua» and 1992-2005 (Projected) Curent $ 1990 Ca s- - MUV b/ G-7 CPI o/ 1950 63 386 509 1951 70 372 510 1952 70 355 489 1953 68 352 467 1954 116 620 792 1955 79 415 539 1956 57 289 381 1957 64 316 416 1958 88 426 559 1959 73 358 464 1960 59 285 370 1961 49 230 298 1962 46 214 274 1963 55 263 320 1964 51 236 285 1965 37 170 200 1966 52 232 273 1967 60 264 307 1968 72 322 361 1969 90 383 434 1970 68 269 305 1971 54 204 228 1972 64 224 247 1973 113 339 380 1974 156 384 474 1975 125 276 336 1976 205 446 535 1977 379 753 896 1978 340 587 657 1979 329 502 600 1980 260 362 425 1981 208 288 336 1982 174 244 284 1983 212 305 342 1984 240 352 387 1985 225 329 357 1986 207 256 272 1987 199 224 232 1988 159 166 171 1989 124 131 135 1990 127 127 127 1991 120 117 114 Proiete 1992 113 106 101 1993 119 108 103 1994 125 111 106 1995 131 113 108 2000 170 124 116 2005 215 136 122 a/ Internationul Cocoa Organiation (ICCO) average daily price for Lndon and New York markit, nearmt thrme dnurm tk~i monb.. b/ Defated by -5 Ma~ factuuing Unit Valuc (MUV) Index. e/ Deflated by 0-7 Consumr Pric. Index (CPI). Sources: ICO cretariat at on) ad FAO Tr feabk (actual); World Bank, Lternaoa Eco~ DeparUmmt (prje). 36  ·―.& 단―--.--l’· World tea output is projected to increase at 2% p.a. over the projection period. This is a considerably lower rate than that for the 1970-90 period when it averaged 4.8% p.a. Lower real prices are the main reason for expecting the slower growth in world output. Kenya is expected to be the largest tea exporter by 2005. Projected Black Tea Output, by 11bWon Projected Black Tea Output, by Country 2500 ISO 1600 2000 1400 '200 1 1500 1,000 11000 M 00 400 "V1 200 ' F2129 ' 0 I"D ISM 2000 2005 Ino 1295 2000 2005 J[Dr3v M umc Am. M Lwc Ad@ w. M bdwAdo Sd Ld. Recent Dew1opments OWput increases Affe demand JhUs. Average London auction prices for tea in real terms in the first half of 1992 have been at their lowest level in history, falling to a level about 30% lower than real prices in the second half of the 1980s. The fundamental causes of the fall have been increases in output in the three major tea-exporting countries, India, Kenya, and Sri Lanka, and reduced import demand from the FSU and Iraq. Between 1989 and 199 1, India's production increased by 58,000 tons, Sri Lanka's by 33,000 tons, and Kenya's by 23,000 tons. The combined increase corresponds to about 6% of world black tea production. The FSU's import demand declined from 23 1,000 tons in 1990 to 170,000 tons in 1991 and is expected to fall to about 100,000 tons in 1992. Due to the international trade embargo, Iraqs imports are estimated to have declined from 37,500 tons in 1989 to 27,500 tons in 1990, and to an estimated 20,000 tons in 1991. Tea prices increased in the second half of 1992 as supply in southern Africa, India, and Sri Lanka declined sharply because of droughts. MeefaUs aho as Aftican teas dominate London market. Another reason for the decline in average London auction prices since the early 1980s has been the change in the composition of tea sold at the London auctions. Table I shows the quantities and prices of tea sold at London auctions. The share of Indian tea sold declined sharply between 1980 and 1990-from 31 % to 21 %. (With well- functioning auctions in producing countries, producers preferred to sell there rather than in London because the UK's share in world tea consumption is declining and finance costs are lower at auctions in producing countries as the sale proceeds are received more quickly.) At the same time, the share of 38 African tea increased from 53% to 69%. Prices of African teas are generally lower and have been weaker than those of Indian and Sri Lankan teas. The relative market strength of Sri Lankan and Indian teas in relation to African teas can be seen in Table 2, which shows trends in tea prices for the period 1980-90 at selected auctions in producing countries. In terms of real US dollars, tea prices at Calcutta and Colombo auctions have not shown any statistically significant decline while tea prices in Mombasa have declined by 6.5% p.a. The trend in real US dollar prices at the London auction was -5.5% p.a. India loses price competitiveness. The main reasons for the higher prices in India have been the strong domestic demand and the earlier growth in demand from the FSU under a special trade agreement. As a result of the higher prices, Indian tea lost competitiveness in the world market and its share of exports to non-FSU countries declined from about 70% in 1980 to 49% in 1990. The reason for the relatively higher prices of Sri Lankan tea compared with African tea is that it is an orthodox type, in demand by countries in the Middle East. This type of tea is considerably more costly to produce than the CTC type which Kenya mainly produces (India's share of orthodox tea is about 20% of total production). Exchange rate adjustments cushion producer price falls. The exchange rate adjusted by inflation is an important variable affecting the prices producers receive in real terms for exports. The value of one US dollar in terms of deflated local currencies of four major producers has been calculated and is shown in Table 3 in index form. In spite of inflation in these countries, the value of one US dollar was significantly higher in 1991 than in 1980 in India, Indonesia, and Kenya. This implies, for example, that even if world tea prices fell by 26% in terms of nominal US dollars, Indonesia's producer price in 1991 was the same as in 1980 in terms of constant Indonesian rupiahs, if it is assumed that there was no change in domestic marketing costs in real terms. Table 1: Quantities and Prices of Teas Sold at London Auctions, by Origin, 1980-91 Origin 1980 1985 1988 1989 1990 1991 (Pence/kg) Prices 105 200 126 145 142 132 India Sri Lanka 92 156 99 126 112 100 Africa 94 150 94 120 108 99 Average 96 159 101 126 115 105 Quantities (tons) India 29,600 10,100 8,800 7,400 9,100 6,000 Sri Lanka 11,600 3,000 3,700 3,500 4,000 2,500 Africa 50,400 39,700 27,200 22,400 30,300 28,000 Total 95,200 55,300 42,100 33,800 43,700 36,600 Source: The Tea Brokers' Association of London. 39 Table 2: Trends in Real Tea Prices at Auctions in Producing Countries, 1970-90 and 1980-90 (percent per annum) UKLondon India:Calcutta Sri Lank:Colombo Kenya:Mombasa US$a/ fb/ US$al Rupeab/ US$a/ Rupecsb/ US$a/ K. Shillings' 1970-90 -3.2 -4.0 1.6 1.3 No Trend 5.3 -3.5 -2.0 198W90 -5.5 -5.7 No Trend No Trend No Trend 4.4 -6.5 No Trend a/ Nominal US dollar deflated by MUV. b/ Local currency deflated by CPI. Source: World Bank, International Economics Department. Table 3: Index of Real Value of Nominal US$1 in Major Tea Ptoducing Countriesal, 1980-91 (1980 = 1.0) India Sri Lanka Kenya Indonesia 1980 1.00 1.00 1.00 1.00 1981 0.97 0.99 1.09 0.90 1982 0.99 0.96 1.09 0.86 1983 0.94 0.96 1.19 1.06 1984 0.98 0.88 1.17 1.08 1985 1.01 0.93 1.18 1.11 1986 0.95 0.89 1.12 1.22 1987 0.89 0.87 1.08 1.43 1988 0.88 0.82 1.08 1.35 1989 0.96 0.83 1.14 1.34 1990 0.95 0.76 1.14 1.30 1991 1.09 0.70 1.19 1.26 a/ Calculated by dividing the nominal exchange rate by the domestic CPI. Source: World Bank, International Economics Department. Production and Export Outlook Because of the recent droughts in southern India, Sri Lanka, and southern Africa, output from these regions is projected to decline in 1992. The decline in these regions is expected to be partly offset by increases in output in other countries such as China, Indonesia, and Uganda. In aggregate, world output in 1992 is expected to be about 80,000 tons lower than in 1991. Over the 1991-2005 period, world black tea production is projected to increase on average at 2% p.a. The incremental output is expected to come mainly from India, and Kenya (see Table 4). 40 Table 4: Black Tea: Supply Projection Growth Rate Regions and 1991-2005 Countries 1990 1991 1992 1993 1995 2000 2005 ('000 tons (% p.a.) FSU 88 93 93 95 95 105 110 1.2 Developing 1766 1822 1745 1850 1965 2170 2400 2.0 Asia 1267 1301 1240 1315 1392 1525 1672 1.8 India 709 735 710 740 776 854 938 1.9 Indonesia 119 116 120 124 131 149 167 2.6 Sri Lanka 227 242 190 230 24 258 265 0.6 Africa 310 331 300n 340 370 425 493 2.9 Kenya 188 204 190 209 226 260 305 2.9 World 1855 1916 1835 1950 2050 2283 2517 2.0 Source: World Bank, International Economics Department. India needs to diversify export destinations, domestic demand strong. Tea prices in INDIA are likely to fall further with the further reduction in import demand from the FSU. Moreover, while the FSU has been importing more than 50% of its total tea imports from India, it is expected to diversify its imports with the opening up of trade by the republics. India will have to diversify its export destinations and this will push Indian tea prices closer to African prices. Some narrowing of the differential between Indian and African prices has already occurred; the ratio of average auction prices in Calcutta and Mombasa was only 1.43 in 1991 compared with 1.85 in 1990. The expected loss of premium for Indian tea prices will have an important impact on tea output in India. Although the government has an ambitious program to expand production by releasing 53,000 ha of land for tea production between 1987 and 2000, it is hard to see an expansion of total tea area by 12% in the 1990s in the face of low producer prices. The World Bank's econometric model projects India's output to increase at an average rate of 1.9% p.a. to reach 854,000 tons in 2000 and 938,000 tons in 2005. As demand for tea in India is projected to increase at about 3% p.a., India's exports are projected to decline to about 150,000 tons in 2000 and 135,000 tons in 2005; recently, exports have been at a level of 220,000 tons. Sm LANICA's export prospects depend critically on demand in the Middle East. Supply prospects depend on the pace of replanting of old trees to higher-yielding varieties. The national plan aims at increasing output at 2.5% p.a. during the 1990s. It will be difficult to achieve this target given the expected low level of world tea prices. 41 Kenyan yields and export market share to increase. KENYA is projected to continue increasing production but at a much lower rate than in the past as land is becoming scarce due to the high population growth. Supply is projected to increase at about 3% p.a. By 2005, Kenya is expected to be the largest black tea exporter with a market share of 23% in 2005 compared with 17% in 1990. The additional output is expected to come mainly from yield increases in the smallholder sector where average yields are presently considerably lower than on estates. MALAWI's output is projected to increase only marginally due to the already very high yields and the lack of suitable land for expansion. UGANDA's output has been increasing at a rapid rate, thanks to successful rehabilitation programs. Its output is expected to continue to increase at about 5% p.a. during the projection period. CHINA's exports are expected to stagnate or even decline during the projection period. China can adjust its black tea output depending on the relative prices of black and green tea. Growers are tending to convert to green tea which gets higher prices. Hence, China's exports are likely to increase when world black tea prices are high. Demand Prospects FSU and Middle East demand growth critical but uncertain. World black tea demand prospects are critically dependent on demand developments in the FSU and the Middle East, two regions where demand is fraught with uncertainty. Prospects for the FSU's imports depend on its economic growth and domestic tea production, which declined sharply in the late 1980s due to the Chernobyl incident. With low yields and poor quality, tea production in the FSU is hardly viable. Assuming domestic production growth of 1.2% p.a. for the projection period, imports are projected to increase at 3% p.a. The import demand of the countries in the Middle East depends on their economic activity and the migrating worker flow they generate which, in turn, depend heavily on world petroleum prices. Given the expected slow increase in real prices of petroleum, import demand in these countries is projected to increase at about 3% p.a. during the projection period. Decreasing demand in tea-drinking OECD countries. Import demand in industrialized countries is expected to decline by about 1% p.a. during the 1991-2005 period. This decline is mainly due to the projected decline of 2% p.a. in UK import demand. Declining demand in the United Kingdom as well as in Canada and Australia is due to a large extent, to changing tastes. In these traditional tea- drinking countries, demand for coffee and other beverages has been increasing at a rapid rate. India's consumption is projected to increase at 3% p.a.. This is a much lower rate than for the period 1970-90 when it averaged 4.6% p.a. The lower rate is expected due to slower population growth and the lower income elasticity of demand with the now higher per capita consumption level. Price Prospects Price recovery weak until after 1995. In 1992 and 1993, world black tea prices in real terms are expected to recover somewhat from the historically low level of 1991. World output in 1992 is expected to be about 80,000 tons lower than in 1991 due to droughts in southern India and southern Africa. However, the price recovery is expected to be weak due to the large carryover stocks and substantially reduced imports of the FSU. Assuming a return to normal weather in 1993, production should increase again and real prices are expected to decline to USc182/kg in 1994 and US0190/kg in 1995 and to fluctuate between US0l90/kg and US0l98/kg during the mid-1990s. 42 In the second half of the 1990s, real tea prices are projected to increase as production growth slows in Kenya and demand increases in the FSU and the Middle East. Tea prices, in constant dollars, are expected to reach USC198/kg by 2000-which is only about one half of the average level for the 1970s. Prices are projected to reach US0204/kg by 2005, the long-term equilibrium price according to our global model simulations. 43 Table AI: Tea - Price, la 1950-91 (Aual) and 1992-2005 (Projeted) Currt S 1990 Conant - G-5MUV b/ G-7 CPI c/ Actuai 1950 111 680 895 1951 113 600 822 1952 94 477 656 1953 113 588 782 1954 163 868 1,111 1955 154 807 1,046 1956 149 754 991 1957 137 677 891 1958 142 690 907 1959 141 694 902 1960 142 687 891 1961 136 646 834 1962 138 641 823 1963 131 620 757 1964 133 618 749 1965 129 598 704 1966 126 563 665 1967 127 561 654 1968 105 467 526 1969 97 412 465 1970 110 437 498 1971 105 399 445 1972 105 365 403 1973 106 317 356 1974 140 345 425 1975 139 306 375 1976 154 335 403 1977 269 534 636 1978 219 378 423 1979 216 328 394 1980 223 310 364 1981 202 279 327 1982 193 272 316 1983 233 335 376 1984 346 508 560 1985 198 289 314 1986 193 238 253 1987 171 192 199 1988 179 188 193 1989 202 213 219 1990 203 203 203 1991 184 181 175 Projecd 1992 206 193 185 1993 208 188 180 1994 205 182 173 1995 220 190 181 2000 272 198 185 2005 322 204 183 al Average of all team at London aucdonm. b/ Deflated by G-5 Manufacturing Unk Valu (MUV) Ildex. c/ Deffated by G-7 Cosumer Price lndex (CPI). Sourcu: International Tea Com e. (actual); World Bank, lternational Economics Depamnt (projected). 44 Sugar Summary * Since 1988-89, political developments in China, Eastern Europe, and the FSU have approximately halved the usually steady growth in sugar consumption, and the price, after peaking at around 015/lb in 1989, slipped to around 010/lb in mid-1992. * Chinese consumption has not recovered the strong growth momentum lost when import controls were applied in 1989, and political upheavals in Eastern Europe and the FSU have greatly reduced sugar consumption and imports in those economies.' * In the next five to ten years, not only will economic developments be important for the world sugar market, but also any number of political developments. On the balance of probabilities, these developments can be expected to slow up production growth in China and India and shift production away from Cuba, the FSU, and the United States towards Australia, Brazil, the EC, Thailand, and some other small, efficient exporting countries. * It is virtually impossible to pick the timing of booms and troughs in the sugar price cycle since they depend on random factors such as the weather and largely unpredictable political factors. Statistically there is no detectable long-term trend in the world sugar price.' Since 1951 it has averaged 018.4/lb in 1990 values, and although the price has averaged only (11.5/lb since 1981, this low average is well within the normal range of volatility and statistically does not signify a downtrend. * The long-term average price forecast is 013/lb (1990 dollars). However, while widespread government intervention prevails, price volatility will remain a feature of the market and sugar must continue to be regarded as a high risk crop. 1 Estimates indicate that the drop in Chinese, Eastern European and FSU consumption together could have caused a 30% decline in price. 0. Wang, R. Sturgise and B. Borrell, 'The Economic Consequence of International Sugar Trade Reform, Australian Bureau of Agricultural and Resource Economics Division Paper (1989.7), AGPS, Canberra, 1989. 2 The indicator price is raw, f.o.b., stowed at Greater Caribbean Ports. 45 Sugar Prices a/, 1950-2005 C$/ton) 2,000 1, 500 Constant 1990 $ b/ 1, 000 500 Currel it$ 1950 1955 1960 1965 1970 1975 1980 1995 1990 1995 2000 2005 / Wor Id" (ISA daIly) pr I ce, fob and stowed Car libtan ports b/ Deflated by G-5 MLN Index Consumption Outlook Recent low growth ate unusual. The marked reduction in consumption growth since 1988 is evident from Table 1. Chinese average annual consumption growth slowed from 8.8% between 1983 and 1988 to virtually zero between 1988 and 1992. In Eastern Europe and the FSU, growth slowed from 1.8% to -4%. Only in the rest of Asia did growth remain strong at 3.4% p.a.-Pakistan 9.5%, Thailand 7.9%, and India 4.8%. The recent slow growth in sugar consumption is unusual. Although political upheavals may occur in other countries in the next decade they are unlikely to be as disruptive of sugar consumption as those that have occurred in recent years in China and the FSU. To maintain consumption per person at existing levels, world sugar consumption must expand by 1.7% p.a., the expected population growth rate. However, consumption growth should outpace population growth over the next 15 years for the following reasons: Growth of competing sweeteners slows. The rate of growth of caloric sweeteners-mainly high fructose corn syrup-which rapidly penetrated the big sweetener markets of the United States and Japan during the 1980s, has now eased. Also, while intense sweeteners such as aspartame are gaining an increasing share of the sweetener markets in industrial countries, to a large extent they are creating their own market in the diet food and soft drink market where they are competing with high fructose corn syrup. Moreover, one outcome of the GATT Uruguay Round seems to be tighter scrutiny of agricultural trade protection, high levels of which encouraged the technical development and market penetration of alternative caloric sweeteners in Japan and the United States. 46 Table 1: Average annual growth in world sugar and caloric sweetener consumption, 1951-92 Sugar Caloric sweeteners Average consumption Growth Rate Average consumption Growth Rate (mill. tons) % (mill. tons) % 1951-59 a/ 1.99 5.2 1960-69 a/ 2.01 3.6 - - 1970-79 2.11 2.7 2.48 3.2 1980-88 2.20 2.3 2.50 2.5 1988-92 1.29 1.2 a/ Corn syrup was not available during these periods. Source: F.O. Licht, World Sugar Balances, 1992. Positive consumption growth resumes in industrial countries. The negative sugar consumption growth which characterized industrial countries throughout most of the 1970s and 1980s (see Table 2) has been reversed in recent years, and modest growth in consumption is projected to continue. An increase in consumption of caloric sweeteners is associated with changing eating habits in industrial countries. By eating in restaurants, for instance, consumers demand foods with more sugar and/or demand a greater choice of ready-to-eat foods at the point of consumption than they would if eating at home. To manage a restaurant efficiently, large quantities of prepared food must be held in reserve and inevitably there is food wastage. Also, continuing, though modest, population growth-mairdy in the United States-contributes to industrial country consumption growth. Asian market potential as incomes and population grow. Asia has great potential for increasing sugar consumption. Per person consumption of sugar is low, around 12 kg/year, the region's income growth prospects are strong, and high population growth is expected to continue. Even assuming historically modest rates of consumption increase in Asia-3% compared with around 6% in the previous two decades-this region should remain the main source of world consumption growth (see Table 2). In China, the continuing rapid income growth and renewed steps toward price liberalization (the Chinese government recently abolished the use of sugar coupons and liberalized sugar prices) suggest a return to high levels of consumption growth. In Pakistan and India, the prospect of continuing strong income growth following economic reform augers well for a continuation of high rates of consumption growth in both countries. Continued strong economic growth in Thailand and Indonesia also should underpin strong Asian consumption growth. Consumption increases with incomes in Central and South America. Central and South America are likely to be the other important sources of growth (see Table 2). In line with strong economic growth, sugar consumption has increased rapidly in Mexico since 1988. Economic reforms in Mexico are expected to underpin continued strong economic growth, and the removal of quantitative restrictions on imports of sugar will allow freer expansion of sugar consumption. Current and prospective economic reforms in Argentina, Bolivia, Chile, Columbia, Costa Rica, Ecuador, Honduras, 47 Table 2: Sugar (Centrifugal, Raw)-Apparent Consumption by Main Countries and Economic Regions Actual-Projected -- rowth rates- Countries/ Economics 1969-71 1979-81 1991 1992 1993 1994 1995 1996 1997 2002 2007 1961-91 1970-90 1992- 2007 ('000 tons) (% p.a.) High-income 23440 27610 25600 28519 26040 26264 26489 26716 29646 28127 29364 0.1 -1.1 0.9 United States 9861 9006 7900 7987 8075 8164 8253 8344 8436 8910 9411 -0.5 2.2 1.1 EC-10 11958 12025 11300 11368 11436 11505 11574 11643 11713 12069 12435 0.5 -0.5 0.6 Industrial Asia 2840 2917 2800 2834 2868 2902 2937 2972 3008 3193 3389 1.8 -0.7 1.2 Eastern Europ & FSU 13583 16361 17100 15900 14900 14975 15066 15389 15892 17374 18649 2.0 1.7 1.1 FSU 9536 11579 13200 12000 11000 11055 11166 11389 11844 13077 14088 1.9 2.0 1.1 Eastern Europe 4047 4782 3900 3900 3900 3920 3900 4000 4048 42297 4561 2.3 0.9 1.0 Developing 28563 44196 66400 68800 70599 72447 74347 76301 78308 89224 101765 4.8 4.6 2.6 Asia 11902 18823 34600 36200 37314 38463 39647 40868 42126 49031 57079 5.8 6.1 3.1 India 3940 5160 11500 12300 12669 13049 13441 13844 14259 16530 19163 5.4 5.9 3.0 China 1997 42399 7400 7800 8034 8275 8523 8779 9042 10483 12152 7.5 8.7 3.0 Indonesia 886 1797 2600 2800 2884 2971 3060 3151 3246 3763 4362 5.8 5.4 3.0 Pakistan 594 800 2500 2800 2912 3028 3150 3276 3407 4145 5043 9.3 8.3 4.0 Africa 4240 7127 9400 9700 9943 10191 10446 10707 10975 12417 14048 4.7 4.6 2.5 America 10663 15379 19300 19800 20211 20631 20161 21500 21949 24352 27039 3.7 2.9 2.1 Brazil 3999 5567 7000 7000 7105 7212 7320 7430 7541 8124 8752 3.4 2.9 1.5 Mexico 1910 3356 4500 5000 5150 5305 5464 5628 5796 6720 7790 4.7 3.8 3.0 Southern Europe 1731 2802 3100 3100 3131 3162 3194 3226 3258 3424 3599 4.2 3.0 1.0 World 70586 88167 109100 110519 111539 113685 115902 118406 121147 134725 149779 2.6 2.2 2.0 Sources: FAO (actual); World Bank, International Economics Department (projected). Peru, and Venezuela also hold promise for higher income and sugar consumption growth in the 1990s than was achieved in the 1980s. Since Eastern Europe and the FSU have experienced large falls in industrial and agricultural output in the past two years, and economic recovery seems some time off, consumption of sugar is projected to remain depressed at least until the mid-1990s and to grow modestly thereafter. Per pernc consumption of sugar is already reasonably high in Eastern Europe and the FSU; so even if economic recovery is strong in the mid- to late-1990s, consumption is unlikely to grow strongly for long although it may quite quickly resume previous levels. World consumption growth of 2% p.a. possible. With the growth rates assumed, world sugar consumption is projected to increase by 36% to 150 million tons between 1992 and 2007-Table 2. This would represent an annual world consumption growth rate of around 2%. But income and consumption growth rates cannot be predicted with much certainty and small changes in growth rates can have a large effect on the size of the market and on the price of sugar. A 4% growth rate in Asia, instead of the 3% projected, would see world consumption reaching 159 million tons by 2007 and a world growth rate of 2.4%. Based on model results (Wong et al., 1989), an increase in consumption growth from 2% to 2.4% over a 20-year period could raise the average world price by around 35%. Production and Trade Outlook Sugar production, on average, will grow to meet the increased demand for sugar. But the regional pattern of production will depend importantly on what happens to the world price and governments' responses to any changes. Similarly, these and other economic and political developments will determine the pattern of trade. Production to decline in Cuba. Sugar production is likely to decline in CUBA. Cuba is a large sugar producer and exporter: its output accounts for 6-8% of world production and its exports around 20% of traded sugar. Its previous bilateral trading arrangements with Eastern Europe and the FSU gave it terms of trade about two to three times better than what it could have commanded directly from the world market. Before its lucrative bilateral deals with Eastern Europe and the FSU, it was reliant upon a similarly lucrative bilateral arrangement with the United States. Removal of this assistance will likely result in a marked contraction in output. Around 95% of Cuba's arable land is presently under sugarcane. While sugarcane received high levels of externally-funded assistance, other land-based activities such as beef and dairy production were severely discriminated against. Loss of FSU assistance to sugarcane production, therefore, is likely to cause a diversification away from sugarcane into other activities as relative producer prices change. Within the normal ranges of sugarcane growers' responses to price changes in other countries, a halving of prices--which seems likely--could reduce production by 30-40% or around 2.5% of world production and around 10% of world trade in sugar. Cuba would no longer be the world's largest exporter. FSU and Eastern European producers uncompetitive. The direction of change in EASTERN EUROPE and the republics of the FSU is more difficult to predict. However, it seems unlikely that these countries could have a comparative advantage in the production of sugar. Their sugar production is based on sugarbeets and even the more efficient sugarbeet producers in the world have costs of production far in excess of efficient cane sugar producers. Moreover, Eastern Europe and the FSU costs of production are among the highest in the world with yields of sugar per hectare extremely low 49 (less than 2.5 tons in the FSU compared with around 11 tons in Australia). Even though there is considerable scope to adopt Western European beet growing technology to increase yields and lower costs, doubling of yields would still leave the FSU with low productivity. Moreover, Western European technology is capital-intensive and the FSU's and Eastern Europe's immediate advantage lies in having lower wage rates than Western Europe. Besides, despite its sophisticated beet growing technology,Western Europe is not low-cost by world standards and production is sustained only by massive subsidies-4 billion ECUs per year-from EC consumers. In line with the severe falls in industrial output across Eastern Europe and the FSU in the past two years, sugar production has also fallen-by around 20%. Production is likely to remain depressed over the next two seasons at least. It may decline even further while shortages of inputs persist and while the paralysis created by the uncertainty of changing over to a market-based economy continues. What happens once property rights for land and sugarbeet factories are redefined will depend closely on what pricing and industrial policies the countries of Eastern European and the FSU pursue. Only with very high levels of subsidization does it appear possible for these countries to maintain existing output. Although this may seem to be an unpopular (not to mention uneconomic) and, therefore an unlikely scenario, many countries less well-off than the countries of Eastern Europe and the FSU force their consumers or taxpayers to subsidize sugar producers--China, India, and Thailand, to name but a few. Further, if some countries of Eastern Europe are successful in joining the EC, the scenario of eventually receiving subsidies from the EC Common Agricultural Policy should not be ruled out. Former East Germany has already become a recipient of such subsidies. Further falls in FSU and Eastern European production likely. A factor mitigating against big subsidy payments in the FSU is the current pattern of production and trade between the members of the FSU. The Ukraine has traditionally produced a large surplus of sugar (around 5 million tons) for transfer to other republics and is the only republic with a surplus. Deficit republics as independent states will seek their sugar imports from the cheapest source and are unlikely to subsidize the Ukraine. The Ukraine will be forced to sell on the world market. If the Ukraine attempted to subsidize such a large quantity of exports, the economic cost of doing so would be highly visible, making such an outcome unlikely. The Ukraine may be forced to reduce production substantially since it is unlikely to be able to compete with other exporters. Technology transfer may eventually bring about higher yields and production in the other republics if existing levels of subsidies are maintained. However, it seems unlikely that subsidies would be maintained, given their high costs. The most likely outcome is that production will fall further before technology transfer from the west eventually starts to promote a gradual increase later in the decade. Therefore, Eastern Europe and the FSU are likely to remain important importers over the projection period, and indeed may even increase their dependence on imports in the latter half of the period. Subsidies encourage continued growth in ECproduction. In WESTERN EUROPE (mainly the EC) the outlook is for increases in production. Increases in EC subsidies in the mid-1970s and early 1980s led to two surges in sugarbeet and sugar production that changed the status of the EC from importer to large exporter. Although subsidies are confined to quota sugar, sugar produced in excess of 3 I.M. Roberts and P. Whish-Wilson, 'Domestic and World Market Effects of EC Sugar Policies," Australian Bureau of Agricultural and Resource Economics Discussion Paper (91.1), AGPS, Canberra, 1991. 50 quota (called C sugar) is indirectly supported by subsidies. Also, historically, the EC Commission has agreed to increases in quotas whenever EC producers have agitated for them during periods of price boom on the world market. If the world price again rises above the otherwise high EC support prices applying to quota sugar, pressure will rise for further increases in quota. Moreover, not only will rising world prices provide a direct stimulus to over-quota production, but any increases in quota will provide an indirect stimulus for further increases in over-quota sugar and exports because of the implicit subsidy through the prices paid for quota sugar. Although EC policy requires that over-quota sugar must be exported without any direct government support, pooling of quota and over-quota returns in some countries means producers face average returns higher than the world price for the extra sugar they produce. In other countries, the high subsidies given on the sales of quota sugar cover the fixed costs of production, making it profitable and less risky to produce additional over-quota sugar even if the world price covers marginal costs only. No EC producers produce over-quota sugar exclusively-which is evidence of the dependence of over-quota production on quota production. Reduced cereal support prices also may stimulate sugar production. Given the security and cost advantage afforded EC producers of over-quota sugar, the more efficient sugar producers in the EC (such as France) will be well placed to quickly increase production in response to any increases in world price. Further, the recent announcement that the EC plans to reduce cereal prices by 30% could provide impetus to expand sugar production. Although sugarbeet and cereals are complementary products on EC farms, implying that a cutback in cereals production will lead to cutbacks in sugar production, this appears to be true only in the short run. Research by Larson et al. (1991) on the relationships between cereals, oilseeds and sugarbeet production in West Germany suggests that, over the long term, declines in cereal prices will cause farm resources to be transferred to sugar production-the 30% decline in cereal prices could lead to increases in over-quota production of around 25%.' The requirement that EC farmers wishing to qualify for direct income support in place of price support must place 15% of their land in fallow could serve to stem the flow of resources into sugar production. But given that income support will have an upper limit, large farms are likely to find it more attractive to switch from cereals to sugar than to fallow land--currently, nearly 20% of the largest farms in the EC produce about 80% of the output. Despite EC farmers' high costs of production and despite pressures through the GATT to cut back on subsidies a decline in sugar output from the EC seems unlikely over the projection period. The EC Commission tends to regard the excesses of the Common Sugar Policy to be largely held in check. The cost of the policy is borne largely by EC consumers and efficient exporting countries, and it does not make big claims against the EC budget. Over the past 15 years, EC production has expanded by between 30-40%. The most realistic scenario for the projection period seems to be for growth of 20- 30%, though external pressures from efficient sugar-exporting countries for the EC to further constrain its agricultural support may slow this growth. Cuba's imminent decline alone is likely to leave the EC- despite its gross inefficiencies-as the world's largest exporter. 4 D.F. Larson, S. Glance, B. Borrell, M. Ingco, J. Coleman, 'Abolishing Green Rates: The Effects on Cereals, Sugar and Oilseeds in West Germany," Policy Research Working Paper No. 607, World Bank, Washington, D.C., 1991. 51 US sugar production to fall as cereal prices rise. In the UNITED STATEs, the growth in sugar production which occurred over the 1980s is unlikely to continue in the 1990s and may well be reversed. Declining cereal support prices in the EC should help raise world cereal prices, and this is likely to encourage increased cereal production in the United States in place of sugarbeets. Each 10% rise in US farm gate cereal prices could bring about an estimated 6% reduction in US sugar production (Vong, et al. 1989). NAFTA's effect on US market. The effects of the North American Free Trade Agreement (NAFTA) on the Mexican market for high fructose corn syrup may have adverse consequences for US net sugar imports. Nearly 50% of MEXIco's sugar is presently used in the production of soft drinks, and at the moment, import restrictions prevent high fructose corn syrup entering Mexico. The removal of border restrictions under NAFTA could result in corn syrup displacing sugar in Mexican soft drinks-as it has done in the United States (although this would be a large, high-risk investment). Displaced Mexican sugar would cross into the United States and either displace sugar imported from other sources or lead to subsidized exports of US sugar. Whichever of these two options might be adopted, the outcome would be the same: a large reduction in net US import demand from other countries. One estimate is that the developments mentioned above could lower the average world price by around 13% over the long term and increase its variability by about 6%. Strong Asian production growth to continue. In Asia, annual growth in sugar production has been exceptional over the past five years-nearly 11% in CHINA, nearly 8% in INDIA, nearly 15% in THAILAND, and about 7.5% overall. The continuing drive toward self-sufficiency in China and India is likely to result in further growth in sugar output over the projection period but this is likely to occur at a declining rate. In India, production has been stimulated by the increase in farm and mill prices resulting from the progressive reduction of the proportion of sugar that producers must sell at a discount to state-run stores. However, soon all sugar will be sold to the protected and higher-priced private market, so the scope for further increases in prices and effective protection is limited. Increases in production will then be restricted to efficiency gains brought about through technological advance. In China, the recent consumer sugar price reforms have made more visible the subsidies offered sugar producers there-producers receive higher prices than consumers pay. This visibility should create pressures to extend price reforms to sugar producers as well. As a result, as its export trade and foreign exchange earnings continue to grow, China seems likely to progressively source its growing needs for sugar from the world market rather than from high-cost domestic sources. Thailand captures growth in world market. Thailand is likely to be a source of exports for China. It is a low-cost producer which exports 70-80% of its output. Although Thai producers receive high prices from sales to their domestic market, the domestic market is relatively small and, in the main, producers respond to the world price. Thai producers have been highly competitive on the world market in recent years. During the 1980s they expanded exports by 250% despite historically low world prices. Among the three major low-cost exporters-AusTRALA, BRAZIL, THAILAND-Thailand is the only one without rigid production controls. For political reasons, both Australia and Brazil have been unable to remove these controls, which are mostly a holdover from the days of the last International Sugar Agreement. The controls greatly restrict Brazil's and Australia's competitiveness and enhance that of Thailand. While these controls persist, Thailand is well placed to capture growth in the world market 1 B. Borrell and J.R. Coleman, wGains from Trade in Sugar and the US-Mexico Free Trade Agreement," Centre for International Economics, Canberra, 1991. 52 ahead of its major competitors. Accordingly, despite the great potential of Australia and Brazil to increase production efficiently, Thailand can be expected to capture a larger share of increases in world consumption than its rivals. Australian production increases constrained by government regulation. Conservative estimates are that Australia could profitably expand exports by over 60% within several years if production controls were lifted." However, growers are resisting federal government moves to open up the industry. Existing growers are attempting to reserve expansion opportunities for themselves rather than share them with other landholders who are currently locked out of the industry. The compromise position prescribes small annual increases. But given the very high opportunity costs of maintaining such a policy it seems reasonable that Australia will eventually deregulate its sugar industry. However, the effects of this are unlikely to show up until the later half of the 1990s. Production controls on sugar seem set to continue in Brazil given its on-going commitment to ethanol production. Although sugarcane would be considerably more valuable for producing sugar instead of ethanol, the high proportion of Brazil's motor vehicles which now rely on ethanol as a fuel makes switching politically difficult. The most likely outlook seems to be for only a gradual switching toward sugarcane for sugar. Drought and uncertainty dampen Aftican production. Despite the lifting of trade sanctions against South Africa, there is little evidence that efficient African countries such as MAuRmius, SouH AFRICA, SwAzILAND, and ZIMBABwE are likely to expand production and export growth over the projection period. The 1992 drought has had disastrous effects on sugar production in Eastern Africa. Zimbabwe, for example, will likely produce no sugar in 1992 or 1993. Production and exports stagnated over the 1980s. The uncertain political outlook in South Africa is reflected in an equally uncertain outlook for its sugar industry. Price Prospects Long-run average price likely to rise 20% (real terM). Table 3 sets out an assessment of the likely influence of developments in various countries on the long-term world market price. This influence is expressed as a range, in percentage terms, and is based on parameters from the model of Wong et al. (1989). The average of the range is given in each instance. This evaluation suggests that likely developments in all major countries together seem more likely to cause an increase in the long-run average world price over the projection period than a decrease. The 12.5% average increase derived suggests that compared with prices since the last boom of 1980-81, when the world price averaged around C 11.5/lb (1990 dollars), during the projection period world prices could average around 0 13/lb. However, a subjective assessment of the most likely developments in each country suggests a higher price rise of 20% (column 3, Table 3). With a rise of that magnitude, the world price would average around 014/lb. Reduced government intervention would lessen price volatility. The assessments made in Table 3 put the price forecast in a realistic range given the costs of production of efficient producers. Nonetheless, while government intervention continues to constrain producers and consumer from responding directly to the world price, the long-run average world price will remain highly sensitive to average rates of growth in consumption and political factors affecting production. If the Uruguay Round of the GATT is successful in lowering protection and intervention by up to 30%, the world price is likely 6 B. Borrel, D. Quirke and D. Vincent, 'Sugar: Winning in a Corrupt World Market," Centre for International Economics, Canberra, 1991. 53 Table 3: Price Impacts of Various Country Developments Range of impact on price Average Assessment Cuba 0-30 15 20 Eastern Europe/FSU -30-40 5 10 EC -30 - 10 -10 -20 China -10-30 10 10 US/Mexico -20-40 10 0 Brazil -50- 0 -25 -5 India -20-60 20 20 Thailand -10- 0 -5 -10 Australia -5 - 0 -2.5 -5.0 Alternative sweeteners -10 - 0 -5.0 -2.5 Rest of world 0 0 0 Overall impact 12.5 20.0 Source: World Bank, International Economics Department. to become considerably less volatile. Removing protection in OECD countries could increase the long-run average world price by an estimated 33%, although removing production controls in Brazil and Australia would create pressures in the opposite direction. Both developments would tend to make the world price less variable." It is hard to say what would happen to the average world price if all intervention ceased. However, what is clear is that price would be less variable and there would be a shift in production away from high-cost subsidized producers to lower-cost producers (most of which are developing countries). So the market would be likely to more closely reflect the costs of production of efficient producers than now. This would seem to put the real price in the 10-150/lb bracket. But the world market has been so distorted for so long, making sense of how it would change involves a lot of guesswork. Besides, the chances of quickly removing all interventions seem remote. From a producer's or an investor's point of view, the sugar industry remains a high-risk industry. 7 B. Borrell and R.C. Duncan, "A Survey of the Costs of World Sugar Policies,* Policy Research Working Paper No. 522, World Bank, Washington, D.C., 1990. 54 Table Al: Sugar - Pri^, al 1950-91 (Actual) and 1992-2005 (Projeced) Currt $ - 1990 Co~sart - G-5 MUV bl G-7 CPI c/ 1950 110 672 885 1951 126 668 915 1952 92 466 641 1953 75 392 520 1954 72 383 490 1955 71 374 485 1956 77 386 509 1957 114 563 740 1958 77 375 493 1959 66 323 419 1960 69 334 434 1961 60 283 365 1962 61 285 366 1963 184 873 1,063 1964 127 594 717 1965 45 206 243 1966 40 179 211 1967 42 187 218 1968 42 187 210 1969 71 299 339 1970 81 323 367 1971 99 375 420 1972 160 556 616 1973 208 624 700 1974 654 1,608 1,984 1975 449 994 1,213 1976 255 556 666 1977 179 356 423 1978 172 297 332 1979 213 325 388 1980 632 878 1,031 1981 374 518 605 1982 186 261 304 1983 187 269 301 1984 115 169 185 1985 90 130 142 1986 133 165 175 1987 149 168 173 1988 225 236 243 1989 282 298 306 1990 277 277 277 1991 198 194 188 Proiece 1992 200 188 179 1993 205 185 177 1994 220 195 186 1995 254 220 209 2000 350 255 239 2005 441 280 251 al For 1950.60, New York World Contract No. 4, f.a.s. Cuba; ftm 1961 ouard, International Sugar Council "World (IDA daily) pric4, f.o.b. and sowd Caribban porus. b/ Deflatd by G-5 Maåmdecumng Unit Value (MUV) .dem. el Deflatd by 0-7 Co~r.mar Pri. Index (CPI). Sourc~: o Or~gaao and FAO Trad (acal); World Bank, lternationa Econ~ Dq-~re (pu 55  Bananas Swnmary * World trade in bananas is expected to slow during the period 1991-2005, with an annual growth rate of 1.6% p.a. compared with 2.3% p.a. during 1961-90. * High-income countries should remain the major market for banana imports but their rate of demand growth is expected to slow while that of the LMICs, the FSU, and Eastern Europe should increase. * Ecuador is likely to remain the leading exporter of bananas and the efficient producers of Central and South America are projected to have the fastest growth in banana exports. * Over the short run, banana prices in current dollar terms are expected to decline from the high prices of 1991 as export availabilities exceed import requirements; in the longer run, increasing productivity means that prices in real terms should continue their downward trend of the last four decades (from $549/ton in 1991 to $434/ton in 1995 and to $414/ton in 2005, in 1990 constant dollars). * The effect of the EC's post-1992 proposed banana regime on world trade, banana prices, and exporters' earnings is unclear, but will depend on the extent to which imports of dollar zone bananas are restricted in order to protect the EC's preferential suppliers in the EC, Africa, the Caribbean, and the Pacific. Banana Prices a/, 1950-2005 C $/ton) 1,200 Constant 1990 $ b/ 1,000 So 400 Current $ 200 - 1950 1955 1960 1965 1970 1975 1980 1995 1990 1995 2000 2005 a/ Central and South American, f.o.r. US ports b/ Deflated by G-5 MLN Index 56 Projected Banana Exports, by Producer Projected Banana Imports, by Consumer 0 10 89 1970 1980 1990 1995 2000 2005 0 . I . . 1970 1980 tS90 1995 2000 2005 Outlook for Import Demand World imports of bananas increased by around 10% in 1990 from the previous year. Strong demand in a number of European countries contributed to the substantial growth. Imports into Germany increased by 33%-from 926,000 tons to 1,232,000 tons. Imports into France and the United Kingdom increased by 9% and 8%, respectively. Imports into LMIC Europe increased by 54%-mainly due to the increase by Yugoslavia of three and a half times. The major factors contributing to the strong import growth in 1990 were: effective marketing promotions by traders, increased consumer preference for natural convenience foods, increasing health consciousness, competitive pricing of bananas, reunification of Germany, political and economic reforms in Eastern Europe, and changes in EC policy. These factors, together with Korean trade liberalization in January 1991 and the EC single market policy in 1993, will continue to affect the import demand for bananas for some time. Growth slows but new market potential emerges. Imports by LMICs are projected to grow faster than those of high-income countries because of higher projected income growth and income elasticities. However, high-income countries should remain the major import markets because of higher per capita consumption levels. World banana imports are expected to increase from 9 million tons in 1991 to 11.2 million tons in 2005, an average annual growth rate of 1.6%, compared with 2.3% p.a. during the 1961-90 period. The political and economic changes in Eastern Europe and the FSU should lead to a substantial increase in banana imports because per capita consumption of bananas is comparatively very low in relation to income levels in these markets. Per capita consumption in Eastern Europe and the FSU averaged only 0.4 kg in 1990 compared with 17.1 kg in Austria and 11.4 kg in the United States. However, imports into Eastern Europe and the FSU decreased by 13% in 1990 due to the economic disruptions. When economic growth resumes, imports of bananas should increase substantially. Imports by the Republic of Korea should increase rapidly as a result of import liberalization. Because of the previous import restrictions, historical imports cannot be used as a guide for import projections. Therefore, it is assumed that per capita consumption will increase to about the 57 current levels in Hong Kong (5.6 kg) by 2005 from the 0.5 kg in 1990. Thus, total imports into the Republic of Korea are projected to increase from 22,000 tons in 1990 to 270,000 tons in 2005. Imports by Germany will be affected by two special factors. Reunification should increase imports into the former East Germany but EC policy changes after 1992 are likely to depress banana consumption. Currently, Germany is virtually a free market for bananas. However, after 1992, if the proposed changes in EC policy are effected, Germany will have to impose a common tariff of 20% on banana imports from the dollar area. This should increase retail prices and have a negative effect on banana consumption. The United States is the largest importer of bananas. Its imports have returned to an upward trend since the 1989 decline due to supply problems and import demand is expected to continue growing. However, the rate of growth should slow because of the already high per capita consumption (11.4 kg), low income elasticity (about 0.3), and low population growth (0.8% p.a). Outlook for Export Supply Reliable data on total banana production (as distinct from commercial production for export) are not available in most developing countries. Therefore, it is not possible to project exports as the difference between production and consumption. Banana exports are determined by expected import demand, because export supply is highly responsive to demand. Under normal circumstances, the volume of banana exports can be varied by 5-15% by changing export quality standards. The short production cycle (11-14 months between planting and harvesting), together with the very high yield per hectare and the fact that many estates own ample reserves of land, means that banana supplies can be adapted to most developments in import demand with a lag of little more than one year. Because of the importance of geographical location and preferential arrangements in determining trade flows, the exports of each country are determined primarily by demand in their export markets. The 1988-90 trade matrix (Table 1) has been used as the basis for making export projections. The trade patterns existing at that time are assumed to remain unchanged during the projection period and, therefore, the market shares of the various exporting countries in specific import markets are assumed to remain fairly constant. In addition, likely important changes in production have been taken into account in particular exporting countries, such as Ecuador, Colombia, Costa Rica, and Jamaica. Ecuador and Costa Rica continue to expand production. Exports from EcuADoR doubled from 1.1 million tons in 1985 to 2.2 million tons in 1990. This increase was attributed mainly to government export promotion policies which expanded areas under bananas from 51,000 ha in 1985 to 85,000 ha in 1990. Ecuador is expected to remain the world's largest exporter as the production expansion is continuing, although a possible constraint to expansion is the black sigatoka fungus which affects almost one third of the country's banana plantations. CosTA RICA is the world's next largest exporter of bananas after Ecuador. It is likely to remain in that position during the projection period because banana companies are expanding acreage and increasing production. Companies have plans to increase banana areas from the current 32,000 ha to 58 65 &--―碧―「―「―--―「「!-------------& 45,000 ha within three years. Fertile soils, the favorable political and economic climate, and expertise in producing top quality fruit have attractul banana companies to invest in Costa Rica. Growoth despite pmbkm In Celomb4- incentives for Hondwan produceff. In CoLohmLA, bananas are produced in two regions on the Atlantic coast, Uraba and Santa Marta. Uraba now accounts for about 70% of banana exports, compared with 90% a decade ago. This decline is due to labor problems which have plagued Uraba's banana industry since the mid-1980s. It is believed that Uraba could improve productivity considerably if social stability returned to the region. The banana area in Santa Marta is expanding, which suggests that exports from Colombia should continue to grow as its export markets grow. Banana exports from HoNDuRAs stagnated during the 1980s. The Honduran Congress passed the Banana Production Incentive Law on May 21, 1991 in order to improve competitiveness of Honduran bananas in the international market and to attract now investment in banana production. This law created the National Bansina Council to direct banana production, marketing, and export policy. For new areas brought into production, the law provides an exemption from export taxes for the first three years and a 60% reduction of export taxes for the following three years. The Banana Development and Expansion Fund, financed by a US$0.03/box export tax, was created to assist the expansion of local independent banana producers and cooperatives. 11is policy should stimulate banana production in Honduras. CwObean andftftpinalgrovAh Undledby market demand. Some CAmwANbsknana growers are increasing production. However, their exports are constrained by the expected slow growth of their traditional export markets. Generally, Caribbean producers have higher production costs and cannot compete with Latin American producers. However, three Caribbean countries, Belize, Dominican Republic, and Jamaica have the potential for large increases in production. UmAicA is still recovering from the devastation of hurricane Gilbert in 1989. It has continued to implement its plantation projects and has an export target of 120,000 tons by 1994. In December 1989, the DommcAN REPuBuc became a b eneficiary member of the Lomd Convention which allows bananas to be exported to the EC duty free. Its exports increased from 1,500 tons in 1989 to 7,900 tons in 1990. The country reportedly plans to expand production to 106,OW tons over the next few years. BELIZE reportedly plans to increase its production to 100,000 tons. Whether these expansion plans will be realized depends heavily on the size of their protected markets. Exports from the ftax?um have been constrained by the growth of the Japanese market, which took 76% of its exports in 1990. However, the liberalization of imports in the Republic of Korea since 1991 should give the Philippines an opportunity to increase exports, although it could encounter competition from the major Latin American exporters in these markets. Banana production is expected to grow faster than import requirements, causing export availabilities to exceed actual exports. A comparison of export availabilities forecast by the FAO for 1994 and our forecast of exports for the same year illustrates this situation (see Table 2). Price Oudook Baum prices increased from $541/ton in 1990 to $560/tDn in 1991, up 3.5%. Factors contributing to the price increases were shipment interruptions due to infrastructure damage caused by 60 Table 2: Export Availabilities and Exports of Bananas, 1994 Export Availabilities Projected Exports ('00 tons) Cameroon 70 63 Colombia 1,300 - 1,400 1,214 Costa Rica 1,550 - 1,650 1,517 C6te d'Ivoire 100 96 Ecuador 2,400 - 2,600 2,316 Guatemala 480 - 530 405 Honduras 980 - 1,050 835 Jamaica 100- 120 80 Panama 800 791 Philippines 900 - 950 895 Windward Islands 296 - 316 271 Sources: FAO, *Medium-Term Outlook for World Trade in Bananas," CCP:BA 91/3, April 1991 (export availabilities); World Bank, International Economics Department (projected exports). the earthquake in Costa Rica and Panama in April and crop damage from floods in Honduras and from a typhoon in the Philippines; price disputes between growers and importers in Ecuador; and labor unrest in Honduras. Stronger demand was evident in the Republic of Korea as a result of the liberalization of banana imports; higher import demand was seen in the United States because of the drop in orange production in California due to a freeze; and consumption increased in Europe due to the unification of Germany and changes in Eastern Europe. Real long4erm trend continues downward. In the absence of further natural disasters and export disruptions, export availabilities are expected to exceed import requirements by 1994, causing downward pressure on banana prices. Over the longer run, the trend in banana prices in real terms has reflected the impact of increasing productivity-constant dollar prices have decreased at an average annual rate of 1.5% during the period 1950-91. This downtrend in real prices is expected to continue. The long-term price projections assume that yields in Latin America will increase by 1% p.a., compared with 2% p.a. in the period 1961-90. The lower growth in productivity is expected because most of the banana producing countries have already switched to high-yielding varieties. Over the longer run, therefore, projected prices (in 1990 constant dollars) in the US market are expected to trend downwards from $549/ton in 1991 to $434/ton in 1995 and to $414/ton in 2005. Banana prices in other markets could have different trends because of differing cost elements, geographical isolation of markets, or preferential trading arrangements. The EC Banana Policy The EC has long been a major importer of bananas. In 1990, the EC was the single largest importer, accounting for 37% of world imports. The major suppliers of bananas to the EC are producers in the Caribbean, Africa, and Central and South America (see Table 1). In 1990, 40% of EC bananas were supplied by overseas territories and ACP countries and the remaining 60% were supplied by Central and South American countries. Trading patterns with these suppliers have shown only minor changes since the EC was established in 1958. The trade links were formed by import policies and preferences granted by member countries. 61 EC, except Germany, continues import restrictions. The EC has a common external tariff of 20%. Only Belgium, Denmark, Ireland, Luxembourg, and the Netherlands apply this tariff exclusively. Other EC countries, except for Germany, apply other restrictions as well as the 20% tariff on banana imports from nonpreferred suppliers. Banana imports from ACP countries are duty free under the Lom6 Convention between the EC and the members' former colonies. Under a special protocol of the Treaty of Rome, Germany has a zero tariff and an unlimited quota on bananas. By increasing its quota in line with demand, Germany imports virtually all of its bananas without duties. France has always maintained a managed market such that two thirds of its market is reserved for imports from the French Overseas Departments (Guadeloupe and Martinique) and one third for African franc zone countries such as Cameroon, COte d'Ivoire, and Madagascar. French imports of bananas from these protected producers accounted for 92% of its total imports in 1988-90. Imports from other origins are subject to licensing, which is only granted when import prices exceed a certain level. The United Kingdom has traditionally granted unrestricted duty-free access to Commonwealth producers such as Belize, Dominica, Grenada, Jamaica, St. Lucia, and St. Vincent, and to Suriname. Imports from dollar area countries' are subject to tariff and licenses that may be granted if supplies from Commonwealth countries fall short of market requirements. Licenses are issued by the Department of Trade and Industry every month, following recommendations from the Banana Trade Advisory Committee. However, a licensed minimum level of 33,500 tons has been guaranteed since 1990. Approximately 80% of the UK banana imports were from traditional suppliers in 1988-90. Italy grants free access to banana imports from overseas EC territories and ACP countries, but imports from third countries are allowed only within the limit of a global quota. This quota has been increased slowly since the 1970s and was set at 320,000 tons in July 1989. Somalia is a traditional supplier to Italy with a preferential status. However, it supplied only 11% of the Italian market in 1988-90 due to production difficulties. The rest was supplied mainly by Latin American countries with a small share by the Philippines. Spain and Portugal restrict imports to protect producers in their overseas territories- Canary Islands of Spain and Madeira of Portugal. This is permitted until 1995 under their treaties of accession to the EC. Portugal has opened its market considerably under a tender system but gives preference to bananas from Madeira. Spain gets virtually all of its bananas from the Canary Islands. Greece has a high tax on bananas, which curtails consumption and therefore restricts imports. Single EC policy proposed after 1992 protects ACP, restricts dollar zone. The EC will become a single internal market after 1992 when all internal trade barriers are scheduled to be removed. The protected markets of France, Greece, Italy, Portugal, Spain, and United Kingdom, as well as the free market of Germany will no longer exist. A new unified regime for banana trade will replace the current regimes of individual member states. I The "dollar area" consists of Bolivia, Canada, Colombia, Costa Rica, Cuba, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, the Philippines, United States, and Venezuela. 62 On April 7, 1992, the EC Commission adopted a general "decision of principle" regarding the post-1992 EC banana regime. The Commission simply stated that there should be (i) a minimum GATT-bound quota on Latin American bananas subject to a 20% duty; (ii) an additional "autonomous quota;" and (iii) EC financial assistance to Community and ACP producers. A Commission Working Party, made up of members of the Commission's Inter-Service Group, was instructed to prepare a more detailed proposal based on these general guidelines. On May 12, 1992, the Commission Working Party issued a report entitled "Setting Up the Internal Market in the Banana Sector" which proposed a new banana regime after 1992. The proposed system includes a GATT-bound minimum quota on dollar zone bananas of 1.4 million tons, with a 20% GATT-bound customs duty. The report suggests that this minimum quota should be increased by 3% p.a. over a period of ten years. In addition to this minimum quota, the report provides for an "autonomous quota" on dollar zone bananas. Two variants are set forth regarding how this autonomous quota might operate, both of which involve Commission discretion to adjust the import volumes, reallocate licenses, and perhaps increase the tariff to assure adequate protection for the preferential bananas. In August 1992, the Commission reached a final proposal for decision in September 1992. The final proposal differs little from the two options presented previously. The quota was increased to 2 million tons from the originally proposed 1.4 million tons. Overall impact on restrictiveness of mar*ets unclear. As a result of ambiguity and the complexity of the options presented in the report, it is difficult to gauge the impact on banana trade. However, in general, the quota system places quantitative restrictions on dollar zone bananas. The restrictions on supply would raise prices in the open market of Germany and in the tariff-only countries and could lower them in the markets currently restricting access by licenses and quotas. The larger the quota, the greater the price decline in markets currently protected. But lower prices would reduce earnings of preferred suppliers. The effect of the proposed quota system on world prices depends on the extent to which imports are restricted. If the new regime is more restrictive than the present regime, then world prices would fall. Conversely, if the new regime is less restrictive than the current regime, then world prices would rise. The aim of the EC in protecting preferred banana suppliers is to support former colonies whose economies have a narrow production base. However, among many policy options, the quota-based option is most costly in terms of transferring aid. Borrell and Cuthbertson have estimated that under the quota-based policy options it could cost the EC as a whole between $2 and $3 for every dollar of aid received by the preferred suppliers. (This estimate does not include the administrative costs associated with such options.) In addition, the proposed new regime would involve enormous administrative costs. 2 B. Borrell and S. Cuthbertson, "EC Banana Policy 1992," Center for International Economics, Australia, 1991. 63 Table Air Bananas - Gross Exports By Main Countries and Economic Regions Actual Projected Growth Rates a/ Averages Countries/ -------------- 1991- Economies 1969-71 1979-81 1990 1991 b/ 1992 1993 1994 1995 2000 2005 1961-90 1970-90 2005 ------------------------------------------------------------------------------------------------------------------------------- --- ------------------------------ -----('000 Tons) ---------------------------------- ---------(% p.a.)------ High-Income 520 358 539 544 550 555 561 569 601 641 0.0 -0.8 1.2 OECD 196 251 486 494 502 510 518 526 569 616 2.4 1.5 1.6 LNICs 5,410 6,542 8,801 8,882 9,013 9,184 9,342 9,499 10,278 11,165 2.4 1.4 1.6 Africa 389 246 234 229 231 232 234 236 247 259 -3.4 -4.5 0.9 Americas 4,807 5,331 7,665 7,680 7,851 8,002 8,141 8,278 8,955 9,733 2.2 1.5 1.7 Ecuador 1,262 1,230 2,188 2,200 2,212 2,269 2,316 2,362 2,584 2,848 0.6 0.8 1.9 Costa Rica 824 1,000 1,434 1,442 1,463 1,492 1,517 1,542 1,664 1,803 5.1 0.5 1.6 Honduras 895 906 781 726 808 822 835 850 925 1,006 1.9 0.3 2.4 Panama 603 546 745 756 768 779 791 803 865 932 2.9 1.2 1.5 Colombia 275 707 1,148 1,159 1,164 1,185 1,214 1,223 1,316 1,421 7.0 9.0 1.5 Guatemala 197 332 359 382 389 397 405 413 451 495 6.2 2.3 1.9 Asia & Pacific 200 958 890 903 920 938 955 973 1,064 1,161 11.1 4.5 1.8 PhiLippines 132 883 847 859 875 892 908 925 1,011 1,103 5.6 1.8 World 5,929 6,900 9,339 9,368 9,563 9,739 9,903 10,068 10,879 11,806 2.2 1.3 1.7 ------------------------------------------------------------------------------------------------------------------------------- al Least squares trend for historical periods (1961-90); end-point for projected periods (1991-2005). b/ Estimate. Sources: FAO, Trade Yearbook Tapes (actual); WorLd Bank, International Economics Department (projected). Table A2: Bananas - Gross Imports By Main Countries and Economic Regions -------------------------------------------------------------------------------------------------------------------------------------- Actual Projected Growth Rates a/ Averages Countries/ ----------------- 1991- Economies 1969-71 1979-81 1990 1991 b/ 1992 1993 1994 1995 2000 2005 1961-90 1970-90 2005 -------------------------------------------------------------------------------------------------------------------------------------- ---- ----------------------------------('000 Tons) ---------------------------------- --------(% p.a.)------ Nigh-Incom 5,097 5,861 7,902 7,939 8,046 8,155 8,266 8,379 8,910 9,503 2.3 1.5 1.3 OECD 5,042 5,760 7,764 7,793 7,899 8,005 8,113 8,224 8,741 9,318 2.3 1.5 1.3 United States 1,798 2,455 3,099 3,114 3,172 3,230 3,289 3,349 3,611 3,910 2.9 2.7 1.6 Canada 200 252 341 312 316 321 326 331 352 377 2.5 2.3 1.4 Germany 606 647 1,232 1,252 1,272 1,293 1,314 1,335 1,443 1,563 1.4 1.2 1.6 United Kingdom 337 318 470 472 475 477 480 483 499 518 0.1 1.3 0.7 Italy 290 292 429 432 434 437 440 443 459 476 3.0 1.8 0.7 Japan 857 741 758 764 771 778 785 792 829 867 4.4 -1.5 0.9 France 445 449 497 499 501 503 505 507 517 528 0.6 -0.2 0.4 LMICs 545 908 996 1,015 1,051 1,122 1,174 1,227 1,446 1,696 2.5 0.5 3.7 Americas 280 372 252 252 251 251 251 251 250 249 -0.3 -0.2 -0.1 Asia & Pacific 3 15 39 59 84 110 135 160 223 287 12.1 11.7 12.0 Ch Middle East & North Africa 85 238 151 148 156 162 169 176 220 274 4.5 0.0 4.5 LA Europe 160 274 545 547 551 590 609 629 741 872 5.6 0.7 3.4 World 5,641 6,769 8,898 8,952 9,097 9,277 9,440 9,606 10,356 11,199 2.3 1.4 1.6 a/ Least squares trend for historical periods (1961-90); end-point for projected periods (1991-2005). b/ Estimate. Sources: FAO, Trade Yearbook Tapes (actual); World Bank, International Economics Department (projected). Tab~ A3: 3 ~ -- rc a/ 1950.1(Ala) 199220(M osd Curet3 - 1990 CDU~ - G-5 MUV b/ G-7 CP1al 1950 161 985 1,298 1951 161 855 1,171 1952 163 827 1,138 1953 163 850 1,129 1954 168 894 1,142 1955 165 865 1,124 1956 168 847 1,114 1957 176 873 1,148 1958 163 793 1,042 1959 146 718 931 1960 143 692 900 1961 139 660 852 1%2 132 616 789 1963 168 796 969 1964 170 792 957 1965 159 735 866 1966 154 691 815 1967 159 702 817 1968 152 679 762 1969 159 673 762 1970 165 659 748 1971 141 534 598 1972 161 559 618 1973 165 494 554 1974 184 453 559 1975 247 546 666 1976 257 561 673 1977 275 546 650 1978 287 496 554 1979 326 496 594 1980 379 527 618 1981 401 555 649 1982 374 526 613 1983 429 617 692 1984 370 544 598 1985 378 551 599 1986 382 472 501 1987 393 442 457 1988 478 502 516 1989 547 578 593 1990 541 541 541 1991 560 549 532 Proi~ce 1992 502 471 450 1993 490 443 424 1994 494 439 417 1995 502 434 412 2000 579 422 395 2005 652 414 371 al Cetral and South Amrin, ~ rg-clas quaity trkpi~al pack iM~portu's priå" to jobber or pro~uan, f.o.r. US Poffi, bl D aed by -5 M-ma riw Uni Valu. (UV) Indx. cl Deflat~d by G-7 Ca~er Pice In~lx (CP. l~ UM an of a u aoi am Uå. de a~ Expo~ de Uaa (~ am Bodank 54aialam9a.oh D pa (P~tjtd. 66  Fresh Citrus Fruit Sunnary * Citrus production and consumption are projected to grow from 76 million tons in 1991 to 97 million tons in 2000 and 112 million tons in 2005. Substantial increases in citrus production are expected in Brazil, China, Cuba, Spain, and Turkey, while production in Japan, Italy, Lebanon, and Gaza is expected to decline. * Citrus consumption is expected to grow faster in developing countries than in industrial countries, reflecting faster growth in income and population. Consumption in China is expected to increase substantially as production expands and in the long run citrus consumption in Eastern Europe and the FSU is also expected to increase significantly. * Imports of citrus fruits are expected to reach 12 million tons by 2005; 8.8 million tons of oranges and tangerines, 1.8 million tons of lemons and limes, and 1.6 million tons of grapefruit. Large increases in exports from Spain, the United States, and Cuba will be responsible for most of this increase in export growth. Although industrial countries should remain the major importing area, growth in their imports is expected to be slower while imports into the Republic of Korea, Eastern Europe and the FSU are expected to increase substantially. * Orange prices have been on a declining trend in real terms, but they fluctuate sharply from year to year mainly because of changing weather conditions in major producing countries. The long- term price projections reflect the historical tendency of supply to grow faster than demand at a given price level. In 1990 constant dollars, prices are expected to decline from $511/ton in 1991 to $470/ton in 1995, to $453/ton in 2000, and to $436/ton by 2005. Orange Prices al, 1950-2005 C$/ton) 1,200 Constant 1990 $ b/ 600 400 Current $ , 200 I .. 1950 1955 1960 1965 1970 1975 1990 1995 1990 1995 2000 2005 a/ Mediterranean Novel, EC lirport, cif Paris b/ Deflated by G-5 MUV Index 67 Supply Outlook Supply projections are based on past trends modified by information on production development plans, new plantings, yield developments, area available for expanded production, introduction of new varieties, improvements in planting methods, spread or control of diseases, and government policies in the major producing countries. The projections assume that production trends will not be affected by unusually adverse weather during the projection period. Pmjected growth ofproduction 2.8% p.a., fastest in LMIC Asia. Total citrus production is expected to increase from 76 million tons in 1991 to 112 million tons in 2005, representing an annual growth rate of 2.8%. Over the same period, oranges and tangerines production is expected to grow at 2.8% p.a., while lemons and limes are expected to grow at 2.9% p.a. and grapefruit at 2.9% p.a. (see Table 1). Production in LMIC Asia is expected to grow fastest, mainly due to rapid growth in China. Citrus production in China has increased rapidly in recent years as increasingly large numbers of trees have come into production. Production has grown from 0.4 million tons in 1975 to 5 million tons in 1990. This rapid expansion was largely a result of major economic reforms which gave individuals more freedom in production decisions through the production responsibility system, decontrol of citrus marketing and prices, and encouragement of regional specialization in cash crops. Citrus has been one of the most profitable cash crops. The regional governments in the main citrus-growing areas have been developing hilly land suitable for orchards. In 1987, it was estimated that about 60% of the planted area was non-bearing and most of the bearing trees had not reached full maturity. New plantings have continued to increase in recent years. As these trees reach maturity, further increases in citrus production will be realized. Although Chinese production is mainly for domestic consumption, ultimately the increased production could have some effect on international markets. Production growth in Latin America is mainly attributed to the developments in Cuba and Brazil. Citrus production in Cuba has grown very fast since the government embarked on an extensive planting program in 1967. The fast growth is expected to continue as more new plantings are made. The national target for citrus production in 1995 is 1.6 million tons, including one million tons of oranges and 500,000 tons of grapefruit, and 112,000 tons of lemons. The target for exports in 1995 is 830,000 tons. Cuba exported about 500,000 tons in recent years, mostly to Eastern Europe and the FSU under reciprocal trade agreements. Cuban exports will face more competition in these major markets as they change their economic systems. This could become a constraint on its production expansion. Brazil is the world's largest producer of citrus fruit, mainly oranges for processing into frozen concentrated orange juice (FCOJ) for export. Orange production in Brazil is likely to continue with strong growth as further new plantings are made and yields continue to improve. Its growth has been encouraged by recent high FCOJ prices due to the shortfalls in Florida because of frost. After the recovery of orange production in Florida, orange production growth in Brazil will depend on the development of new markets such as Japan, the Middle East, Eastern Europe, and the FSU. Demand for FCOJ in these markets is expected to increase significantly. Spain and the United States to increase production while Italy and Japan contmct. Among the OECD countries, Spain and the United States will be the major countries contributing to citrus production growth whereas production in Japan and Italy is expected to decline. Spain is the world's largest exporter of fresh citrus. Production has increased substantially since Spain joined the EC in 1986, 68 Table 1: Word Citusa Productio, 198840 to 2005 Annua Orowh Average Rates 1988-90 1991 1992 1993 1994 1995 2000 2005 1991-2005 (l'io' tal.) --(% p.a.)- Orauge and Tagså~ High-Incm 18.6 19.3 19.7 20.1 20.5 20.9 22.9 25.2 1.9 OECD 17.3 18.0 18.4 18.7 19.1 19.5 213 23.8 2.0 Non-OECD 1.3 1.3 1.3 1.3 1.3 1.4 1.4 1.4 0.5 LMICs 40.8 43.4 44.7 46.1 47.5 49.0 57.1 66.8 3.1 Africa 1.2 1.2 1.3 1.3 1.3 1.4 1.5 1.7 2.5 America 23.1 24.3 24.8 25.4 26.0 26.7 30.0 33.8 2.4 Ania 8.4 9.3 9.7 10.2 10.7 11.3 14.4 18.4 5.0 Euope 2.4 2.6 2.6 2.7 2.8 2.9 3.3 3.8 2.8 Middl Eaet N. Africa 5.7 6.0 6.2 6.4 6.6 6.8 7.9 9.1 3.0 World 59.5 62.7 64.4 66.1 68.0 69.8 80.0 92.0 2.8 Lmoms and I=am High-locome 2.2 2.3 2.3 2.3 2.4 2.4 2.6 2.9 1.7 OECD 2.1 2.2 2.2 2.2 2.3 2.3 2.5 2.7 1.7 Non-OECD 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 2.5 LMIC 4.5 4.8 4.9 5.1 5.3 5.4 6.4 7.6 3.4 Africa 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.3 2.8 Amrica 2.0 2.1 2.2 2.3 2.4 23 3.1 3.8 4.2 Asia 0.9 0.9 0.9 0.9 1.0 1.0 1.1 1.2 2.0 Europ 0.5 0.6 0.6 0.6 0.6 0.6 0.7 0.8 2.5 Midd Eas &N.Afrca 0.9 1.0 1.0 1.1 1.1 1.1 1.4 1.6 3.5 Wodd 6.6 7.0 7.2 7.4 7.7 7.9 9.1 10.5 2.9 Graprit High-ncome 2.8 2.9 2.9 3.0 3.0 3.0 3.3 3.5 1.4 OECD 2.4 2.4 2.5 2.5 2.5 2.6 2.8 3.0 1.5 Non-OECD 0.4 0.4 0.4 0.4 0.5 0.5 0.5 0.5 1.0 IMICs 1.9 2.1 2.2 2.3 2.4 2.5 3.1 3.9 4.5 Africa 0.2 0.3 0.3 0.3 0.3 0.3 0.3 0.3 2.0 America 0.9 1.0 1.0 1.1 1.1 1.2 1.5 1.8 4.6 Asia 0.6 0.7 0.7 0.7 0.8 0.8 1.1 1.4 5.2 Europ. 0.0 0.1 0.1 0.1 0.1 0.1 0.1 0.1 6.7 Middleat &N.Africa 0.1 0.1 0.1 0.1 0.2 0.2 0.2 0.2 4.0 World 4.7 5.0 5.1 5.2 5.4 5.5 6.4 7.4 2.9 Total Cib Higb-Incom~ 24.1 25.0 25.4 25.9 26.4 26.9 29. 32.4 11.9 OECD 22.2 23.0 23.5 23.9 24.4 24.9 27.4 30.1 11.9 Non-OECD 1.9 1.9 2.0 2.0 2.0 2.0 2.1 2.2 0.9 IMICs 48.0 51.1 52.7 54.4 56.1 57.9 67.8 79.7 3.2 Africa 2.0 2.1 2.1 2.2 2.2 2.3 2.5 2.8 2.3 Am"rica 26.1 27.5 28.2 29.0 29.7 30.5 34.8 39.6 2.6 Ania 10.0 11.0 11.5 12.0 12.6 13.2 16.7 21.1 4.8 Europe 3.0 3.2 3.3 3.4 3.5 3.6 4.1 4.7 2.8 MddleEat & N.Africa 6.9 7.4 7.6 7.8 8.1 8.3 9.7 11.4 3.2 World 72.1 76.1 78.1 80.3 82.5 84.8 97.3 112.0 2.8 Sourc. World Bank, Ib~ernational Eonmomica D%mM~. 69 and is expected to continue to rise as new plantings come to maturity. Spain will enjoy EC full membership in 1995. After that time, elimination of import duties and eligibility for export subsidies should stimulate further production growth. However, climatic and water supply constraints are likely to prevent any significant increase in area, so increases in production will have to come mainly from improvements in yields. The United States is the largest citrus producer in the OECD. However, its major producing area, Florida, is susceptible to freeze damage. There were five frosts causing damage to Florida citrus in the 1980s. Bearing acreage dropped sharply from 1980 to 1986 due to the freezes and increased only marginally from 1986 to 1990. Because of new plantings to replace trees killed by the frosts and the development of new groves, nonbearing areas have increased substantially-from 20,478 ha in 1980 to 66,898 ha in 1990. This dramatic increase in nonbearing area suggests that citrus production in Florida will increase substantially through 2005. Citrus production in Japan is expected to decline as a result of the government-sponsored production adjustment programs, which aim to reduce the production of Mikan tangerines. This area has already declined from 173,000 ha in 1973 to 87,000 ha in 1990. The liberalization of citrus imports in 1991 and 1992 could accelerate the reduction in citrus production. Citrus production in Italy is also forecast to decline, particularly for lemons. The area devoted to citrus is expected to decline as old groves are phased out and alternative crops are promoted. Also, the EC's more stringent policy on market withdrawals will have a negative effect on citrus production. Further, the increased incidence of mal secco disease in traditional lemon-growing areas suggests reduced lemon production. Demand Outlook Per capita consumption to continue expanding, overft conssumpion growth to decline. Consumption' projections have been made on the basis of income growth, estimated income elasticities, projected population levels in each region, and price projections. Likely changes in trade policies, processing practices, and domestic production were also taken into account. World per capita consumption of citrus fruit is projected to increase from 13.8 kg in 1988-90 to 15.8 kg in 2005. Per capita consumption of oranges and tangerines is projected to increase from 11.5 kg to 13 kg, while per capita consumption of lemons and grapefruit is projected to increase from 1.3 kg to 1.5 kg and from 0.9 kg to 1.0 kg, respectively (see Table 2). World consumption of citrus fruit is projected to increase from 72 million tons in 1988-90 to 112 million tons in 2005. The increase represents an average growth rate of 2.8% p.a., compared with 3.9% p.a. growth during 1961- 90. The slower growth in the projection period reflects slower expected income and population growth together with lower income elasticities. Total consumption in the LMICs is expected to grow faster than in high-income countries due to higher growth of income and population (see Table 3). 1 In this section, "consumption" refers to apparent consumption of freah citrus fruit, including that used for direct human consumption and for industrial processing. 70 Table 2: World Per Capita Consumption of Citrus Fruit, 1988-90 to 2005 1988-90 1995 2000 2005 (kg/year) Oranges and Tangerines 11.45 11.77 12.35 12.99 Lemons and Limes 1.28 1.31 1.39 1.47 Grapefruit 0.87 0.91 0.97 1.04 Source: World Bank, International Economics Department. Consumption in LMIC Asia is expected to grow the fastest, largely due to the rapid expansion in citrus production in China. Consumption in the Republic of Korea is also expected to increase substantially as a result of high income growth and the phased liberalization of import quotas on oranges, which began in March 1991 and is to be completed in 1997. Consumption in Eastern Europe and the FSU is also expected to grow rapidly as a result of the move towards market-oriented economies. However, the increase is expected to be rather long term. In the Middle East, consumption is expected to grow rapidly though at a slower rate than in the past because a high level of per capita consumption has already been reached. Rade Outlook Import requirements and export availabilities were calculated for the seven major economic regions and major countries in those regions for each kind of citrus fruit on the basis of the differences between production and consumption. From these calculations we derived projections of imports and exports by taking into account likely re-exports and intraregional trade. Spain and the United States to remain largest expoters, Cuba to grow signtflcantly. Trade in fresh citrus is expected to reach 12 million tons by 2005, consisting of 8.8 million tons of oranges and tangerines, 1.8 million tons of lemons and limes, and 1.6 million tons of grapefruit. Spain is expected to remain the world's largest exporter, followed by the United States. Exports from Cuba should grow substantially because of the large expansion in its production; Cuba should become the world's third largest exporter of citrus fruit by the year 2005. The large increase in citrus production in China is mainly for domestic markets. However, over time China might become a significant exporter, particularly to other Asian markets. Although Brazil is the world's largest producer of oranges, most of its production is processed into FCOJ for export. Although Spain has been a member of the EC for more than six years, the Spanish citrus industry will receive the full economic incentives available to other EC member states only after the transition period ends in 1995. Under the terms of the accession agreement, EC import duties charged on Spanish citrus are being eliminated over a ten-year period. So after 1995, Spanish exports of citrus fruit to the EC market will have an advantage over other exporters to the EC such as Cyprus, Israel, Morocco, and Tunisia, and exports from Spain to the EC market should grow faster at the expense of these countries. 71 Table 3: World Citrus Conm~ption, 1988-90 to 2005 Annual Growh Average Rat8s 1988-90 1991 1992 1993 1994 1995 2000 2005 1991-2005 (million tons) -(<% p.a.)- Oranges and Tangerinn High-Incomfe 20.0 20.7 21.1 21.4 21.8 22.2 24.2 26.7 1.8 OECD 18.7 19.4 19.7 20.1 20.4 20.8 22.6 24.8 1.8 Non-OECD 1.3 1.3 1.3 1.4 1.4 1.4 1.6 1.9 1.6 LMICs . 39.7 42.0 43.3 44.7 46.1 47.6 55.8 65.3 .3.2 Africa 0.8 0.9 0.9 0.9 1.0 1,0 1.2 1.3 3.1 America 22.6 23.6 24.2 24.8 25.4 26.0 29.1 32.3 2.3 Asia 8.4 9.3 9.7 10.2 10.7 11.3 14.3 18.3 5.0 Europe 2.6 2.7 2.8 2.8 2.9 3.0 3.7 4.4 3.6 Middle Eat & N. Africa 5.2 5.6 5.7 5.9 6.1 6.3 7.6 9.0 3.5 World 59.7 62.7 64.4 66.1 68.0 69.8 80.0 92.0 2.8 Lemons and Limes High-Incom 2.2 2.3 2.4 2.4 2.5 2.5 2.8 3.1 2.0 OECD 2,1 2.2 2.2 2.3 2.3 2.4 2.6 2.8 1.8 Non-OECD 0.1 0.1 0.1 0.1 0.1 0.1 0.2 0.2 5.1 LMICs 4.4 4.7 4.9 5.0 5.2 5.4 6.3 7.5 3.3 Africa 0.1 0.1 0.1 0.2 0.2 0.2 0.2 0.2 3.0 America 1.8 2.0 2.0 2.1 2.2 2.3 2.8 3.4 3.9 Asia 0.9 0.9 0.9 0.9 1.0 1.0 1.1 1.2 2.0 Europe 0.6 0.7 0.7 0.7 0.7 0.7 0.8 0.9 2.5 Middle East & N. Africa 1.0 1.0 1.1 1.1 1.2 1.2 1.5 1.8 3.8 World 6.7 7.0 7.2 7.4 7.7 7.9 9.1 10.5 2.9 Grapefruit High-Income 3.0 3.1 3.1 3.2 3.3 3.3 3.6 4.0 1.8 OECD 2.7 2.8 2.7 2.9 2.9 3.0 3.3 3.6 1.8 Non-OECD 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.4 1.5 LMICs 1.7 1.9 2.0 2.0 2.1 2.2 2.7 3.4 4.5 Africa 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 1.6 America 0.6 0.7 0.9 0.8 0.8 0.8 1.1 1.3 4.4 Afia 0.6 0.7 0.7 0.7 0.8 0.8 1.1 1.4 5.3 Europe 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.3 4.2 Middle East & N. Africa 0.1 0.1 0.1 0.1 0.1 0.2 0.2 0.2 4.0 World 4.7 5.0 5.1 5.2 5.4 5.5 6.4 7.4 2.9 Total Citrus High-Income 25.7 26.6 27.0 27.6 28.1 28.6 31.3 34.5 1.9 OECD 23.9 24.8 25.2 25.7 26.2 26.6 29.0 31.9 1.8 Non-OECD 1.8 1.8 1.8 1.9 1.9 2.0 2.3 2.6 2.7 LMICs 46.6 49.4 51.1 52.7 54.4 56.2 66.0 77.5 3.3 Africa 1.5 1.6 1.6 1.7 1.7 1.8 2.0 2.2 2.6 America 25.2 26.5 27.3 27.9 28.6 29.3 33.2 37.2 2.5 Asia 10.0 10.9 11.4 12.0 12.6 13.2 16.6 21.0 4.8 Europe 3.4 3.5 3.6 3.7 3.8 3.9 4.7 5.6 3.4 Middle East & N. Africa 6.5 6.9 7.2 7.4 7.7 8.0 9.6 11.4 3.6 World 72.3 76.1 78.1 80.3 82.5 84.8 97.3 112.0 2.8 Source: World Bank, International Economics Department. 72 Imports into Eastern Europe and the FSU are expected to increase substantially because of the expected large increase in consumption as almost all consumption requirements in these countries are met by imports. However, the major part of the projected increase in imports is expected in the latter part of the projection period. Japanese orange imports are expected to increase significantly as a result of the elimination of the import quota restriction in April 1991. Another factor contributing to increases in Japanese imports will be the declining production of Mikan tangerines caused by the reduction in planted area due to the government's production adjustment program. The United States should benefit from the expansion in Japanese imports since it already supplies most of Japan's orange imports. Also, the Japanese market is known for its quality consciousness and the United States supplies premium quality citrus fruit. The Republic of Korea could become a significant citrus importer as a result of the phased liberalization of import quotas on oranges and orange juice which began in March 1991 and will be completed in 1997. This expectation is further supported by expected strong economic growth in the Republic of Korea. Price Outlook Declining real prices to continue. In this report, price forecasts are made for oranges only. Orange prices have been on a declining trend in real terms over the past four decades. However, prices fluctuate sharply from year to year, reflecting supply variations caused primarily by changes in weather conditions. For instance, orange prices increased from $445/ton in 1989 to $531/ton in 1990, as a result of adverse weather in 1990 in major producing countries such as the United States and Italy. The high prices were sustained in 1991 due to a severe freeze in California, which cut the navel orange crop by 60%. In the short run, orange prices should decline unless adverse weather prevails. Over the long run, the declining trend in real prices is expected to continue because consumption will not keep pace with production growth (resulting from the support being given to the citrus industry in many countries) unless prices fall. Orange prices in 1990 dollars are expected to decline from $511/ton in 1991, to $470/ton in 1995, $453/ton in 2000, and $436/ton in 2005. Trade Policy Issues EUROPEAN CoMMuNrIEs. Impact of Uruguay Round on EC protection unsure. The single internal market will be established at the end of 1992, when a unified trade policy will be implemented. However, as far as citrus is concerned, a single market already exists through the common organization of the market, in areas such as external tariffs and price supports. The EC applies a common external tariff to imports of oranges, mandarins, lemons, and grapefruit. The rates for oranges vary seasonally, with higher duties in the winter (20% for the period October 16 to March 31) when the citrus supply is abundant in Mediterranean countries, and lower duties in other periods (ranging from 4% to 13%). This regime benefits the summer suppliers such as the United States, South Africa, and Brazil. However, the EC gives significant reductions in tariffs to most Mediterranean and ACP countries. 73 The EC uses a reference price system to protect EC producers against low-priced imports. EC reference prices act as minimum imports prices. The regime provides for the application of countervailing charges, uniform across all member states, on imports from third countries whenever entry prices (landed prices at the EC border) fall below reference prices. This charge equals the difference between the reference price and the entry price, excluding the import duty. Citrus fruits covered in this system are oranges, mandarins, and lemons. The reference price system applies during December 1 to May 31 for oranges, November 1 to February 28 for mandarins, and June 1 to May 31 for lemons. The ultimate impact of the GATT Uruguay Round on these policies is still an open question. UNrrED STATEs. NAFTA should encourage Mexican exponts. There are no quota restrictions on citrus imports into the United States. However, there are tariffs imposed on citrus imports. A tariff of 1 cent/lb for oranges, limes, and grapefruit (for grapefruit 00.8 /lb during October and 01.3/1b during November 1 to July 31), and 01.25/lb for lemons. Imports from the Caribbean Basin, including 24 countries in the Caribbean and Central America, are duty free. The Caribbean Basin Initiative has promoted an increase in citrus production and exports in Belize and Costa Rica. Import duties on imports from Israel are 20% lower than the general rates. Within the NAFTA the tariffs on FCOJ will be phased out over 15 years. Currently, the United States imposes C9.25/liter on FCOJ imports. Mexico is a large orange producer with 1.8 million tons of production in 1990. It exported 170 million liters of FCOJ to the United States in 1990, accounting for 15% of total US imports in that year. With its proximity to the United States, its cost advantage through lower labor rates, and its potential for expansion, the creation of NAFTA could result in keen competition for Mexico with Florida production and Brazilian exports of FCOJ. JAPAN. Japan lifted quota restrictions on orange imports in April 1991 and on orange juice imports in April 1992. As a result, Japan is expected to increase imports of both oranges and orange juice substantially. Japan maintains a 40% tariff on imports of oranges during the main marketing season (December 1 - May 31) and 20% in the off-season (June 1 - November 30), as well as a 10% tariff on imports of grapefruit and 20% on imports of tangerines and mandarins throughout the year. REPUBLIC OF KoREA. A phased liberalization of the import quota on oranges began in March 1991 and will be completed in 1997. Imports of oranges are expected to increase as a result. Imports of lemons and grapefruit have grown rapidly following liberalization in the mid-1980s, despite the still high import duties--40% for lemons and 50% for grapefruit. 74 Table Al: Oages - Pr at, ./1950.91(Acamal, 1992-2005 (Projected) Cr~ 1990 Coana - G-5 MUV bl G-7 CPI el 1950 185 1,133 1,492 1951 201 1,068 1,463 1952 170 861 1,186 1953 199 1,038 1,377 1954 221 1,178 1,506 1955 239 1,250 1,624 1956 223 1,126 1,483 1957 238 1,177 1,548 1958 195 948 1,245 1959 173 853 1,107 1960 192 928 1,205 1961 160 760 982 1962 186 866 1,110 1963 131 622 757 1964 168 784 946 1965 163 755 890 1966 146 653 771 1967 159 703 818 1968 168 750 841 1969 170 720 816 1970 168 670 760 1971 153 579 648 1972 155 538 595 1973 163 488 548 1974 189 464 573 1975 228 504 616 1976 216 471 564 1977 254 505 601 1978 299 516 577 1979 400 610 729 1980 391 543 637 1981 405 560 655 1982 385 541 630 1983 373 537 602 1984 352 518 570 1985 398 581 631 1986 394 487 517 1987 456 513 530 1988 453 476 490 1989 445 471 483 1990 531 531 531 1991 521 511 496 Proectod 1992 520 488 466 1993 523 473 452 1994 530 471 448 1995 543 470 446 2000 622 453 424 2005 687 436 391 a/ Navel, Modhomnuammaa mau, DC Indicative Import Pric., o.i.f. Paria. b/ Doflated by -5 ~ ~M i-r Uni Vahe (MUV) r.aar 0/ Deflaued by G-7 Caaane Price Index (CPi). Soue. rie (aca; Wold Bank, Iternational Eonomiff 75  ·阡 --!-!!’· Rice Prices a/, 1950-2005 C$/tonD 1,200 Constant 1990 $ bl 1,000 800 1500 It A Current $ 200 0 ... . . . . . .. 1950 1955 1950 1965 1970 1975 19SO 1985 1990 1295 2000 2005 a/ Thai, 5% broken, BDT posted price, fob Bangkok bt Deflated by G-5 AN Index Recent Grain Market Dewlopwnts What pfices Ase wfthpoor hamestr, stocks low. Reduced world wheat production and strong import demand in 1991/92 (July-June) led to a drawdown in stocks and boosted wheat prices over 1990/91 levels. Wheat prices have increased over 50% during the last year for the Bank's indicator price (Figure 1). The major factor driving up wheat prices has been the very large imports by the FSU. Their imports are expected to total 40 million tons for the 1991/92 crop year. The largest share, 23 million tons, will be taken as wheat, while coarse grains imports should total 16 million tons. Grain imports by the FSU are expected to be approximately 20% of world trade in 1991/92. The FSU's large grain imports were necessitated by the lowest grain harvest since 1984/85, totaling only 175 million tons-82% of the average of the past five years. World grain stock levels were low prior to the recent imports from the FSU, and wheat stocks were especially low by historical standards (see Figure 2). World wheat stocks are estimated to fall to 125 million tons by the end of the current crop year, which is about 22% of utilization. Measured relative to use, wheat stocks have not been this low since 1974n5. The low level of world wheat stocks leaves the market vulnerable to any production shortfaIls. Unusually high yields for coarse grains in 1990/91 resulted in production increases of 34 million tons and prices fell sharply (Figure 1). However, yields were close to normal in 1991/92 and world coarse grain production is estimated to reach 800 million tons, 34 million tons less than in 1990/91. Major declines in production occurred in the United States where drought reduced the US maize crop to 190 million tons, as compared with 202 million tons in 1990/91. The FSU's crop of 91 77 Ngure 1: World Grain Prices (monthly) 189-92 Wheat Price Wheat Price (Candan, No. 1. CWRS) (US, No. 2. SRW, f.o.b. Gulf) 220 lIN 21D 170 20 150 910 15 \10 J1N0 15209 130 1250 120 iao 100 Ji~i 3089 ~A0 AU.0 ~l ~l.8 ~M2 £8U2 --Aåå'- »MOS AUG9 J= JUI9 »MI838 JUL92 780 Figure 2: World Grai Production, Consumption, and Stocks, 1965-92 World Grain Production World Grain Consumption 1800 1800 1700 ¶7D0 1800 1 7 700 500 1800 11300 11300J/ 1200 1200 1100 1100 1000 OHNO .00 900 4030 19ss 1989 1971 974 1877 ieso t913 198s 19se 1992 1ess 9o9 1971 1974 1977 te80 lOSS 19ss tes0 te92 00 t7 21 350 122 2500 200 150 .1 1985 1968 1971 1974 497i 1980 lås5 iisi 199 4i2 1@ii iiGi i7i i954 1977 1980 1983 1DU6 itii i192 79 million tons is 22 million tons less than in 1990/91 and the smallest since 1984. In response to the reduced grain harvest, prices rose beginning July 1991. However, maize prices did not rise to the same extent as wheat prices. The spread between wheat and maize prices has been unusually wide with the ratio of wheat to maize export prices in February 1992 at 1.68 compared with an historical average of 1.41 since 1960. We expect the spread to narrow to more typical levels as demand and supply adjust. The relationship between the two prices is established in the short run primarily by adjustments in demand and in the longer run by adjustments in both demand and supply. Strong substitutability in both demand and supply ensures that prices will return to a more normal relationship. After expanding rapidly for several years, world rice production and consumption growth have slowed since 1985, with consumers diversifying their diets and several countries turning to more profitable crops. While comparative shortages and tight supplies have recurred since the mid-1980s, relative surpluses were longer lasting. The world rice market has near normal stock levels and rice prices have declined from a year ago. The world demandisupply balance is estimated to tighten slightly in 1992, although a shortage is not expected. Supplies are near normal in the major producing countries, including China, Bangladesh, Indonesia, and Thailand. Aftican drought drastlcally cutr maize production. The worst drought of the century hit southern Africa and extended north along the eastern half of Africa to Egypt. South Africa and Zimbabwe are the worst affected, but all countries in the southern region are affected. The drought is blamed on the El Niflo which has affected weather patterns in other world regions, but not to the extent it has in Africa. Grain supplies were already low due to poor harvests last year. Countries most affected include: Angola, Botswana, Lesotho, Malawi, Mozambique, Namibia, South Africa, Swaziland, and Zambia. Drought effects are less severe in Tanzania, Kenya, Somalia, Ethiopia, Sudan, and Egypt. Western Africa is not affected and prospects there appear good for an above-average harvest. Countries in southern Africa traditionally produce and consume white maize. There is little yellow maize produced in the region, except for South Africa which has a significant commercial livestock industry using yellow maize. When white maize is not available, countries blend white maize and imported yellow maize for human consumption. Wheat is a good substitute for maize and is preferred to yellow maize in some countries; however, it is more expensive and therefore not as commonly available. Rice is seldom imported because of its high cost. South Africa is typically the world's largest producer and exporter of white maize; however, this year it does not have enough for its own consumption. It has purchased nearly all of the white maize available from the world market to supplement production. According to an FAO source, South Africa will have to import 4 million tons of maize this year. The southern region as a whole is reported to need 7 million tons of food imports over the next year. Transportation will be a problem both because of high land transport costs and limited port capacity. Nearly all the grain imported into the southern region will enter through South Africa and then be shipped by rail or truck to various countries. With South Africa already importing substantial maize for its own use, imports for other African countries may be delayed at the port. 80 Grain Price Forecasts Pices to fal thrmugh 1994, then rse slowly. Forecasts of grains prices are summarized in Table 1 and presented in detail in the Annex Tables. Grains prices are projected to decline slightly from their 1991-92 levels over the next two years and then increase in nominal terms through the end of the decade. Prices should rise in real terms by the latter part of the 1990s. The price forecasts for the 1995-2000 period are lower than in our 1990 forecasts due primarily to the major changes in Eastern Europe and the FSU. Coarse grains prices are projected to decline and remain at relatively low levels over the medium term as production capacity in major producing countries remains large. With the large reserves Table 1: Grains Price Forecasts, 1992-2005 a/ - Wheat Maize Sorghum Rice MUV* Deflator Canadian US 1990= 100 Actual 1988 179.5 140.7 106.9 98.5 301.4 95.31 1989 201.2 161.3 111.5 105.9 320.2 94.65 1990 156.2 129.1 109.3 103.9 287.2 100.00 1991 142.9 126.1 107.4 105.1 314.4 102.11 Forecast 1992 172.0 144.0 105.0 102.8 290.0 106.53 1993 161.9 142.3 104.1 101.9 288.1 110.53 1994 164.2 145.6 106.9 102.7 290.4 112.58 1995 171.3 153.7 110.2 105.2 300.4 115.59 1996 179.8 161.4 112.5 107.4 304.5 119.63 1997 189.0 169.2 117.4 114.5 307.5 123.82 1998 198.8 177.9 124.0 120.3 313.4 128.15 1999 209.1 186.6 130.6 126.6 327.7 132.64 2000 218.1 195.0 138.7 133.9 336.3 137.28 2005 203.9 190.5 130.2 125.1 374.4 157.60 a/ Prices are for the calendar year in nominal dollars per ton and refer to the following: Wheat (Canadian), No.1, Western Red Spring (CWRS), in Store, Thunder Bay; Wheat (US), No. 2, Soft Red Winter, f.o.b. Gulf Port; Maize (US), No. 2 Yellow, f.o.b. Gulf Ports; Sorghum, Grain (US), No. 2, Milo Yellow, f.o.b. Gulf Ports; Rice (Thai), White, Milled, 5% Broken, f.o.b. Bangkok. * The MUV deflator is the unit value index in US dollar terms of manufactures exported from the G-5 countries weighted proportionally to the countries' exports to the developing countries. Source: World Bank, International Economics Department. 81 of area that could be brought into production, a sustained price increase would be unlikely. However, prices of maize and sorghum should increase in real terms in the longer term with import demand in developing countries tending to increase faster than production capacity. The international rice market remains in a state of surplus, with few countries importing regularly. The emergence of Viet Nam as a major exporter in recent years has added to the downward pressure on prices. Fundamental changes in import policies to favor wheat over rice when a shortfall occurs and more generally the increasingly diverse diets of Asian consumers should prevent rice prices from rising significantly relative to other grains. Wheat is also characterized by surplus capacity but to a lesser extent than coarse grains. US production in 1991/92 is 29% below the peak of 1981/82 with the US wheat area harvested estimated to be 28.4% below the 1981/82 record level. When the yield improvements of the past decade are taken into account, it appears that substantial productive capacity is available if market conditions justify. However, environmental constraints and long-term area reduction programs will reduce the responsiveness of wheat production. Wheat prices (Canadian, CWRS, #1) are projected to fall from $172/ton in 1992 to $162/ton in 1993 and then rise to $171/ton by 1995 in current dollars. These levels are well below the $201/ton reached in 1989. Maize prices (US #2, Yellow) are forecast to decline from $105/ton in 1992 to $104/ton in 1993 and then increase to $110/ton by 1995. Sorghum prices (US #2, Yellow) are projected to fall from $103/ton in 1992 to $102/ton in 1993 and then rise to $105/ton in 1995. Thai rice prices are forecast to decline from $314/ton in 1991 to $290/ton in 1992. A further decline to $288/ton by 1993 is projected, but then prices should turn upwards to $300/ton in 1995. REVIEW OF PAST GRAINS PRICE FORECASrs. Wheat price forecasts the most accurate. Comparisons of the nominal price forecasts made in 1986, 1988, 1990, and 1991 with actual prices are shown in Table 2. The forecasts made in mid-year 1986 were correct in forecasting lower prices in 1987 and higher prices for all grains during 1988-90. The forecasts also correctly forecast small increases for wheat and large increases for other grains. The average error was 7.3% for the 1990 price forecasts made in 1986 for the four grains. During the intervening period, the average price increase for the four grains was 22.9% compared with a projected increase of 30.3%. Wheat prices were projected to increase 10.3%; they actually increased only 4%. Rice prices increased 37.5% as compared with a projected 33.9% increase. The 1988 forecasts correctly projected further price increases for all grains in 1989 following the US drought in 1988, as well as the decline in prices in 1990. The 1990 forecasts correctly projected the price decline in wheat and coarse grains in 1991. However, the surge in prices in 1992 following the collapse of the FSU was not anticipated. Also, the increase in rice prices in 1991 due to drought in several Asian countries resulted in a large error in the 1991 rice price forecast. Overall, the forecasts have been rather accurate with the wheat price forecasts the most accurate. Forecasts of maize and sorghum prices have not been as good, with maize and sorghum prices declining further than projected for 1987 and remaining lower than forecast in the period since. The slower growth in maize and sorghum prices relates to the generally weak demand for imports by developing countries. Import trends of the 1970-80 period have not been maintained because of increased foreign debt and reduced foreign exchange earned from primary commodity exports such as petroleum, metals and minerals. 82 Oudook- Production, Conswption, Trade, and Stocks MARICET BALANcEs. Global trndr to slow dows. The total grain balances are shown for the world and major regions in Figure 3 with historical data to 1991 and projections to 2005. The overall trends in global grain production, consumption, and stocks are expected to slow, with world consumption increasing 1.6% p.a. from 1991 to 2005 compared with 2.4% during the previous 15-year period. Production is expected to keep pace with consumption; however, we know that unforeseen factors could alter the year-to-year path significantly. The developing countries are expected to continue expanding their net grain imports to satisfy demand from increasing incomes and populations. By 2005, they are projected to have net grain imports of 180 million tons compared with 90 million tons in 1990. At these levels net grain imports will account for 13.5% of total grain consumption compared with 8.7% in 1990 and 5.9% in 1975. The higher imports will be primarily in the form of wheat for human consumption and coarse grains for livestock and poultry feed. Total grain consumption in developing countries is projected to increase at about 2.2% p.a. to 2005 compared with 2.5% during the 1980s. Table 2: Review of Past Price Forecasts, 1985 to 1992 1985 1986 1987 1988 1989 1990 1991 1992 ---(nominal u1$/on Wheat Actual Price 173.3 161.0 133.5 179.5 201.2 156.2 142.9 176.6* 1986 Forecast 159.8 138.3 152.8 168.7 177.6 1988 Forecast 176.1 186.7 156.5 1990 Forecast 155.7 141.0 143.0 1991 Forecast 143.0 148.0 Rice Actual Price 215.9 210.5 230.3 301.4 320.0 287.2 314.4 291.3* 1986 Forecast 209.5 220.1 243.0 267.4 281.8 1988 Forecast 303.0 296.6 250.0 1990 Forecast 287.3 270.0 264.0 1991 Forecast 314.0 300.0 Maize Actual Price 112.2 87.6 75.7 106.8 111.7 109.3 107.4 107.4* 1986 Forecast 98.7 116.8 123.1 123.1 120.7 1988 Forecast 107.8 109.5 98.4 1990 Forecast 109.1 105.8 101.9 1991 Forecast 107.0 110.0 Sorghum Actual Price 103.0 82.4 72.8 98.5 106.1 103.9 105.1 106.0* 1986 Forecast 93.7 110.8 116.7 116.7 114.5 1988 Forecast 100.2 102.2 90.5 1990 Forecast 103.7 99.6 95.9 1991 Forecast 105.0 104.0 *January-September average. Source: World Bank, Iternational Economics Department. 83 igure 3: World and Regional Grain Baances, 190-2005 World Developing Countries 1400 1200-.111 31500 100 196 1970 19.0 1990 20O0 1910 1970 190 1990 2000 Eastern Europe and FSU Industrial Countries 4000 300 OC00 2350 :5000 1000 1960 1970 1980 1990 2000 1960 1970 . 1980 1990 2000 Prhelo + cmn 0m* i 9. ++com~uml + Ebng $k E4stern Europe and FSU to increase production, reduce inports. The countries of Eastern Europe and the FSU are currently undergoing dramatic changes and projecting their grain balances is difficult if not impossible. These countries have been large net importers since the mid-1970s. From 1980 to 1990, net imports averaged more than 40 million tons and accounted for about 20% of world grain trade. Some analysts have suggested that this region could shift to being a major exporter. Our forecast takes the middle ground and projects net grain imports declining to about 22.4 million tons by 2005. A more rapid shift would lead to lower grain prices than forecast and cause grain exporting countries to lower production and exports. The grain balance in the industrial country region is expected to remain in surplus with large exports to the developing countries and possibly to Eastern Europe and the FSU. The level of exports will depend primarily on imports by developing countries. The production growth necessary to meet the expected export demand will be less than during the 1970s and appears to require no more than trend yield growth. Stock levels should increase during the 1990s from the extreme low levels of the past several years. How stock levels and production are brought into balance will depend on policy decisions in the exporting countries. The recent policy shift in the United States toward reducing stock levels will force other exporters either to hold higher stocks or to impose production restrictions on producers. If Eastern Europe and the FSU reduce their grain import demand more rapidly than projected, which is a possibility given their very high per capita consumption levels, then industrial countries are likely to produce even greater surpluses, and, while the level of grain imports projected for 2005 has been sharply reduced from our previous forecast, even the present forecast could be too high. Forecasts for production, consumption, and ending stock levels are shown Figures 4-6 for wheat, rice, and coarse grains for the major regions. Additional country detail is presented in the Annex Tables. Near-term wheat supplies remain tight. Supplies of wheat are likely to remain tight in the near term, while coarse grains and rice supplies are expected to improve slightly from last year. World wheat production in 1992/93 (July/June) is expected to increase only slightly (0.5%) from the reduced levels in 1991/92. Projected increases in the United States, the FSU, and Australia will be offset by declines in Canada and Eastern Europe. The expansion in supplies is likely to be largest in the United States due to the increase in area planted and harvested as land set-aside requirements are further reduced. Coarse grain stock levels to recover in 1992/93. World coarse grains production is also expected to increase in 1992/93-by about 3.2%--to 823.8 million tons. Forecast increases in the United States (+ 14%), the FSU (+20%), and India (+ 13.4%) should offset projected declines in several major regions including the EC, Eastern Europe, and China. With only a slight increase expected in world consumption, 1992/93 ending stocks of coarse grains are forecast to recover by over 8% from last year's low levels. However, the supply/demand balance will remain relatively tight in the near term. The stocks-to-utilization ratio is forecast at slightly above 17%, a marginal improvement from the very low levels since 1989/90. Utilization should be fueled by stronger demand for livestock products in several countries-particularly in Asian countries where incomes are growing rapidly. Imports by the FSU are likely to decline in the next several years as production increases and consumption declines, reflecting the removal of price controls and subsidies. The medium- and long-term outlook presented here is based on a continuation of the price- and income-support policies in the major industrial producing countries. 85 igure 4: Wheat Production, Consumption, and Trade Projections, 1960-2005 Wheat: Industrial Countries 300 150 1200 sao- 80 120 60 40 1960 1965 1970 1975 1980 l985 1990 1995 2000 2005 1 PRODUCTION - CONthdTION --STCS Wheat: Developing Countries 450 400 20 450 100 350 300 2960 1985 1970 1975 1980 1985 1990 l995 2000 2005 PRODUCTION - CONSUATIH STC00S 86 igure 5: Rice Poduction, Comnmption, and Trade Projections, 1960-2005 Rice: Industrial Countries 25 20 1960 1965 1970 1975 1980 1985 1990 INS 2000 2005 MU--ZM -sroScAsM Rice: Developing Countries 450 400 350 200 1 350 1360 1965 1970 1975 1980 198 1990 1995 2000 2005 N- ncum --- CMR&M-M STOWs Rice: FSU & Eastern Europe 3.5- 3- 2.5. 1.5 0.5 1960 1OS5 1070 1375 1380" 130 10010 1915 2000 2005 PRODUCTO CONMEN --w- STOCS 87 Fgure 6: Coam Grains Production, Consumption, and Trade Projectioin, 19G-2005 C. Grains: Developing Countries B00 450 400 I-I 250 50 250 200 10 1960 1965 1970 1975 1900 1955 1190 IIIHI 2000 2005 PRODUCTI - CONSUMTION -m- SF=OC C. Grins: DSEvelopn Courie 250- 20 100 50 C.GncoucDon congo sCouts 300-8 250- 400- 350- 10 1ib-60hI659170-1'9'75 980 -115 -1990 IIIIS 2000 2005 PROUC-O r o .-CONSUWTION -4*- STOCS Several developments that could alter the medium- and long-term outlook include the multilateral trade liberalization talks still in progress, policy changes in Eastern and Western Europe and the shift to market economies in the FSU. These issues and their likely effects on the world grains markets are discussed in a later section. PRODUCnON OuLooK. Wodd production to grow mo slowly during 1992-2005. World grains production is projected to grow more slowly during the forecast 1992-2005 period than during the past two decades because of slower growth both in developing countries (because yields are not expected to grow at the high rates of the 1970s) and in industrial countries (because the demand for exports will not increase enough to require rapidly increasing production). In the countries of Eastern Europe and the FSU, however, we expect to see grain production expanding more rapidly than during the period since about 1975 in response to the infusion of investment and technology from western countries. The slower growth expected in yields in developing countries is attributed to their reaching both the limits to the expansion of areas planted to high-yielding varieties and the yield cap on the existing high-yielding varieties. Much of the growth in rice production in Asia, for example, has come from extending the areas planted to higher-yielding varieties. With this source of growth closed, further growth must come from increased yields; but evidence is mounting that this is not occurring and yields may even be falling in some countries because of soil fertility problems resulting from years of intensive production. The International Rice Research Institution in the Philippines has begun work on developing a series of new rice varieties to replace those used in the green revolution of the 1960s and 1970s. However, the impact of these successors is not expected to be felt before 2000. Industrial countries are expected to adjust production to their domestic and export markets, as they have done historically. The potential for greater production exists and should continue through the forecast period. However, neither domestic nor export markets are expected to grow fast enough to encourage an all-out production effort. Overall, grain production is expected to grow by about 2.2%, with wheat growing slightly faster than coarse grains. CONsuMPrIoN OuTLOOK. Wheat consumption increases as incomes rise. Over the past two decades both the mix and levels of per capita food consumption in many countries have changed significantly (see Figures 7 and 8). Per capita direct consumption of wheat and indirect consumption, through livestock feeding, of both maize and wheat have increased while consumption of staple cereals such as rice has declined in Asian countries and has stagnated in developing countries as a whole. Rice is still the dominant cereal food consumed in low-income countries, but average per capita consumption in low-income countries appears to have stabilized at about 80 kg/person since the mid-1980s. Grain consumption in developing countries is influenced by several factors, including population and income growth, urbanization, relative grains prices, changes in production, and domestic and international policies. The increase in wheat consumption in developing countries reflects, in part, increasing urbanization in these countries. In urban areas incomes are higher and more diversity in the diet and convenience foods are demanded. As incomes increase, the percentage of wheat and meat products in food consumption tends to increase, while that of staple cereals tends to decline. At higher income levels, food consumption of rice and coarse grains tends to decline in countries where they are 89 a staple. However, the increased demand for meat at these income levels results in an increase in derived demand for coarse grains and also for feed wheat. Per capita grain consumption levels for major world regions are shown in Table 3 for historical years and for the projection period. Consumption levels in the developing countries are expected to increase significantly during the 1995-2005 period as rapid income growth translates into higher per capita grain consumption. However, in Eastern Europe and the FSU reduced consumption levels in the 1990s are projected due to lower income levels along with higher domestic prices, and greater efficiency of livestock and poultry feeding. The industrial countries are projected to show modest increases in per capita consumption levels-0.9% p.a.. TRADE OuomOK. Net imports to fall for FSU and Eastern Europe. Eastern Europe and the FSU are projected to reduce net grain imports from about 40 million tons in 1991/92 to about 22 million tons in 2005. Per capita grain consumption levels are very high relative to other countries. For example, in 1988 per capita grain consumption in the FSU was 783 kg compared with 571 kg in the industrial countries. Despite these high levels of grain consumption, consumer diets are lower in terms of meat consumption and higher in terms of direct grain consumption in Eastern Europe and the FSU than in the industrial countries. Livestock feeding is less efficient than in the west; rations are not properly balanced for protein according to some reports. The extent and impact of economic reforms including efficiency gains are a matter of conjecture at this time. However, it appears certain that grain consumption levels will fall either because income levels fall or because greater efficiency in usage and handling allow food consumption levels to be maintained with lower total grain consumption. Production efficiencies are also possible, but again the rate of these improvements is a matter of conjecture. Developing countries main source of impon growth. The developing countries are projected to be the major source of growth in world grain imports during the 1990s. An important question facing the grains markets during the 1990s is whether the developing countries' imports will continue to increase rapidly, particularly in the Asia Pacific region. The large imports projected are primarily income driven and reflect what some may consider to be rather optimistic assumptions about economic growth in the large countries of the region during the latter half of the decade. Rapid income growth translates into rapid growth in grain import demand as domestic production cannot match the expected growth in food demand. Given this pressure to increase exports, wheat and coarse grains prices should rise in real terms towards the end of the decade. It is of some interest to note that even with the fast rate of growth projected in their imports, the developing countries' per capita consumption growth is slower than during the 1960s and 1970s. Wheat imports are expected to account for the greatest share of total grain imports. As the decade progresses, however, coarse grain imports are expected to increase more rapidly than wheat as consumers increase meat consumption. Rice is expected to remain a minor commodity in world trade with countries substituting wheat imports for rice when domestic rice production falls short of requirements. With nearly 60% of world population and the fastest projected income growth, Asia is expected to have the largest growth in grain imports. Latin America continues to expand grain imports, but from a relatively low base. North Africa also remains a major importing region, while Sub-Saharan Africa's imports are expected to be severely constrained by slow income growth. Total net wheat imports of the developing countries have grown from 36.6 million tons in 1975 to an estimated 65 million tons in 1990. 90 Table 3. Summary of Per Capita Total Gram Consumptian Level, 1965-2005 Region 1965 1975 1985 1990 1995 2000 2005 kglp/~nyear World 286.2 302.7 331.5 333.9 330.6 338.3 347.4 Developing 181.5 199.7 233.4 234.4 240.2 249.2 258.9 Industrial 506.4 519.5 573.7 573.7 587.3 600.3 611.8 Eastern Europe and FSU 565.1 701.7 763.4 839.6 774.2 814.5 866.5 Source: World Bank, International Economics Department. igure 7: Per Capita Food Consmption in Selected Asian Countries, 1M1-89 Japan Republic of Korea 70 40 8 1u1 INIS 1 3 175 1877 181 188 188 181 1881 1i6m 1975 1977 181 fs85 1989 91 Figure 8: Cereal Per Capita Food Consmption By Income Group', 1961-89 Rice Milled Wheat & Products o 14 0120 70 bW WA-VWAWA pw~ WN-im IN0 -U4* 140 #30 #40 2: 20 01 J 16i 19o5 1169 1973 1977 IN8 195s i9n 1951 1965IN 9173 1977 1981 1185 1988 Industdal countres main exporsrs. The industrial countries are the major grain exporters and their total exports are projected to rise from about 140 million tons in 1989 to 200 million tons by 2005. Growth is likely to be concentrated in the second half of the forecast period as sustained high income growth in the developing countries increases imports. Most of the increased production needed for the large increases in exports could be accommodated by yields increasing at trend rates, with the area of major grains harvested expanding at less than 0.5% p.a. Mafor Policy Developments DEVELOPMENTS IN THE URUGUAY RoUND. Dunkel proposal would reduce subsidies and price supports. The Uruguay Round of multilateral trade negotiations has now passed several deadlines. In December 1991, a package of reform proposals (the Dunkel reform package) was advanced to provide a basis for completing the Round, but agreement has not yet been reached. However, the Dunkel proposals indicate the broad nature of any likely agreement. The proposals in respect of agriculture include reductions in support over six years (1993-99) in the areas of market access, domestic support and export subsidies. More specifically, the Dunkel package proposes: (i) conversion of nontariff barriers into tariff equivalents, and reductions of such tariff equivalents from a base period (1986-88) by an average of 36% for agricultural products as a whole for each country, with a minimum reduction of 15% for each individual tariff; (ii) a 20% reduction of the total value of domestic supports which are trade distorting; (iii) a 36% reduction of budgets for export subsidies and a 24% reduction of volumes of subsidized exports from their 1986-90 averages. Several forms of domestic support are exempted including: government support for research, training, and extension; public stockholding for food security; domestic food aid; decoupled income support where payments are not related to the volume of I The 185 economies are divided into income groups using the World Bank's Global Economic Prospects' classification. 92 production and prices; government insurance; structural adjustment assistance; payment for natural disasters; and environmental programs. Developing countries would have the option to implement the reduction commitments at lower rates (with a minimum set at two thirds of the above rates) over ten years. The Dunkel proposals, if adopted completely, would likely increase grains prices. The elimination of subsidies and price supports would lower production and increase consumption in producing countries, while the elimination of trade barriers should stimulate world import demand. Adopted in their present form, the impact of the proposals would depend on the form of implementation by each country. Given the significant flexibility in implementation provided by the package, the potential gains may be limited. For instance, countries could satisfy the requirements by reducing tariffs on important commodities by less than 36% while tariffs for other items were cut by more than 36%. Also, the base period (1986-88) was a time of low world prices relative to support prices in major countries; hence, the tariff equivalents would be much higher than for other periods. The insistence of the EC on a "Community preference" which would involve increasing the EC intervention price by 10% in determining base period tariff equivalents would also limit the effects of the proposals. US to increase agricultural support if agreement delayed. The United States responded to the absence of an agreement in the Round by including several production and trade initiatives called "GATI triggers" in the US Budget Reconciliation Act of 1990. These provisions were to be activated if no agreement was reached by June 30, 1992. The GATT triggers stipulate the following provisions: (i) an increase in the US export promotion program levels by $1 billion during the 1994 and 1995 fiscal years (starting October 1, 1993); (ii) an authorization for the Secretary of Agriculture to waive any minimum level of area reduction program for the 1993-95 crops of wheat, feed grains, upland cotton, and rice; (iii) the institution of a marketing loan program for 1993-95 wheat and feed grain crops. If no GAT1 agreement is in force by June 30, 1993, the US Secretary of Agriculture is authorized to consider the following: (i) waiving all or part of the requirements for reductions in agricultural spending under the Budget Reconciliation Act of 1990; and (ii) increasing the level of funding for export promotion programs and/or implementing marketing loans for the 1993-95 wheat and feed grains crops. These initiatives would increase US production and exports and reduce world prices. EFFECTS OF EC CAP REFORMS AND MCA ELIMINATION.2 Limited impact on grain prices and trade. In May 1992, the EC Agricultural Council of Ministers approved a CAP reform package which included the following: (i) reduction in internal grain support prices from the reference buying-in price of 155 ECU/ton in 1991 to a target price of 110 ECU/ton and an intervention price of 100 ECU/ton to be phased in over three years beginning in 1993; (ii) direct income payments to compensate producers for the reduction in support prices; and (iii) an area reduction program of 15% for producers planting more than 20 ha. The CAP reforms could enable the EC to satisfy some of the requirements in the Dunkel reform package. However, significant areas such as reductions of export subsidies are not addressed. The effects of these reforms in reducing the depressing impact of the CAP on world prices are likely to be limited by the following: (i) farmers are likely to set aside their poorest land; and (ii) the exemption of 2 See Ingco, M.D. and D.O. Mitchell, "How EC 1992 and Reforms of the Common Agricultural Policy Would Affect Developing Countries' Grain Trade," Policy Research Working Paper No. 848, World Bank, Washington D.C., 1992. 93 producers with less than 20 ha implies that about 25% of the land planted to cereals would be exempted from the set-aside requirements. In general, the new agrimonetary arrangements to remove Monetary Compensation Amounts (MCAs) involves the revaluation of the so-called "green rates" in countries with positive MCAs and devaluation of the green rates in countries with negative MCAs. The effects of this would be a gradual increase in grain prices in France, the United Kingdom, Ireland, Italy, and Greece compared with prices in countries with strong currencies such as Germany and the Netherlands. The effects on world grain prices and trade of the elimination of the MCAs are estimated to be small partly due to the inelastic supply response and the offsetting effects of exchange rate policies in member countries. In effect, each member country's macroeconomic policies have affected the level of protection in EC agriculture. Analysis of the effects of proposals under consideration in trade negotiations to reduce protection in EC agriculture should therefore consider the effects of macroeconomic policies, including exchange rate variations, on agricultural protection. Under current EC macroeconomic policies, large price reductions would be necessary in order to bring production in line with demand. Since such large price cuts are currently politically infeasible, policies designed to remove land and farmers from grain production are likely to be more important. However, it is likely that the land set-aside schemes will have to be implemented with much higher compensation payments than now contemplated before they will have a significant effect on production. The elimination of the CAP and a return to pre-CAP growth paths for yields would result in a significant decline in EC production and net grain exports-resulting in substantially higher world wheat and coarse grains prices. IMPLICATIONS OF THE BREAKUP OF THE FSU ON THE WORLD's GRAINS MARKET. Success of economic reforms will be critical. The impact on the world's grains markets of the breakup of the FSU into independent republics could be monumental-perhaps as important as the emergence of the FSU as a major grain importer during the early 1970s. The FSU has imported 15-22% of world grain trade in recent years (see Figure 9). The ongoing economic and social restructuring are markedly reducing incomes in the FSU. They should lead to higher consumer prices for grains and much lower levels of grain consumption. Over the next several years actual imports will be heavily influenced by the policies of western countries on export credit assistance, food aid, and concessional sales. While this much seems reasonably clear, the impact of the reforms on grain production is highly uncertain--it is not clear whether production will be facing incentives to increase or decrease production. When the FSU first imported large quantities of wheat in 1974, it signaled the beginning of a period of increases in trade prices and investment, the effects of which still linger after almost two, decades. The level of world trade increased substantially during the 1970s as did the year-to-year price volatility as fluctuations in FSU production affected demand for imports. Future changes in the grains markets due to the current changes in the FSU could be equally significant, but at present the outcome is highly uncertain, mostly because of doubts about the success of the economic reforms. Many opportunities for increased productivity exist. It is likely that crop yields can be increased and yield variability decreased by adopting improved varieties from Western Europe and the United States. Greater output of meat, milk, and eggs can be obtained by improving the breeding stock and feeding a better balanced ration while saving on feed inputs. More timely planting 94 Fmgure 9: FSU Grain Imports in World Trade 25 20 15 10. 5. 1965 1965 1971 1974 1977 1980 1983 1986 '19 and harvesting could be possible with better machinery and machinery maintenance, and, better storage and grain handling could reduce post-harvest losses. In the next few years, the FSU should remain a major grain importer, with the actual volume dependent on the availability of credit and assistance from supplying countries. In the long run, if market economies with private sector agriculture develop, the FSU could become a major grain exporter. A shift from importing about 20% of world grain trade to exporting an equal percentage is not unthinkable. This would reduce world grain prices substantially. On the other hand, if the new republics are not able to make the transition to stable market-based economies, then imports could remain at whatever levels can be financed and grain prices will not be so greatly affected. It seems likely that the future level of FSU grain imports will be increasingly linked to developments in other sectors. The FSU has large reserves of oil, natural gas, coal, and timber. If the performance of these sectors improves and traditional exports of oil, gold and raw materials increase, the FSU will be in a better position to finance its grain import requirements. Broad scope for prductivity inreases. If the FSU adopts western technology and allows the privatization of agriculture, it is very likely that productivity will increase. Grain production has stagnated since the late 1970s and the peak in grain production was reached in 1978. Wheat area harvested has fallen sharply over the past 20 years while coarse grain area trended downwards during the 1980s. Climatic factors have caused yields to fluctuate widely. Average grain yields have been much lower than in the United States and Western Europe (Figures 10 and 11). Three republics, the Russian Federation, Ukraine, and Kazakhstan account for more than 90% of grain production. Average yields in the Ukraine are nearly twice those of the Russian Federation and almost three times higher than those of Kazakhstan. Due to the short growing season in the northern regions, grain production has depended on spring-sown grains which are lower yielding than winter varieties, while changeable weather conditions limit growth in winter grain regions and make its production very variable. Other production- related problems include heavy post-harvest losses and inadequate transport, storage, and distribution infrastructure. Reports indicate that some 20 million tons of grain are lost every year due to insufficient storage facilities and the inefficient transport system. 95 gure 10: Wheat Yied gur 11: Coae Grain Yields 70 7 650 20 2 10 196i 195 1969 1975 1977 1981 1985 1989 19b'i äå's 199 1975 1977 1981 1945 19 %1 Table Al: Wheat - Production By Main Countries and Economic Regions ------------------------------------------------------------------------------------------------------------------------------ Actual Projected Growth Rates a/ ------------------------------------------------ ---------- ----------------------------------------- -------------------------- Averages Countries/ ----------------- 1991- Economies 1969-71 1979-81 1990 1991 b/ 1992 1993 1994 1995 2000 2005 1961-90 1970-90 2005 ----------------------------------------------------------------------------------------------------------- --------------------- ------------------------------- -----('000 Tons)---------------------------------- ---------(% p.a.)-------- High-Income 110,509 162,751 211,914 173,799 196,428 202,788 207,788 211,581 230,964 250,053 2.9 3.0 2.6 OECD 110,270 162,528 211,646 173,626 196,228 202,588 207,588 211,381 230,764 249,853 2.9 3.0 2.6 United States 40,040 66,225 74,532 54,772 66,900 63,346 66,439 67,792 75,591 86,210 2.1 3.3 Canada 13,901 20,426 32,710 32,500 28,700 32,019 32,155 32,529 34,728 37,086 2.4 4.0 0.9 Australia 9,014 14,468 15,402 11,500 13,194 13,130 13,007 13,196 14,369 15,552 2.6 3.2 2.2 France 14,288 22,036 33,700 34,800 33,774 34,748 35,567 36,356 39,406 41,908 3.9 4.4 1.3 Japan 557 570 952 860 866 890 915 940 1,072 1,215 -0.9 7.9 2.5 LMICs 213,244 277,388 382,608 362,396 351,672 367,873 374,494 382,452 431,507 486,117 3.3 2.7 2.1 Africa 2,845 3,289 3,770 4,050 4,958 5,157 5,373 5,609 6,702 7,469 3.2 2.1 4.5 Nigeria 6 24 50 70 144 158 172 186 260 340 10.9 12.0 South Africa 1,461 1,965 1,702 2,100 2,774 2,894 3,033 3,185 3,844 4,218 4.3 2.0 5.1 Americas 11,137 14,961 20,304 18,384 16,136 22,058 23,003 23,862 26,878 26,523 3.0 3.9 2.7 Argentina 5,873 8,060 10,500 9,000 8,500 9,720 10,346 10,893 12,411 14,007 1.9 3.1 3.2 Brazil 1,192 2,591 3,200 3,200 3,000 5,015 5,201 5,383 6,259 3,672 12.7 6.8 1.0 Mexico 2,027 2,660 3,900 3,500 3,500 4,228 4,321 4,412 4,857 5,345 3.7 4.1 3.1 Asia & Pacific 58,213 106,830 165,547 166,076 170,306 176,699 180,424 186,494 220,092 255,730 6.3 5.6 3.1 India 20,859 34,550 49,652 54,000 54,556 55,173 56,753 59,425 71,782 84,084 6.2 4.8 3.2 China, People's Rep. 29,682 59,193 98,229 94,000 101,000 102,852 105,359 108,048 125,696 145,314 6.6 6.3 3.2 Pakistan 6,796 10,760 14,315 14,500 14,922 15,351 15,783 16,279 18,691 21,106 4.9 4.0 2.7 Europe 127,726 134,282 166,712 144,986 138,228 138,879 138,739 138,663 144,826 156,909 1.5 0.5 0.6 FSU 92,804 89,827 108,000 85,500 84,900 80,306 79,242 78,284 80,329 85,195 0.8 -0.4 0.0 Middle East & North Africa 13,323 18,027 26,275 28,900 24,962 25,080 26,955 27,824 33,009 39,486 2.6 2.6 2.3 Egypt 1,508 1,863 4,286 4,800 5,310 5,374 5,419 5,461 5,678 5,908 2.5 3.0 1.5 World 323,753 440,139 594,522 536,195 548,100 570,661 582,282 594,033 662,471 736,170 3.1 2.8 2.3 -------------------------------------------------------------------------------------------------------------------------------- a/ Least squares trend for historical periods (1961-90); end-point for projected periods (1991-2005). b/ Estimate. Sources: USDA Foreign Agricultural Service (actual); World Bank, International Economics Department (projected). Table A2: Wheat - Apparent consumption By Main countries and Economic Regions Actual Projected Growth Rates a/ Averages Countries/ 1991- Economies 1969-71 1979-81 1990 1991 bl 1992 1993 1994 1995 2000 2005 1961-90 1970-90 2005 -- ------------------------------------- ('000 Tons) ------------------------------------ -------- (% P.a.) -------- High-Income 88,759 92,313 121,686 105,127 117,135 119,157 120,708 122,062 128,462 134,779 1.6 1.6 1.8 OECD 87,152 90,244 119,231 102,530 114,772 116,753 118,272 119,599 125,870 132,060 1.6 1.6 1.8 United States 21,721 21,891 37,495 34,428 28,420 29,077 29,577 29,989 32,151 34,590 2.5 0.0 Canada 4,671 5,294 6,705 6,900 6,395 6,449 6,504 6,564 6,856 7,010 1.7 1.8 0.1 Australia 2,688 3,164 4,100 3,500 3,418 3,531 3,621 3,723 4,221 4,715 1.4 0.7 2.2 France 9,700 10,716 13,300 13,600 12,803 13,024 13,193 13,341 14,040 14,731 1.0 1.8 0.6 Japan 5,253 6,085 6,100 6,100 6,657 6,655 6,662 6,672 6,745 6,817 1.3 0.8 0.8 LIICs 244,402 352,986 444,993 441,675 430,965 445,831 456,880 468,333 527,125 590,395 3.6 3.1 2.1 Africa 4,358 7,105 9,376 8,937 9,426 9,769 10,114 10,471 12,299 14,283 5.0 4.4 3.4 Nigeria 330 1,463 400 420 792 911 1,010 1,094 1,448 1,911 9.1 1.9 11.4 South Africa 1,337 1,932 2,522 2,400 2,611 2,727 2,833 2,949 3,459 3,911 3.7 3.3 3.5 Americas 15,885 22,213 25,820 25,411 263,389 28,899 29,667- 30,539 34,207 38,341 3.0 2.5 3.0 % Argentina 4,393 4,090 4,800 4,600 4,915 5,433 5,434 5,499 5,602 5,765 0.7 0.4 1.6 0 Brazil 3,315 6,667 7,500 7,200 7,512 8,258 8,514 8,877 10,121 11,575 5.0 3.8 3.4 Mexico 2,097 3,633 4,425 4,500 4,404 5,078 5,303 5,514 6,756 8,070 4.8 3.8 4.3 Asia & Pacific 69,329 130,566 186,324 193,357 203,475 210,970 218,510 226,211 263,923 303,762 5.6 5.5 3.3 India 22,436 35,555 49,102 52,300 56,123 57,991 60,522 63,586 77,669 92,029 4.7 4.2 4.1 China, People's Rep. 32,930 73,811 106,029 107,500 108,732 112,745 116,235 119,399 136,380 155,522 6.4 6.9 2.7 Pakistan 7,831 11,062 15,845 16,450 16,944 17,502 18,074 18,685 21,675 24,700 3.9 3.6 2.9 Indonesia 549 1,349 1,920 2,160 2,210 2,365 2,539 2,721 3,575 4,439 14.9 6.6 5.3 Thai land 69 192 395 505 344 366 389 412 502 604 8.5 8.3 1.3 Europe 134,745 158,631 175,822 165,534 139,560 141,150 141,761 142,353 148,345 155,455 1.9 0.8 -0.4 FSU 96,032 110,469 118,500 109,500 96,152 95,025 94,951 94,818 96,970 99,884 1.7 0.4 -0.7 Middle East & North Africa 20,085 34,471 47,651 48,436 53,384 55,043 56,828 58,759 68,351 78,554 4.5 4.3 3.5 ---- --- --- --------------- -------------------------------------(-000 Tons)----------------------------------------- --------(% p.e.)---------- 88yt,07 92,33 121,786 105,123 117,940 119,258 120,5808 122,90 18,362 14,779 4.5 4.6 2.0 WorLd 333,1671 45,299 56,679546,809 ,00 63 56,49 57,588 59,35 6,86 7,14 31 2.7 20 a/ Least squares trend for historical periods (1961-90); end-point for projected periods (1991-2005). bl Estimate. Sources: USDA Foreign Agricultural Service (actual); World Bank, International Economics Department (projected). Table A3: Wheat - Gross Exports By Main Countries and Economic Regions Actual Projected Growth Rates a/ Averages Countries/ ----------------- 1991- Economies 1969-71 1979-81 1990 1991 b/ 1992 1993 1994 1995 2000 2005 1961-90 1970-90 2005 --- ------------------------------ ----('000 Tons) ----------------------------------- --------(% p.a.)------ High-Income 46,548 91,213 98,273 92,027 92,256 93,874 198,053 102,412 106,973 116,233 4.0 3.7 1.7 OECD 46,429 91,021 98,223 91,977 91,725 93,821 97,997 102,353 106,915 116,107 4.0 3.7 1.7 United States 17,630 42,275 29,064 29,937 30,315 31,094 33,938 35,190 43,469 47,212 2.1 3.3 Canada 11,662 16,864 22,109 24,000 24,510 24,950 25,210 25,661 27,851 30,018 2.4 2.7 1.6 Australia 8,327 11,261 12,100 7,500 9,094 9,411 9,578 9,659 10,191 10,867 3.1 3.3 2.7 LMICs 9,449 7,789 12,780 17,220 9,200 9,653 10,663 10,735 19,940 34,700 1.2 2.6 5.1 Americas 1,799 4,162 5,550 4,820 5,150 5,302 5,448 5,501 7,007 8,476 3.1 6.8 4.1 Argentina 1,640 4,079 5,300 4,700 5,000 5,148 5,289 5,841 6,802 8,229 3.2 6.9 4.1 World 55,997 99,001 111,053 109,247 101,456 103,527 108,716 113,147 126,913 150,933 3.6 3.5 2.3 a/ Least squares trend for historical periods (1961-90); end-point for projected periods (1991-2005). b/ Estimate. Sources: USDA Foreign Agricultural Service (actual); World Bank, International Economics Department (Projected). Table A4: Wheat - Gross imports By Main Countries and Economic Regions --------------------------------------------------------------------------------------------------------------------------------------- Actual Projected Grouwth Rates a/ -------------------------------- ---------------------------------------------------- -------------------------- Averages Countries/ 1991- Economies 1969-71 1979-81 1990 1991 b/ 1992 1993 1994 1995 2000 2005 1961-90 1970-90 2005 --------------------------------------------------------------------------------------------------------------------------------------- --------- -------------------------------------- ('000 Tons) ------------------------------------ --------C (Zp.a.) ------- High-Income 20,460 20,578 23,421 20,119 20,220 20,321 20,422 20,525 21,050 21,574 1.0 0.4 0.5 OECD 18,966 18,581 20,920 17,664 17,752 17,841 17,930 18,020 18,481 18,941 0.8 0.2 0.5 Japan 4,741 5,672 5,600 5,600 5,818 5,788 5,764 5,745 5,679 5,606 2.1 0.4 0.0 LMICs 34,300 76,306 81,763 91,972 81,236 83,206 88,294 92,622 105,863 129,359 4.4 4.6 2.5 Africa 1,809 4,007 5,614 4,963 5,664 5,726 5,837 5,962 6,826 7,901 6.9 6.4 3.4 Americas 6,230 11,676 11,220 11,590 11,291 11,177 11,626 12,141 14,208 16,538 2.8 1.6 2.6 BraziL 2,005 4,357 4,200 4,000 3,588 3,244 3,317 3,502 3,872 4,318 0.9 -0.3 0.5 Mexico 154 1,059 490 1,000 778 871 998 1,122 1,921 2,749 17.9 11.4 7.5 Asia & Pacific 12,830 21,018 23,099 29,345 28,792 31,923 34,345 36,112 41,183 58,616 2.5 3.2 5.1 India 2,621 683 150 100 1,455 2,712 3,686 4,282 6,453 8,608 37.5 China, People's Rep. 3,918 11,951 9,500 14,500 10,160 11,095 11,682 12,091 11,870 12,735 4.1 6.9 -0.9 o Indonesia 542 1,358 2,000 2,100 2,220 2,375 2,549 2,731 3,585 4,449 14.8 6.6 5.5 o Pakistan 1,062 445 920 1,300 2,040 2,170 2,310 2,424 3,002 3,612 -2.3 -0.7 7.6 Thailand 72 203 385 490 344 366 384 412 508 610 8.3 8.2 1.6 Europe 6,757 22,910 17,975 23,469 14,108 12,338 13,540 14,420 14,494 11,697 5.1 5.9 -4.9 FSU 1,719 16,142 15,000 21,000 14,040 14,772 14,262 15,342 16,548 14,986 13.0 11.7 -2.4 Middle East & North Africa 6,674 16,695 23,855 22,605 21,381 22,042 22,946 23,987 29,152 34,607 7.5 6.9 3.1 Egypt 2,548 5,402 6,500 6,500 5,633 5,886 6,163 6,452 7,682 8,891 5.5 5.2 2.3 World 54,760 96,885 105,184 112,091 101,456 103,527 108,716 113,147 126,913 150,933 3.4 3.5 2.1 ------------------------------------------------------------------------------------------------------------------------ a/ Least squares trend for historical periods (1961-90); end-point for projected periods (1991-2005). b/ Estimate. Sources: USDA Foreign Agricultural Service (actual). Table AS: Whea - Pric , 1950-91 (Actual) and 1992-2005 (Projbcied) curreat $ 1990 C~san 3 - Cum~ 3 - 1990 Coan - G-5MUV / G-7 CPId/ G-5 MUV J/ G-7 CP1 d/ 1950 67 410 540 70 427 563 1951 72 385 527 81 428 586 1952 72 365 502 85 428 590 1953 68 355 471 77 400 531 1954 63 335 428 67 355 453 1955 62 323 419 65 339 440 1956 63 317 418 65 326 430 1957 63 313 411 63 311 409 1958 61 299 392 62 300 394 1959 58 287 372 64 316 409 1960 59 286 372 63 304 395 1961 60 283 365 64 304 392 1962 60 279 357 67 312 400 1963 59 281 342 67 318 387 1964 64 297 358 70 328 395 1965 58 269 317 66 305 360 1966 62 278 328 70 315 372 1967 62 273 318 69 307 357 1968 58 261 292 67 297 334 1969 56 238 270 64 272 308 1970 57 227 258 63 250 284 1971 62 235 263 64 242 271 1972 69 240 265 71 247 274 1973 137 410 460 147 441 495 1974 178 438 540 209 513 633 1975 138 306 374 181 401 490 1976 123 268 321 149 325 390 1977 96 190 226 116 230 274 1978 125 216 241 135 233 260 1979 156 238 285 172 263 314 1980 168 234 274 191 265 311 1981 155 214 250 196 272 318 1982 133 186 217 167 234 273 1983 137 197 221 170 244 273 1984 140 206 227 165 243 267 1985 129 188 204 173 253 275 1986 118 146 156 161 199 211 1987 112 126 130 134 150 155 1988 141 148 152 180 188 194 1989 161 170 175 201 213 218 1990 129 129 129 156 156 156 1991 126 123 120 143 140 136 Pmoctod 1992 144 135 129 172 161 154 1993 142 ' 128 123 162 147 140 1994 146 130 123 164 146 139 1995 154 133 126 171 148 140 2000 195 142 133 218 159 149 2005 191 121 109 204 129 116 a/ Foc 1950june, 1974, No. 2 Soft Rd Wit~ bei~ning July 1974, No. 1, Lo.b. Gulf pos. bl For year uto 1972, Manita~a ranadian No. 1 No~er, baie in omt, Thn ~hy 1973-1984, No. 1 Caain W~sen Red srig ( beginning Apdi 19å5, m ao , St. lawumwe. c/ Doflat~d by G- S annrbctuig Unit Valuå (MUV) Index. d/ Deflatd by G-7 Cou~ne Price Index (CP). Somues: UB Agr servia and Cadua Whem od (malua); Wodd 101 Table A6: Rice - Production By Main Countries and Economic Regions Actual Projected Growth Rates a/ Averages Countries/ ----------------- 1991- Economies 1969-71 1979-81 1990 1991 b/ 1992 1993 1994 1995 2000 2005 1961-90 1970-90 2005 ---- ----------------------------------('000 Tons) ---------------------------------- ---------(%p.a.)------ High-Income 24,437 25,479 25,486 25,186 25,819 25,763 24,876 24,663 28,596 31,419 0.2 0.1 1.6 OECD 21,206 22,445 23,195 22,895 23,528 23,472 22,585 22,372 26,305 29,128 0.3 0.4 1.7 United States 3,953 6,968 7,027 7,012 7,530 7,427 6,464 6,195 9,665 11,655 3.1 2.8 3.7 Australia 267 678 923 787 959 934 974 1,007 1,265 1,511 7.4 6.0 4.8 Japan 15,658 13,321 13,124 12,908 13,034 13,028 13,060 13,062 13,236 13,743 -0.9 -0.9 0.4 LMICs 275,611 365,392 486,955 482,355 494,251 504,881 514,869 525,415 578,705 635,074 3.2 3.0 2.0 Africa 4,627 5,672 7,413 7,246 7,411 7,573 7,736 7,900 8,764 9,560 3.3 2.4 2.0 Nigeria 425 739 930 993 1,019 1,043 1,068 1,091 1,200 1,300 4.2 4.3 1.9 Americas 10,150 15,475 14,123 16,609 19,021 20,216 20,722 21,184 24,026 26,365 2.9 2.9 3.4 Argentina 347 288 331 351 391 399 407 413 454 488 2.6 1.3 2.4 Brazil 6,145 8,623 7,200 9,300 10,738 11,747 12,088 12,391 14,247 15,775 2.1 2.7 3.8 Mexico 389 485 300 625 640 653 667 679 750 822 1.6 0.3 2.0 Asia & Pacific 254,687 336,704 456,901 450,498 459,279 449,478 477,647 487,399 536,108 588,557 3.2 3.0 1.9 India 62,925 74,679 112,511 106,860 106,321 108,490 110,658 112,929 124,604 136,718 2.7 3.0 1.8 China, People's Rep. 99,862 140,195 180,130 189,331 182,560 189,693 194,134 198,182 221,218 240,665 3.8 3.0 1.7 Pakistan 3,417 4,889 4,887 5,018 5,342 5,327 5,293 5,286 5,327 5,475 4.0 2.1 0.6 Indonesia 19,173 29,569 45,178 42,189 43,179 44,498 45,734 47,376 55,936 66,249 4.6 4.9 3.3 Thailand 12,473 16,865 20,177 17,300 20,552 21,128 21,318 21,494 22,812 23,854 2.7 2.5 2.3 Europe 1,836 3,145 3,256 2,585 3,050 3,039 3,142 3,253 3,862 4,270 5.5 3.1 3.6 Middle East & North Africa 4,312 4,395 5,262 5,437 5,490 5,565 5,622 5,679 5,945 6,232 1.7 0.7 1.0 Egypt 2,582 2,415 2,675 2,764 2,791 2,829 2,858 2,887 3,022 3,168 1.2 -0.2 1.0 World 300,048 390,871 512,441 507,541 520,070 530,644 539,745 550,078 607,301 666,493 3.0 2.8 2.0 a/ Least squares trend for historical periods (1961-90); end-point for projected periods (1991-2005). b/ Estimate. Sources: USDA Foreign Agricultural Service (actual); World Bank, International Economics Department (projected). Table A7: Rice - Apparent Consumption By Main Countries and Economic Regions ------------------------------------------------------------------------------------------------------------------------------------- Actual Projected Growth Rates a/ ------------------------------------- ---------------------------------------------------- -------------------------- Averages Countries/ ----------------- 1991- Economies 1969-71 1979-81 1990 1991 b/ 1992 1993 1994 1995 2000 2005 1961-90 1970-90 2005 ------------------------------------------------------------------------------------------------------------------------------------ ----0----------------------------------('0 Tons)----- ---------------------------------- ---------( p.a.)-------- High-Income 16,845 16,467 17,063 17,061 17,244 17,286 17,526 17,689 18,697 19,856 0.0 0.0 1.1 OECD 14,029 13,765 14,523 14,209 14,361 14,396 14,596 14 732 15,571 16,537 0.0 0.0 1.1 United States 1,279 2,052 2,990 2,633 2,686 2,786 2,885 3,001 3,523 4,019 3.9 4.3 3.1 Canada 54 96 160 137 141 145 148 151 165 176 5.3 1.8 Australia 66 62 172 168 162 166 171 176 193 209 3.8 3.3 1.6 France 148 190 213 - - - - - - 1.9 1.7 Japan 11,543 10,281 9,600 9,647 9,595 9,565 9,585 9,608 9,761 10,098 -0.8 -1.0 0.3 LMICs 186,160 249,866 326,287 329,693 334,920 340,208 347,471 355,601 393,152 431,918 3.2 3.0 1.9 Africa 3,678 6,053 7,530 7,450 7,690 7,925 8,176 8,395 9,621 11,002 4.3 4.0 2.8 Nigeria 285 974 808 838 910 985 1,027 1,056 1,206 1,371 6.6 6.2 3.6 South Africa 62 127 347 308 298 309 316 326 365 424 7.0 9.0 2.3 Americas 6,817 10,572 12,917 12,715 13,500 13,916 14,324 14,731 16,523 18,359 3.1 3.4 2.7 o Argentina 138 107 156 155 156 159 158 158 165 171 0.9 -0.1 0.7 Brazil 4,170 6,048 7,400 7,450 8,031 8,318 8,589 8,871 10,036 11,246 2.5 3.3 3.0 Mexico 279 377 460 380 454 467 482 497 585 674 3.3 2.6 4.2 Asia & Pacific 171,314 225,762 297,190 301,155 304,986 309,431 315,802 323 038 356,183 390,291 3.1 2.9 1.9 India 42,121 51,098 72,975 72,278 71,443 72,452 73,888 75,383 82,663 90,596 2.6 2.8 1.6 China, People's Rep. 67,490 95,953 123,059 127,600 132,022 133,252 136,172 139,661 154,015 167,364 3.9 3.3 2.0 Indonesia 13,718 21,231 29,874 29,480 30,541 31,661 32,718 33 980 40,143 47,079 4.2 4.2 3.4 Pakistan 2,105 2,250 2,100 2,219 2,388 2,369 2,342 2,213 2,409 2,903 2.5 0.7 1.9 Thailand 6,935 8,065 8,600 8,300 8,785 8,761 8,723 8,680 8,600 8,506 1.9 0.6 0.2 Europe 1,722 3,107 2,868 2,743 2,948 2,957 2,988 3,037 3,323 3,595 4.5 3.2 2.0 FSU 1,027 2,246 1,914 1,810 1,973 1,980 2,000 2,035 2,245 2,441 6.8 3.9 2.2 Middle East & North Africa 2,627 4,373 5,782 5,630 5,796 5,979 6,181 6,400 7,502 8,671 4.4 4.0 3.1 Egypt 1,083 1,485 1,670 1,656 1,689 1,732 1,779 1,828 2,045 2,265 2.7 1.4 2.3 World 203,004 266,333 343,350 346,754 352,164 357,494 364,997 373,290 411,849 451,774 3.0 2.8 1.9 at Least squares trend for historical periods (1961-90); end-point for projected periods (1991-2005). b/ Estimate. Sources: USDA Foreign Agricultural Service (actual); World Bank, International Economics Department (projected). Table A8: Rice - Gross Exports By Main Countries and Economic Regions --------------------------------------------------------------------------------------------------------------------------------- Actual Projected Growth Rates a/ Averages Countries/ ----------------- 1991- Economies 1969-71 1979-81 1990 1991 b/ 1992 1993 1994 1995 2000 2005 1961-90 1970-90 2005 --------------------------------------------------------------------------------------------------------------------------------- --- ------------------------------------('000 Tons) ---------------------------------- --------(% p.a.)------ Nigh-Income 2,930 4,964 4,020 4,475 4,600 4,700 4,800 5,000 6,500 7,197 3.2 2.1 3.5 OECD 2,827 4,696 3,875 3,162 4,252 4,397 4,531 4,720 6,300 6,900 3.6 2.0 5.7 United States 1,684 2,805 2,351 2,300 2,580 3,021 3,174 3,302 4,086 5,600 2.7 2.0 6.6 Australia 129 396 461 470 496 515 535 557 691 846 8.6 6.9 4.3 LMICs 4,976 7,450 8,558 8,967 7,821 8,204 8,670 9,049 10,201 11,542 2.3 3.3 1.8 Asia & Pacific 3,797 6,560 7,765 7,050 7,560 8,006 8,670 9,049 10,201 11,542 2.7 4.0 3.6 Pakistan 157 1,030 1,200 1,250 1,297 1,421 1,447 1,598 1,704 1,800 9.7 6.1 2.6 Thailand 1,221 2,815 3,927 4,200 4,546 5,306 5,698 5,834 6,433 7,225 5.3 8.8 4.0 Viet Nam 14 13 1,500 1,200 1,200 1,300 1,400 1,500 1,750 2,000 3.7 World 7,906 12,414 12,549 13,442 12,421 12,904 13,470 14,049 16,701 19,739 2.6 2.9 2.8 --------------------------------------------------------------------------------------------------------------------------------- a/ Least squares trend for historical periods (1961-90); end-point for projected periods (1991-2005). b/ Estimate. Sources: USDA Foreign Agricultural Service (actual); World Bank, International Economics Department (projected). Table A9: Rice - Gross Imports By Main Countries and Economic Regions Actual Projected Growth Rates a/ Averages Countries/ -------------- 1991- Economies 1969-71 1979-81 1990 1991 bf 1992 1993 1994 1995 2000 2005 1961-90 1970-90 2005 -------------------------------------('000 Tons)---------------------------------- ---------(% pa.)------ High-Income 1,428 2,174 2,637 2,410 2,482 2,557 2,633 2,712 3,234 3,755 1.8 3.3 3.2 OECD 732 1,322 1,597 1,610 1,658 1,678 1,695 1,742 1,958 2,274 2.4 4.3 2.5 United States 30 8 152 160 169 178 190 199 240 270 3.8 Canada 54 96 160 180 190 198 208 219 251 290 5.3 3.5 LMICs 5,968 9,982 9,912 9,759 9,939 10,347 10,837 11,337 13,467 15,984 3.1 2.7 3.6 Africa 755 2,336 2,822 2,756 2,885 3,013 3,163 3,277 3,943 4,749 7.3 7.9 4.0 Nigeria 3 441 250 186 234 291 319 334 409 507 31.9 29.6 7.4 South Africa 77 127 350 307 298 308 316 326 365 424 6.1 8.4 2.3 Americas 372 983 1,691 1,010 840 881 961 1,075 1,318 1,751 5.3 7.2 4.0 BraziL 0 326 405 600 387 363 373 425 641 812 2.2 Mexico 8 74 250 250 285 325 370 400 475 550 5.8 Asia & Pacific 3,821 3,817 2,073 2,300 2,369 2,440 2,513 2,587 2,794 3,000 -1.6 -3.9 1.9 0 China, People's Rep. 4 66 59 150 170 175 180 185 200 200 2.1 Ul Indonesia 692 1,506 100 200 600 100 250 379 732 1,056 -6.5 -14.3 12.6 Europe 605 1,265 945 983 1,021 1,059 1,097 1,135 1,320 1,505 3.1 3.4 3.1 Middle East & North Africa 416 1,582 2,381 2,710 2,824 2,954 3,103 3,263 4,092 4,979 10.0 9.7 4.4 World 7,396 12,155 12,549 13,442 12,421 12,904 13,470 14,049 16,701 19,739 2.8 2.8 2.8 a/ Least squares trend for historical periods (1961-90); end-point for projected periods (1991-2005). b/ Estimate. Sources: USDA Foreign Agricultural Service (actual); World Bank, International Economics Department (projected). Table A10: Ris - Pris, af 1950-1 (A~m.f and 1992-2005 (1ojetd) CUe S 1990 Ca~sag - 0-5 MUV b/ 0-7 CP1 ci 1950 137 837 1,102 1951 144 767 1,051 1952 156 792 1,091 1953 175 911 1,209 1954 158 842 1,076 1955 142 740 961 1956 137 691 910 1957 137 679 893 1958 142 692 909 1959 132 652 846 1960 125 602 783 1961 137 648 837 1962 153 712 912 1963 143 680 828 1964 138 642 776 1965 136 631 744 1966 163 730 862 1967 206 910 1,059 1968 202 900 1,010 1969 187 792 897 1970 144 574 651 1971 129 488 547 1972 147 510 565 1973 350 1,049 1,176 1974 542 1,333 1,644 1975 363 803 981 1976 255 555 665 1977 272 541 644 1978 368 634 709 1979 334 509 609 1980 434 603 708 1981 483 668 781 1982 293 412 480 1983 277 398 447 1984 252 370 408 1985 216 315 342 1986 211 260 276 1987 230 259 268 1988 301 316 325 1989 320 338 347 1990 287 287 287 1991 314 308 299 1992 290 272 260 1993 288 261 249 1994 290 258 245 1995 300 260 246 2000 336 245 229 2005 374 237 213 a/ 'Mai, 5% brok, Uona of Trad ponsd pris, f.ob. Bangok. b/ Deflad by 0-5 Mafinuing Uit Vat. (MUV) Inde~ e/ Deflated by 0-7 Co.mm ~ar I e (CP). Sou s: US £spMata of Ak eM (~enul); Word Bank, Internationul Econo~ica 106 Table All: Coarse Grains - Production By Main Countries and Economic Regions ------------------------------------------------------------------------------------------------------------------------------------ Actual Projected Growth Rates a/ ----------------------------------- ---------------------------------------------------- --------------------------- Averages Countries/ --------------... 1991- Economies 1969-71 1979-81 1990 1991 b/ 1992 1993 1994 1995 2000 2005 1961-90 1970-90 2005 ------------------------------------------------------------------------------------------------------------------------------------ ---- ----------------------------------(000 Tons)----- ----------------------------- -------CX p.a.).------- High-Income 270,379 352,080 360,039 357,113 373,063 408,845 415,243 414,602 441,141 477,532 2.1 1.3 2.1 OECD 270,192 351,840 359,481 356,553 372,463 408,204 414,592 413,952 440,449 476,783 2.1 1.3 2.1 United States 165,774 227,789 230,586 218,205 263,200 258,085 260,186 256,328 268,321 289,527 2.0 1.4 2.0 Canada 20,495 22,340 26,061 22,701 20,800 26,593 27,946 28,863 32,483 35,852 2.5 1.0 3.3 Australia 4,694 5,949 6,897 7,497 7,600 8,208 8,384 8,480 9,265 10,481 4.2 2.7 2.4 LMICs 313,594 392,814 473,124 461,748 460,837 492,429 500,666 507,009 550,471 601,523 2.4 1.9 1.9 Africa 35,943 48,034 46,167 49,877 46,760 57,678 58,730 59,761 64,632 69,411 1.9 1.6 2.4 Nigeria 8,209 8,625 6,320 8,698 8,568 8,662 8,723 8,770 8,949 9,119 0.2 -0.3 0.3 South Africa 7,197 11,954 9,511 5,369 8,500 11,316 11,703 12,007 13,251 14,318 1.7 0.3 7.3 Americas 44,898 59,209 59,816 70,267 67,822 71,571 72,872 74,004 80,668 88,304 2.8 1.8 1.6 Argentina 13,727 16,028 8,124 12,388 12,900 14,891 15,168 15,314 16,498 18,291 1.7 -1.1 2.8 Brazil 13,811 20,062 22,450 29,328 25,642 25,927 26,279 26,614 28,560 30,704 3.6 3.1 0.3 Mexico 10,674 14,400 18,355 16,902 16,800 18,508 18,950 19,369 21,600 23,862 2.8 1.7 2.5 Asia & Pacific 97,010 128,519 171,343 165,567 164,476 167,618 170,082 172,129 182,875 193,530 2.6 2.4 1.1 India 27,426 29,116 34,969 29,028 33,800 29,518 29,411 29,213 28,798 28,680 0.9 0.7 -0.1 China, People's Rep. 56,726 81,415 113,455 112,320 108,900 113,184 115,335 117,263 126,266 135,212 3.2 2.9 1.3 Indonesia 2,575 4,035 5,300 5,985 5,300 6,373 6,480 6,494 6,891 7,596 2.7 4.0 1.7 Pakistan 1,431 1,541 1,781 1,833 1,600 1,862 1,877 1,874 1,909 1,992 1.1 1.0 0.6 Thailand 2,083 3,930 4,050 3,771 3,564 3,607 3,692 3,786 4,418 5,068 6.8 4.4 2.1 Europe 125,320 144,620 161,443 150,944 152,358 169,792 172,733 174,353 192,915 217,429 2.2 1.5 2.6 FSU 73,811 77,009 113,300 87,194 85,700 110,515 112,282 112,980 126,148 144,485 2.4 1.5 3.7 Middle East & North Africa 10,422 12,432 23,950 25,092 25,969 26,411 26,900 27,411 30,075 32,858 2.0 2.5 1.9 Egypt 3,308 3,670 5,387 5,435 5,518 5,603 5,688 5,774 6,210 6,659 2.2 2.4 1.5 World 583,972 744,893 833,163 818,861 833,900 901,274 915,909 921,611 991,612 1,079,055 2.3 1.7 2.0 a/ Least squares trend for historical periods (1961-90); end-point for projected periods (1991-2005). b/ Estimate. Sources: USDA Foregin Agriculture Service Tape (actual); World Bank, International Economics Department (projected). Table A12: Coarse Grains - Apparent Consumption By Main Countries and Economic Regions Actual Projected Growth Rates a/ Averages Countries/ ----------------- 1991- Economies 1969-71 1979-81 1990 1991 b/ 1992 1993 1994 1995 2000 2005 1961-90 1970-90 2005 ---- ----------------------- -----------('000 Tons)---- --------(----------------------%-------- p.a.)--------- High-Income 274,335 312,816 333,294 345,829 349,223 354,122 357,555 361,089 380,346 397,102 1.5 0.9 1.0 OECD 272,256 306,854 326,942 339,238 342,567 347,373 350,741 354,207 373,097 389,534 1.4 0.8 1.0 United States 145,748 154,514 181,192 183,747 185,189 186,470 187,354 188,340 195,480 196,553 1.3 1.3 0.5 Canada 17,270 18,270 19,801 19,760 20,099 20,443 20,800 21,154 22,571 22,835 1.7 0.7 1.0 Australia 2,693 3,536 4,277 4,209 4,313 4,450 4,599 4,750 5,385 5,508 2.9 3.2 1.9 Japan 11,063 19,233 23,630 24,193 24,785 25,318 25,845 26,382 28,788 29,229 5.5 3.7 1.4 LMICs 305,615 429,731 508,742 502,526 484,677 522,055 532,972 543,803 606,328 678,141 2.9 2.4 2.2 Africa 33,600 44,045 46,256 51,429 49,001 53,662 55,545 56,962 63,108 69,470 2.2 2.1 2.2 Nigeria 8,214 8,879 6,584 8,615 8,561 8,655 8,729 8,797 9,070 9,301 0.2 -0.2 0.5 South Africa 5,455 7,427 7,653 7,778 8,006 8,380 8,734 9,117 10,740 12,512 2.6 1.6 3.5 Americas 37,940 58,265 67,505 72,466 71,444 73,285 75,494 77,420 89,166 102,043 3.7 2.9 2.5 Argentina 6,057 6,359 5,657 6,239 6,789 7,111 7,311 7,296 8,097 8,974 1.3 -0.8 2.6 Brazil 13,483 20,879 25,076 28,999 26,439 26,727 27,232 27,784 30,354 33,143 3.9 3.6 1.0 00 Mexico 10,728 18,973 22,391 22,093 22,875 23,652 24,592 25,582 31,588 37,905 4.4 3.1 3.9 Asia & Pacific 93,965 133,144 178,178 175,579 170,830 172,930 176,396 180,536 200,869 224,385 2.8 2.6 1.8 India 28,236 29,454 33,266 29,082 29,310 29,551 29,433 29,224 28,749 28,567 0.9 0.4 -0.1 China, People's Rep. 54,395 84,317 108,307 108,951 109,233 109,823 112,070 115,267 130,291 148,101 3.2 2.9 2.2 Indonesia 2,354 4,028 5,294 5,978 6,243 6,386 6,514 6,550 7,006 7,745 2.8 4.3 1.9 Pakistan 1,399 1,541 1,757 1,807 1,815 1,831 1,844 1,840 1,856 1,903 1.0 1.1 0.4 ThaiLand 236 1,160 2,012 2,164 2,331 2,515 2,724 2,919 3,676 4,441 20.2 13.2 5.3 Europe 129,144 175,321 183,709 169,196 156,467 179,474 181,418 183,348 201,249 223,843 2.8 1.8 2.0 FSU 74,683 99,142 129,102 108,454 98,336 120,419 121,362 122,292 134,885 151,436 3.2 2.1 2.4 Middle East & North Africa 10,966 18,956 33,004 33,850 41,480 42,704 44,119 45,537 51,936 58,400 4.8 6.2 4.0 Egypt 3,337 4,593 6,878 6,931 7,020 7,189 7,375 7,565 8,419 9,263 3.3 4.5 2.1 World 579,950 742,547 842,036 848,355 833,900 876,177 890,527 904,892 986,674 1,075,243 2.3 1.7 1.7 a/ Least squares trend for historical periods (1961-90); end-point for projected periods (1991-2005). b/ Estimate. Sources: USDA Foregin Agriculture Service Tape (actual); World Bank, International Economics Department (projected). Table A13: Coarse Grains - Gross Exports By Main Countries and Economic Regions Actual Projected Growth Rates a/ Averages Countries/ ----------------- 1991- EconomIes 1969-71 1979-81 1990 1991 b/ 1992 1993 1994 1995 2000 2005 1961-90 1970-90 2005 --- ------------------------------------(000 Tons) ---------------------------------- ---------(% p.a.)------- High-Income 36,829 90,967 80,961 75,981 77,305 74,748 79,642 82,616 102,606 122,445 5.7 3.3 3.5 OECD 36,752 90,432 80,861 75,881 77,205 74,565 79,632 82,516 102,506 122,345 5.6 3.3 3.5 United States 20,577 66,769 51,158 48,604 50,542 48,227 49,932 54,814 62,940 72,439 5.3 3.3 2.9 Canada 3,770 5,637 5,025 6,050 4,307 5,805 6,885 7,530 9,751 11,993 7.0 1.6 5.0 Australia 2,074 2,744 2,342 2,215 2,762 2,846 2,812 2,744 3,877 3,501 6.7 1.8 3.3 LMICs 16,288 19,417 14,163 15,764 14,582 14,890 15,032 15,836 17,746 20,375 1.6 0.3 1.8 South Africa 1,661 3,718 1,000 650 300 2,432 2,794 2,859 2,563 1,880 -1.8 -4.0 7.9 Argentina 7,493 9,811 4,250 5,655 5,409 7,766 7,854 8,012 8,396 9,308 2.1 -1.4 3.6 World 53,117 110,384 95,124 91,745 91,887 89,638 94,674 98,452 120,352 142,820 4.7 2.7 3.2 a/ Least squares trend for historical periods (1961-90); end-point for projected periods (1991-2005). b/ Estimate. Sources: USDA Foregin Agriculture Service Tape (actual); World Bank, International Economics Department (projected). Table A14: Coarse Grains - Gross Imports By Main Countries and Economic Regions Actual Projected Growth Rates a/ Averages Countries/ ----------------- 1991- Economies 1969-71 1979-81 1990 1991 b/ 1992 1993 1994 1995 2000 2005 1961-90 1970-90 2005 ------------------------------ -------('000 Tons) --------------------------------- ----------(%p.a.)------- High-Income 40,162 57,032 46,100 41,351 40,851 41,394 42,018 42,473 46,510 48,648 2.1 0.1 1.2 OECD 38,136 50,634 38,795 34,166 34,378 34,835 35,360 35,743 39,460 41,415 1.5 -0.6 1.4 Japan 10,267 18,690 21,400 21,100 21,619 22,129 22,669 23,210 25,660 28,882 6.8 3.8 2.3 LMICs 9,431 55,347 46,270 49,716 51,036 48,244 52,656 56,434 73,842 94,172 10.7 8.0 4.7 Africa 602 1,799 1,026 1,256 3,518 915 1,294 1,886 2,638 3,461 7.3 5.6 7.5 Americas 1,570 9,933 8,872 9,009 9,013 9,546 10,543 11,517 16,971 23,127 11.8 8.5 7.0 Brazil 71 1,248 778 1,210 500 701 890 1,119 1,730 2,369 11.6 15.7 4.9 Mexico 380 5,029 4,630 4,855 5,109 5,260 5,718 6,282 10,064 14,117 17.2 13.4 7.9 Asia & Pacific 1,060 5,158 8,070 8,300 8,704 9,149 10,014 11,245 16,913 26,056 8.9 9.7 8.5 China, People's Rep. 138 1,402 1,000 800 800 800 800 1,056 4,548 12,735 21.9 Europe 5,492 31,394 15,662 18,421 16,057 14,103 13,325 13,379 14,187 14,703 10.0 4.9 -1.6 o FSU 1,568 20,800 11,200 15,000 12,118 10,164 9,313 9,379 8,687 6,953 30.5 10.9 -5.3 Middle East & North Africa 706 7,062 12,640 12,730 15,744 16,531 17,480 18,407 23,133 26,825 15.5 18.2 5.5 Egypt 63 931 1,600 1,850 1,504 1,589 1,689 1,793 2,211 2,606 10.8 15.3 2.5 World 49,593 112,379 92,370 91,067 91,887 89,638 97,674 98,452 120,352 142,820 4.8 3.0 3.3 a/ Least squares trend for historical periods (1961-90); end-point for projected periods (1991-2005). b/ Estimate. Sources: USDA Foregin Agriculture Service Tape (actuaL); World Bank, International Economics Department (projected). Table A15: Cose Grain - Prfim 1950.91 (Ctal and 1992-2005 am~ctd) & ~J al - - ~ bl - cureK $ - 1990 cOu~ -- rCa~ $ - 1990 Coan~ - 0- MUV bl 0-7 CP£l G-5 MUV bl 0-7 Cin ol 1950 53 326 430 68 417 549 1951 62 329 451 72 382 524 1952 65 331 456 63 317 437 1953 55 289 383 60 314 417 1954 55 294 376 58 311 397 1955 48 252 327 49 255 332 1956 52 263 346 52 261 343 1957 43 214 282 48 235 310 1958 43 211 277 48 232 304 1959 38 187 242 46 227 295 1960 38 182 237 43 209 272 1961 43 202 261 46 218 282 1962 46 212 272 51 239 307 1963 49 231 281 55 260 316 1964 48 225 272 56 260 314 1965 47 219 258 55 255 300 1966 52 231 273 59 266 314 1967 50 223 259 50 221 257 1968 47 208 233 49 219 246 1969 50 212 240 54 228 259 1970 52 207 234 58 233 264 1971 56 211 236 58 221 247 1972 56 194 215 56 194 215 1973 93 279 313 98 294 329 1974 121 298 367 132 325 400 1975 112 248 302 120 265 323 1976 105 230 275 112 245 294 1977 88 176 209 95 189 225 1978 94 162 181 101 174 194 1979 108 165 197 116 176 211 1980 129 179 210 125 174 204 1981 126 175 204 131 181 212 1982 109 152 178 109 154 179 1983 129 185 208 136 196 219 1984 119 175 192 136 200 220 1985 103 150 163 112 164 178 1986 83 102 108 88 108 115 1987 73 82 85 76 85 88 1988 99 103 106 107 112 115 1989 106 112 115 112 118 121 1990 104 104 104 109 109 109 1991 105 103 100 107 105 102 1992 103 97 92 105 99 94 1993 102 92 88 104 94 90 1994 103 91 87 107 95 90 1995 105 91 86 110 95 90 2000 134 98 91 139 101 95 2005 125 79 71 130 82 74 al U8 No. 2, YdLow, f.o.b. Gulf pod. bl US No. 2, Ydlow, f.o.b. ulf pod. o/ Dgad by 0-5 Mamaturag Uni Vlue (blUV) Todex. d/ D.Satd by G-7 Coa~ma- Price Index (CP. So~re: Uo, Foriugn Agriultral Service (aoepa=); World Bak, I h national Eonomic 111 Vegetable Oils Sumary * Following the generally depressed prices of 1990, vegetable oils and meals posted small gains in 1991. These are expected to continue in 1992 and 1993. The market for groundnut oil, which experienced a price rally in 1990, will be the notable exception. * A cyclical downturn in palm oil yields in Malaysia and Indonesia should be reversed in the second half of 1992 and 1993 so that by 1994 prices are expected to fall again; for coconut oils, drought conditions limited early 1992 supplies and caused significant price rises but prices are expected to fall through the second half of 1993. Finally, soybean prices, having fallen sharply in real terms since July 1988, are expected to remain stable through 1995. * For the longer term, vegetable oil prices are expected to remain flat to downward trending in real terms despite vigorous growth in demand. The fast pace of production increases in several low- cost producing countries, especially Argentina, Brazil, Indonesia, and Malaysia, is expected to continue. * In an environment of low prices and positive income growth, demand growth is expected to remain robust, especially in many populous countries in Asia. * Vegetable oil and meal prices are expected to remain volatile, although the diversification of production has helped to ease the effects of weather on global production levels. 112 Projected Palm Oil Production, by Reion PrQjed~d Palm Oil Co mmption, by Reion 25 01 Q-14 1970 l9ga 1990 1995 2000 200 1970 lom 1990 1995 2000 2005 Palm OU Prces a/, 1950-2005 C$/ton) 2, 000 Constant 1990 $ bl 1, 500- 1,000- 500 Current $ D....1.-. 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 e/ lalaysian, 5%, cif NW Europe b/ Deflated by G-5 MIV Index 113 Projected Soybemn Production (Oil Equivalent), Projected Soyben Oil Conumpdon, by Regio by Region 0 20 1970 1980 1990 1995 .2000 2005 1970 Imso 1880 1995 2000 2005 Sye i a 19 50 -ue A20 M L0 5~3 Soybemn P~ie a/, 1950-2005 C$/ton) 1,000 900 Constant 1990 $ b/ 600 400- 200 Current $ - 0 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 a/ US No. 2, bulk, cif Rotterdam b/ Deflated by G-5 MIN Index 114 Market Characteristics and Recent Developments Oilseeds and their products are traded in a world market, the workings of which are complicated by the physical nature of the production processes for both raw and finished products. Production includes both annual crops grown on land easily used for alternative crops and perennial tree crops whose productive lives span decades. Oilseeds are grown in both rich and poor countries and are produced to some extent in almost every country. Some production technologies are quite input-intensive, while other growing methods-especially for some tree crops-require no additional inputs other than land, rain, and harvesting labor. All countries consume oilseed products, in forms ranging from animal feed, to cooking oil, to industrial products such as detergents and paint products. Oilseeds contain multiple products, and all oilseeds contain both oils and meals in varying amounts. All meals can be used as feed, but each possesses a unique nutritional composition characterized especially by protein content. Almost all of the vegetable oils can be used as cooking oil and, through various methods of processing, all oils can be broken down into their basic chemical components and recombined to form nearly homogeneous final products. Because of the multiple and varied nature of final oil products, vegetable oils compete in markets shared with animal products such as butter and tallow, and in markets shared with petroleum products such as detergents and wood finishes. The worldwide prevalence of oilseeds, the combination of annual and perennial crops, the jointly produced products, and the wide- ranging degree of technical substitution among oilseed products produces a unique and intricate market with a number of distinctive economic and physical characteristics. Worldwide prduction is geographically diverse and the diversity wi continue to increase. Figure 1 illustrates the changing country origins of oilseed production. During the early 1970s, the North American harvest dominated the oilseed market as US farmers expanded quickly into soybeans to meet the demands of rapidly growing feedlot and poultry industries. However, by the 1980s, lower production costs in other countries and a US farm policy designed to support farm incomes by stockpiling US supplies had fueled a rapid expansion of oilseed production, especially soybeans and sunflowerseeds, in South America. Moreover, during the mid-1970s, a dramatic move by the EC to Figure 1: Oilseed production in selected regions 1960-92 250 wtrn Lrwpe 200 m k-Oal a*bw & Wo, 1 150 R*Ot of world us Cana soo -. 50~IE 1960 1970 I980 1992 Source: Oil World. 115 support domestic production of oilseeds spawned its significant entry into rapeseed and sunflowerseed production. During the same period, an easing of the controls on producer prices in China, together with a restrictive import policy, drove up domestic prices and production. In India, restrictions on imports have spurred production while the high domestic prices have kept consumption well below free-market levels. While North and South America, the EC, China, and India were expanding their production of annual oilseed crops, the tree-crop planting programs begun in the late 1970s and early 1980s literally began to bear fruit (particularly in Asia). Figure 2 vividly illustrates the rapid growth of Malaysian and Indonesian palm oil output. The production of vegetable oils and meals will continue to diversify globally throughout the next decade as an even greater share of oilseed production will move to the developing countries. (Detailed descriptions of the prospects for production are given in a later section, Supply Prospects, and in the Annex tables.) Production of palm oil will grow inexorably in Malaysia and Indonesia, as trees planted during the past decade reach maturity while low production costs will support further production gains in Latin America. However, a combination of EC budget constraints, GATT rulings, EC market unification, and Uruguay Round negotiations are changing the way in which oilseeds are supported in the EC and are likely to slow production growth there. Also, changes in US farm policy to increase farmer planting flexibility have favored soybeans production there, but soybean area in the United States (which declined during the 1980s) is not expected to increase and production gains will most likely be modest. Worldwide demand for both oils and meals is growing rapidly and will grow most rapidly in the developing countries. Driven by population and income growth, the demand for both oils and meals is growing rapidly and will continue to do so throughout the current decade. The demand for both sets of products has grown most rapidly in the developing countries where income gains during the Figure 2: Palm oil production in selected regions, 1960-92 12- Ii m 10 4. 2- 1960 1970 1980 1991 Source: Oil World 116 past decade have led to better and more diversified diets. As incomes climb in poor countries, consumers quickly increase their consumption of cooking oil to add flavor, calories, and diversity to their diets. When incomes climb still further, poultry and other meat sources are added to the diet, contributing to the demand for oilseed meals. (A detailed description of demand prospects is given in later sections.) Figures 3a and 3b illustrate the growth in the consumption of oilseed products in developing countries. In 1970, Japan, Western Europe, Canada, and the United States consumed nearly one half the world's supply of fats and oils; those same countries currently consume slightly more than one third. A similar trend has begun among the oil meals. As late as 1980, Japan, Western Europe, Canada, and the United States consumed nearly two thirds of all oilseed meals (Figure 4). By 1990, that share had dropped to 55% of total supplies. Interestingly, the consumption of oilseed products has grown most rapidly outside of major producing areas, stimulating international trade in these products. Figure 3a: Consumption of major fats and oils for Figure 3b: Consumption of major fats and oils for selected regions, 1970 selected regions, 1991 (2a.21) ~~~ ~d (35332Wrr.NMJR 3.1 bood (7.J%) 0*4~~~-Oh (I. 1.51)01 F 7- Source: Oil World. Prices are, on average, highly correlated. While each vegetable oil and meal has unique characteristics that allow for quite specialized market niches, almost all vegetable meals can be used as a protein source for animal feed, and almost all vegetable oil can be used as a cooking oil. The demand for livestock feed is based on its nutritional basis, not its oilseed origin; and all vegetable oils can be chemically separated into more basic components and recombined to produce products that are practically indistinguishable to the final consumer. This does not mean that all oils and meals can be lumped together without regard to individual market characteristics; however, the large range of technical and economic substitutability does result in a high correlation among prices despite quite disparate supply characteristics. Tables 1 and 2 present the correlations calculated from 22 years of annual prices for vegetable oils and meals respectively. The extremely high correlation between soybean, rapeseed, and sunflowerseed oil prices demonstrates the degree to which substitutability on the demand side binds price 117 fgure 4: Consumption of mgjor oilseed meals for selected regions, 1960-91 140- Res of the work 120. M cha 600. go.Faw SUvIet Mkan W rAr. US. Cen JpnI 40 20 1960 1970 1980 1991 Source: Oil World, movements across the three oils despite differences in supply conditions. Even the price of groundnut oil, which has special taste and cooking characteristics, remains highly correlated with other oil prices. The lauric oils (coconut and palm kernel oil), which have special industrial uses in detergents, are themselves highly correlated, although they are slightly less correlated with the nonlaurics. Interestingly, palm kernel oil prices are more highly correlated with coconut oil prices than with palm oil prices despite being derived from the same palm fruit, demonstrating once more the way in which demand substitutability links the various oil markets. While vegetable oil and vegetable meal prices tend to be highly correlated on average, relative prices can change in rapid and extreme ways. For example, between May 1991 and May 1992 groundnut oil prices dropped by $287/ton (about 31%), while coconut oil prices jumped by $305/ton (91%). While such large changes in relative prices are rare, they are not unique. For example, in 1975 the 25% premium that coconut oil traditionally commanded over soybean oil fell to a 36% discount. And between 1986 and 1987, the 25% discount on palm oil against soybean oil swung to a 3% premium. Table 1: Simple Correlation Among Selected Vegetable Oil Prices, 1970-91 Oil: Soybean Palm Rapseed Coconut Groundnut Palm kernel Sunflower Soybean 1.000 0.918 0.994 0.894 0.819 0.890 0.969 Palm 1.000 0.943 0.908 0.744 0.938 0.888 Rapeseed 1.000 0.858 0.833 0.899 0.961 Coconut 1.000 0.596 0.988 0.788 Groundnut 1.000 0.653 0.814 Palm kernel 1.000 0.847 Sunflower 1.000 Source: World Bank, International Economics Department. 118 Prces ar extrmely volaie, and volatility wil diminish only slightly as production diversifles. A salient feature of the vegetable oil market is its remarkable price volatility, extraordinary even by the capricious standards of primary commodity markets. Groundnut oil sold for over $1,000/ton during 1974, 1978, 1981, 1984 and 1991, and for less than $600/ton in 1982, 1983, 1986, and 1987. Coconut oil averaged $464/ton in 1982, $1,115/ton in 1984, $590/ton in 1985, and $297/ton in 1986. Palm oil, soybean oil, and other vegetable oils have experienced similar swings, introducing considerable price risk for both producers and consumers. Table 3 provides two measures of price variation for a large number of primary commodities: a standard deviation from trend, and a more formal instability index. The commodities are listed in order of their instability index. Monthly average prices from January 1979 to February 1992 were used to calculate the measures. As indicated by the table, vegetable oil prices were particularly volatile, even when compared with coffee or petroleum. In the past, a significant proportion of the price variability has come from the disproportionate share of production centered in the US corn belt. Weather and policy shocks radiate from changes in the US soybean crop and US government stockpiles into world markets. However, the emergence of significant production available for export from Argentina, Brazil, Indonesia, and Malaysia has reduced the dependence of world production on a single weather system and helped to reduce the seasonal component of production and price swings. At the same time, the joint-production nature of vegetable oils and meals, together with the growing share of palm oil, will ensure a continued high level of volatility for the following reasons. Farmers growing annual oilseed crops can respond at the beginning of each growing season. To the extent that the prices farmers receive reflect international prices, the two-hemisphere production of oilseeds allows the market to adjust roughly every six months. However, the price to which farmers respond is, effectively, a weighted average of meal and oil prices. Oilseeds are generally not consumed directly but are crushed to produce oil and meal. The crusher normally extracts a small portion of the value of the oil and meal and remits the remainder to the oilseed producers. Therefore, different combinations of meal and oil prices can result in the same product value for the underlying seed. Since the demand for feed is driven by the livestock population, while vegetable oil is mostly used as food, market conditions can be quite different in the two markets-leading to atypical market results. For example, as vegetable oil prices drop, oilseed crushing, and therefore the supply of vegetable oil, need not fall significantly if meal prices happen to rise slightly to compensate. For soybeans, a $22/ton increase in the price of meal will, on average, compensate for a $100/ton drop in the price of soybean oil, leaving the price of soybeans--the price to which the farmer responds- unchanged. An example of this occurred during 1983 and 1984 when international prices for soybean Table 2: Simple Correlation Among Selected Vegetable Meal Prices, 1965-89 Meal: Soybean Rapeseed Groundnut Sunflower Copra Soybean 1.000 0.878 0.963 0.863 0.800 Rapeseed 1.000 0.910 0.935 0.931 Groundnut 1.000 0.917 0.816 Sunflowerseed 1.000 0.839 Copra 1.000 Source: World Bank, International Economics Department. 119 Table 3: Primary Commodity Price Instability, 1979-921 standard % deviation Commodity Instability index from trend Tobacco 0.45 4.93 Bauxite 0.68 6.83 Beef 0.78 7.70 Iron 0.85 9.31 Phosphate 1.08 11.68 Wheat 1.14 11.64 Soybean 1.18 11.28 Rubber 1.24 12.35 Sorghum 1.29 12.86 Cocoa 1.30 13.71 Maize 1.32 13.14 Soybean meal 1.34 12.20 Tin 1.35 12.81 Cotton 1.38 13.96 Oranges 1.49 14.77 Wool 1.50 15.27 Logs 1.50 14.41 Bananas 1.51 14.85 Soybean oil 1.69 16.66 Zinc 1.76 17.03 Coffee 1.80 16.96 Tea 1.87 15.44 Rice 1.90 19.70 Palm oil 2.01 19.20 Copper 2.01 20.99 Petroleum 2.06 20.61 Groundnut oil 2.11 23.13 Aluminum 2.12 20.40 Lead 2.64 27.08 Jute 2.65 19.50 Copra 2.72 27.91 Groundnut meal 2.72 41.54 Coconut oil 2.94 29.13 Nickel 3.17 31.48 Sugar 4.41 43.54 Source: World Bank, International Economics Department. *AThe instability index is given by ( (xt-x,')/x ', where n is the number of observations and x* is the trend-forecasted value of x. 120 oil rose by nearly $200/ton (See Table 4). Nonetheless, the sharp price increase did not signal farmers to plant more soybeans because a simultaneous drop in meal prices offset oil-product gains. While farmers can readily choose among annual crops at each growing season, oil palm and coconut trees are planted with long-term prices in mind. The trees take years to reach a fruit-bearing stage, may take a decade to fully mature, and may produce fruit for 50 years or more. In addition, for modern palm oil plantations, the majority of the costs of producing vegetable oil from tree crops are fixed and unavoidable. In addition to the fixed cost of clearing the land and planting the trees, expensive processing plants are built near the plantation, since the oil contained in the picked fruit quickly becomes rancid. Since most of the processing plants are fueled by waste products, the variable, or avoidable costs of palm oil production are quite low. In addition, only an insignificant amount of meal is recovered by crushing the small kernel of the modern oil palm fruit, so that the revenues of the oil palm plantation are almost exclusively determined by the prices of vegetable oils. Hence, while annual oilseed producers can respond relatively quickly to prices-but look to an average of oil and meal prices in making their planting decisions-tree-crop producers, while highly dependent upon vegetable oil prices, are unable to adjust production in response to those prices. These combinations of physical characteristics-the joint production of meals and oils from annual oilseed crops and the fixed nature of perennial vegetable oils-are a key cause of the wild gyrations in vegetable oil prices. The price instability has a number of ramifications. Investment analysts must be aware of the potentially large revenue swings throughout the life of the project. In development projects involving mono-cropping, smallholders remain especially vulnerable, as farmers near subsistence levels are least likely to possess the resources needed to weather lean years. Likewise, countries that depend heavily on vegetable oils to generate export revenue, such as the Philippines and Senegal, face reat uncertainty in regard to income and debt management. Tools and strategies of risk management- sensitivity analysis, hedging, and diversification-are vitally important to the investment analyst and investor. Characteristics of demand for fats and oils. The demand for fats and oils is determined by a variety of factors, including income, population, relative prices, cultural preferences; however, there is an archetypical pattern of demand development which is tied to economic development and which transcends national boundaries. This pattern is illustrated in Table 5. At very low levels of daily caloric intake, when per capita calorie supplies are around 2,000 calories per day, the share of the diet derived Table 4: An Example of Off-setting Movements in Oil and Meal Prices Average Price Commodity 1983 1984 (US$/ton) Soybeans 282 282 Soybean oil 527 724 Palm oil 451 729 Soybean meal 238 197 121 Toble 5: Daily Per Capita Calories by Fo~type for Selected Comaries, 1969-89 Counry Comnodity 1969 1979 1989 1969 1979 1989 (1'oýtal (%) Bangladeah Total 1,984.00 1,962.00 2,021.00 1.000 1.000 1.000 Cereal 1,550.00 1,615.00 1,711.00 0.781 0.823 0.847 Roots & Tubern 47.93 38.14 26.31 0.024 0.019 0.013 Pules 45.59 69.38 39.83 0.023 0.035 0.020 Meat 18.49 18.62 15.69 0.009 0.009 0.008 Vegetable fat* & oilk 46.51 47.63 81.90 0.023 0.024 0.041 Animi fats & oils 7.03 7.71 4.88 0.004 0.004 0.002 China Total 1,930.00 2,275.00 2,639.00 1.000 1.000 1.000 Cerea 1,287.00 1,606.00 1,854.00 0.667 0.706 0.703 Roots & Tubers 303.90 259.10 148.90 0.157 0.114 0.056 Pulse 51.16 46.78 23.25 0.027 0.021 0.009 Met 78.96 113.90 212.80 0.041 0.050 0.081 Vegetable fatt & oils 37.53 53.96 116.90 0.019 0.024 0.044 Animal fate & oils 9.98 14.60 18.68 0.005 0.006 0.007 India Total 1,988.00 2,111.00 2,229.00 1.000 1.000 1.000 Coreals 1,308.00 1,381.00 1,416.00 0.658 0.654 0.635 Roots & Tubers 38.15 44.66 38.98 0.019 0.021 0.017 Pules 149.30 131.80 134.10 0.075 0.062 0.060 Met 9.10 9.90 11.58 0.005 0.005 0.005 Vegetable fats & oiis 98.92 123.70 148.20 0.050 0.059 0.066 Animal fata & oils 21.14 23.46 24.99 0.011 0.011 0.011 Indonesia Total 1,909.00 2,323.00 2,750.00 1.000 1.000 1.000 Cereuli 1,264.00 1,574.00 1,958.00 0.662 0.678 0.712 Roota & Tuben 261.60 191.80 178.90 0.137 0.083 0.065 Pulges 18.86 23.39 18.79 0.010 0.010 0.007 Meat 20.93 21.49 35.98 0.011 0.009 0.013 Vegetable fats & oil& 50.16 89.72 113.90 0.026 0.039 0.041 Animal fats & nila 2.19 3.60 3.81 0.001 0.002 0.001 Pakitan Total 1,859.00 2,222.00 2,219.00 1.000 1.000 1.000 Cereli 1,133.00 1,398.00 1,339.00 0.609 0.629 0.603 Roote & Tubern 5.86 7.15 8.42 0.003 0.003 0.004 Pulses 75.46 62.40 52.97 0.041 0.028 0.024 Meat 38.66 44.80 54.44 0.021 0.020 0.025 Vegetable fata & oik 59.98 151.20 218.20 0.032 0.068 0.098 Animal fate & oilk 56.95 57.18 60.56 0.031 0.026 0.027 Thailand Total 2,209.00 2,292.00 2,316.00 1.000 1.000 1.000 Cereal 1,555.00 1,474.00 1,359.00 0.704 0.643 0.587 ROts & Tuberi 60.35 46.41 27.89 0.027 0.020 0.012 Pulsa 22.48 13.52 52.66 0.010 0.006 0.023 Meat 94.12 107.90 116.70 0.043 0.047 0.050 Vegetable fats & nila 33.56 41.21 110.60 0.015 0.018 0.048 Animal fat & oils 14.76 12.24 13.36 0.007 0.005 0.006 United State TOtal 3,379.00 3,498.00 3,671.00 1.000 1.000 1.000 Ceres 629.20 641.30 729.70 0.186 0.183 0.199 Rots & Tubers 95.30 93.59 95.86 0.028 0.027 0.026 Pules 34.98 29.37 22.47 0.010 0.008 0.006 Mest 663.70 679.50 691.10 0.196 0.194 0.188 Vegetabt fa & oilk 389.30 481.00 519.40 0.115 0.138 0.141 Animal fau & oilk 154.10 114.40 105.40 0.046 0.033 0.029 Soure: FAO. 122 from cooking oils is extremely low. For example, in Bangladesh in 1979 over 87% of daily calories came from cereals, roots, tubers or pulses. Rice was boiled and fats and oils composed less than 3% of the diet. As food becomes more affordable through income growth or price declines, vegetable oils consumption grows rapidly. Though still a small part of its diet, the relative share can grow rapidly. Continuing the example of Bangladesh, between 1979 and 1989, while average per capita caloric supplies grew by only about 60 calories per day, calories derived from vegetable oils grew by about 34 calories. Over the range of 2,000 to 3,000 calories per day, vegetable oil demand grows rapidly and meat is added to the diet. As calorie levels grow further, total fat consumption stagnates, with changes coming in composition of fats rather than levels. For example, growth in vegetable fats and oils in the United States between 1969 and 1989 came primarily at the expense of animal fats. When calories per capita derived from fats and oils are below 300/day, very small income increases can trigger very large increases in daily intake. This is illustrated in Figure 5a, which maps per capita fats and oils supplies against per capita income. The solid line in the graph represents a population-weighted regression line explaining average caloric intake levels as a function of income. Generally, in all countries clustered around the lower left corner of the graph (see Figure 5b for clearer comparison), a 1% increase in income will generate a greater than 1% increase in demand for fats and oils. The overwhelming majority of the world's population is found in these countries. Particularly interesting is the difference between Pakistan and India which have followed very different policies with regard to vegetable oil imports. Table 6 gives the average per capita apparent consumption of 17 major fats and oils for selected countries and regions, and illustrates the potential for demand gains in the world's populous countries. China, India, Indonesia, Bangladesh, Nigeria, the Philippines, and Thailand all consume below-average levels of fats and oils for their per capita incomes. China, India, Indonesia, and Thailand have experienced rapid income growth in recent years, growth which is projected to continue over the next decade. The same is true for Pakistan. The potential for consumption growth in this region is quite Figure Sa: Income and fats and oils consumption: Cross-country comparisons for 1989 2700 - Cook S00 Peringa r 1a Frca A --Lil-Sweden Switerkn p0 . -Arba"a 300 200 - 100 0 0 5 10 15 20 25 30 Per cW to GDP In S (T*onds) Source: FAO. 123 fgure 5b: Income and fats and oils consumption: Detail from cross-country comparison 350 250 140" 100 M0040 So urce F AO I No -I - SriLWho 50 ENo 160 2006 0 400 50 Per 0ta O in SIM Source: FAO. important in world terms. By way of example, a 1 kg/capita increase in vegetable oil consumption in China and India would increase world consumption of vegetable oils by an amount equal to current US exports of soybean oil plus current exports of palm oil from Indonesia. Thus, the combined concentration of population and income growth in Asia will shift the mainspring of vegetable oil consumption demand growth away from the EC and North America. Table 6: Population and Per Capita Consumption of Major Fats and Oils in Selected Countries for 1985 and 1991 Per capita consumption Country 1991 population 1985 1991 millions China 1,150.0 6.3 8.2 India 871.3 7.2 7.4 EC-12 343.3 35.7 39.7 United States 251.1 38.9 42.3 Indonesia 187.8 8.6 10.7 Brazil 153.3 16.6 19.3 Japan 123.9 18.3 20.9 Pakistan 126.7 13.1 15.7 Bangladesh 118.8 3.3 4.6 Nigeria 112.1 6.9 9.3 Mexico 90.5 15.9 18.3 Philippines 63.9 6.2 6.1 Thailand 56.5 3.6 7.8 World 5,399.8 13.9 15.2 Source: Oil World. 124 Demand Prospects for Vegetable Oils Demographic and income growth prospects indicate that the most rapid demand growth for vegetable oils will come from developing countries, particularly in Asia. Clearly, China and India have the greatest potential for demand growth; however, there are good reasons to expect demand growth in these countries, while significant, to remain substantially below its potential. As stated earlier, both countries follow policies that raise the price and greatly limit the availability of vegetable oils toconsumers. Without these restrictive policies, consumption levels would likely increase by more than 50% immediately. Per capita income levels in China and India are roughly equivalent to incomes in Pakistan where per capita fats and oils consumption is roughly double. However, the restrictions on consumption have a long history in each country, and a rapid departure from past policies is not envisaged. Brazil, Indonesia, and the Philippines, countries that are large and fast-growing producers of vegetable oils, are also expected to grow rapidly as consumers. Brazil and the Philippines have population growth rates in excess of 2% p.a. While income growth prospects are more optimistic for Brazil and Indonesia than for the Philippines, the Philippine consumption level is comparatively low and possesses a large potential for improvement, even at close to current income levels. Encouraged by income growth, demand is expected to grow rapidly in Thailand as well. Changes in the countries of Eastern Europe and the FSU fom command to market economies will eventually favor demand for vegetable oils. Historically, aggregate consumption levels of fats and oils in Eastern Europe and the FSU have been comparable to consumption levels in the rest of Europe. However, consumers and producers in Eastern Europe and the FSU faced relative prices and supplies very different from the rest of Europe. The results are well illustrated by comparing the composition of consumption of fats and oils between formerly divided East and West Germany (see Figures 6a and 6b). While total per capita consumption levels were comparable between the two countries in 1985, animal fats accounted for over 63% of total fats and oils in East Germany compared with less than 36% in West Germany. Rapeseed oil, which was produced in East Germany, and sunflowerseed oil, a major FSU crop, dominated vegetable oils in East Germany while West Germany consumed a variety of vegetable oils, both imported and locally produced. Generally speaking, the countries of Eastern Europe consumed more animal fats than other countries in Europe. This is illustrated in Figure 7. As markets are liberalized, changes in relative prices should favor an adjustment away from animal fats such as butter and lard toward vegetable oils such as soybean oil and palm oil. Eventually, this should lead to an overall increase in demand for vegetable oils in these countries. However, the early stages of liberalization have been characterized by a precipitous drop in purchasing power and severe limitations on credit. As a result, total demand levels are likely to drop as imports become unaffordable. Figure 8 illustrates the experience of Poland where demand has fallen significantly since 1988. The demand for vegetable oils will continue to grow more rapidly than the demand for animal fats. A consistent worldwide trend over the past three decades has been the declining share of the fats and oils market taken by animal fats. In 1960, equal amounts of butter and soybean oil were produced worldwide. In 1991 soybean production exceeded butter production by a factor of 5 (see Figures 9a and 9b). Part of the change in composition comes from the increase in consumption in Asia where animal fats are less traditional components of the diet. However, in industrial countries, health 125 Fgure 6a: Composition of fats & oils consumption igure 6b: Composition of fats & oils consumption in former West Germany (1985) in former East Germany (1985) se (15.1t) sun (2(s.%s k6mh~ fat (35.5%) fta 34)-oo 2.5 SM (7.OX) (12.4%) kntd fat (63.4X other. (10.7%) others (26.8) FIgure 7: Per capita calories from fats and oils Fgure 8: Vegetable oil consumption and imports for selected European countries in 1985 for Poland, 1987-91 No.0 220 C 0200- "We 700 1 180 IWO00 -180- 144 no\ -- -.IS 120 200 - ---- - - Vo -oo 1 A 100 iou.MM.F.o' OL - i-5 so Source: Oil World. concerns have reduced per capita consumption of butter, lard, and grease. Until recently, tallow, often used for frying in fast-food restaurants, had not experienced a similar decline. For example, from 1958 to 1991, lard consumption in the United States dropped from 850 tons to 362 tons despite a population increase of about 77 million consumers. During the same period tallow consumption roughly doubled from 958 tons to 1,990 tons. Even so, in the United States there is now anecdotal evidence in recent years to suggest that major fast-food chains are replacing tallow with vegetable oils-again in response 126 Figure 9a: Worldwide fats and oils production Figure 9b: Worldwide fats and oils production 1960 (million tons) 1991 (million tons) rasd & ouflmwerseed (2.89 o*wr (17.42) rqaesed & suiftwerssed* .p aim & pi kenel lard (6.DG) sobm(15.89) Wolw (3.57) butter (5.43) F ard (4.19) .12) t (7)m & pain kerm (12.47) Source: Oil World, to consumer health concerns. The changes in Eastern Europe and the FSU will eventually reinforce the on-going process of displacing animal fats with vegetable oils. DEMAND FORECASTS FOR VEGETABLE OILs. After remaining stagnant from 1980 to 1986, worldwide soybean oil consumption grew rapidly up to the end of the decade. The slowing down of the world economy has reduced growth and consumption has lingered around 18-19 billion tons in recent years. While forecast to grow less rapidly than lower-cost palm oil, soybean oil consumption is projected to expand at 2.6% p.a. through 2005 to about 26.5 billion tons. Consumption is expected to grow quite slowly at 1% annually in Europe and North America. Only the high-income countries of Asia are expected to experience significant growth. Consumption elsewhere is expected to exceed population growth rates and in LMICs is expected to exceed high-income country consumption by the close of the century. Asia and Latin America are expected to experience growth rates in excess of 3% p.a. while demand in Asia is expected to grow at around 4% p.a. through 2005. After experiencing a downturn in consumption, Eastern Europe is expected to grow rapidly-albeit from a low base-expanding by about 4.5% p.a. from 1991 to 2005. Competitively priced, with production centers well located geographically, palm oil is expected to experience the most rapid consumption growth of the major vegetable oils. Worldwide, consumption is expected grow at slightly better than 4% p.a. from 1991 to 2005. Demand growth should be vigorous in all parts of the world; however, nearly one half of all palm oil consumption is expected to take place in Asia. Although industrial demand exists for most oils, it is particularly important in the case of the lauric oils-palm kernel oil and coconut oil. Historically, nonedible uses of coconut oil have accounted for about 50% of total lauric oil consumption in the United States and Western Europe. Most 127 of the lauric oil for industrial use finds its way into soap or detergent manufacturing, either directly or indirectly after the lauric oil has been converted into fatty acids and fatty alcohols. In the early 1960s, a portion of the industrial market was lost to petroleum-based synthetics, but market shares have since stabilized. Coconut oil has traditionally dominated this segment of the vegetable oil market and will continue to do so over the projection period. However, palm kernel oil will supply an expanding share of the market. For industrial countries, growth in this market will be steady but slow, expanding primarily with population gains. Worldwide, most gains will come from urbanization and population growth in the developing countries. Gains in food use will be limited because of health concerns in the United States and other high-income countries. Demand in China, India, and Indonesia is expected to grow with domestic production, most significantly in the case of Indonesia. Demand Prospects for Vegetable Meals The demand for vegetable meals will grow most mpidly in Asia. Growth in the demand for vegetable meals will come mainly through income growth and the attendant growth in the demand for poultry and red meat in Asia. Eventually, more efficient feeding practices should stimulate demand in the FSU and Eastern Europe as those economies begin to price domestic resources at world levels. In South America-and, to a lesser extent, parts of Africa-the availability of grazing land allows livestock numbers to grow without necessitating a corresponding growth in feed demand (see Table 7). However, in populous areas of Asia, particularly India, grazing land is limited, and feeding rates are higher than in Europe and North America. As incomes grow and the demand for poultry and other livestock products increases in these populous areas, the demand for meals will expand quite rapidly. Figure 10 illustrates the indirect effects of income growth on meal consumption for several countries in Asia. Changes in pricing policies in Eastern Europe and the FSU are eventually expected to stimulate the demand for meals, for soybean and rapeseed meals in particular. In the past, inappropriate domestic pricing policies and limited supplies resulted in inefficient feed practices. With economic planners reluctant to import soybean meal, feed compounds in those countries have contained a less-than- optimal protein component. In recent years, foreign exchange and credit limitations have dampened the ability of these countries to import meals. Lines of credit extended by the United States and the EC to the FSU have softened the effects of adjustment on the feed industry. So far, the adjustment experience of the FSU has been less severe than in Poland (see Figure 11). Pricing policies in China have also contributed to inefficient practices in which livestock are fed wheat and rice rather than protein meals. From 1958 to 1962, meal usage rates in China were substantially higher than subsequently, averaging 872 kg/ton of livestock compared to 362 kg/ton in 1992. A move to price resources at international market levels would result in large increases in feed demand. However, policy reforms in China appear more slowly paced than those in Eastern Europe, and only marginal increases in feed demand are expected over the projection period. DEMAND FORECASTS FOR VEGETABLE MEALS. Demand for soybean meal is expected to grow slowly but consistently among the high-income countries. In the United States consumption is expected to reach almost 58 million tons by 2005, growing at slightly under 2% p.a. Demand is expected to grow more slowly in Western Europe and rapidly in Japan so that total consumption by high-income countries is expected to reach about 62.6 million tons by 2005. Demand is expected to grow rapidly in 128 Fgure 10: Oilseed meal consumption in selected Y1gure 11: Oilseed meal consumption Poland and Asian countries for 1982 and 1992 the FSI 8 LI 1 S Worl 1 44 o 50.4 - 02 5 Source: OIi2l WQ-r the LMICs. In Latin America, feed consumption is expected to reach about 12.8 million tons by 2005. The most rapid increases in feed consumption are expected to occur in Asia, where soybean meal demand is expected to grow by more than 10 million tons between 1992 and 2005. Consumption growth rates are also expected to be high in Eastern Europe; however, the high rate of growth (around 5% p.a.) will be from levels reduced by structural adjustments currently under way. Table 7: Average Meal Use, Kilograms of Soybean Meal Equivalents Per Ton of Livestock, 1973-77 to 1983-87 Country/Region 1973-77 1983-87 Argentina 87 100 Brazil 242 392 China 462 446 EC 458 639 India 1,047 1,102 Japan 880 905 United States 470 543 FSU 174 194 World 375 459 Source: Oil World. 129 Supply Prospects for Oilseeds Production gains will come primarily from developing countries. Many developing countries, especially Argentina, Brazil, Indonesia, and Malaysia, appear to have a comparative advantage in producing vegetable oils and meals. Cost of production studies indicate that continued expansion is still profitable for efficient operations and several countries will continue to expand production, despite falling real prices. Yield improvements are likely for soybeans in Argentina and Brazil, and for oil palm in Indonesia and Malaysia. In addition, Argentina, Brazil, and Indonesia have land available for production expansion. Production gains through area expansion are likely in China as well, where current harvested area remains below levels in the late 1950s. Slow increases in production are projected for the United States in soybeans and for the EC in rapeseed and sunflowerseed. Limited land availability, along with income-support policies that also limit planted area, are likely to restrict production gains in both of these areas to improvements in yields. Biotechnology provides a potential for continued gains in productivity beyond the projection period. In 1971, Cohen and Boyer developed the techniques for recombinant DNA technology which allows the transfer of genetic material from one organism to another. In 1976, the first biotechnology firm was established. By 1982, the first biologically engineered products reached markets in Europe and the United States. In 1985 the United States extended patent protection to genetically engineered plants and recent years have seen a number of patents awarded for biologically engineered plants and organisms or products. A recent paper published by the World Bank entitled Agricultural Biotechnology, the Next Green Revolution? reviews potential applications of biotechnology and makes an attempt to forecast the time horizon for applications of such technology to existing problems in agriculture. Oilseeds will eventually benefit from research already begun, but few meaningful applications are anticipated within the next five years. The applications which seem to have the shortest lead time involve the use of new techniques for diagnostics which use monoclonal antibodies or nucleic acid probes to test for pests or plant diseases. Such tests are anticipated for rapeseed within the next five years as is a diagnostic for viral diseases in coconuts; however, similar tests for palm oil are likely to occur much later, perhaps more then ten years into the future. Similarly, genetically engineered strains of palm oil which slow fruit spoilage or change the fatty-acid composition of the oil remain distant prospects. Clonal reproduction in palm oil has been attempted in recent years but has not proved successful. However, current research offers a potential solution through novel tissue culture methods. The distant time between current research and future applications does not mean that technological gains will be suspended for the next ten years. Existing techniques have not been fully applied, or remain economically suboptimal because of relative prices. However, biotechnology provides a new set of tools for solving problems which are currently well understood and thus increases the potential of existing agricultural resources. SUPPLY FORECASTS FOR OILSEEDS. Palm oil continues fast growth. A "baby-boom" is well underway in Southeast Asian palm oil production. Malaysian palm oil production doubled over the period 1962 to 1967. It doubled again by 1970, by 1973, by 1977, by 1982, and by 1989. It is expected to approach 11 millon tons by 2005. By that time, production from Indonesia is expected to exceed 7 million tons. Because of already completed plantings, Indonesia and Malaysia are locked onto a path of rapid expansion through the close of the century. Figure 12 shows that this historically aggressive expansion of area into oil palm has not slowed in Malaysia, and is expanding more rapidly in Indonesia. 130 It should be emphasized that the impact of the most recent plantings will not be realized until the end of the decade. For a well-managed estate in Malaysia, the amount of oil that can be produced from a hectare of land climbs quickly from 1.4 tons four years after planting to 5.1 tons in the tenth year. Yields then decline very slowly over the life of the tree. Therefore trees planted in 1992 will not fully mature until early in the 21st century. Slow down in soybean production. Soybean production in the United States is expected to grow slowly over the projection period-at about 1.9% p.a. Soybean area grew rapidly in the United States during the 1970s, peaked in 1983, and has declined slowly since. Area gains in Latin America have more than compensated, however; the soybean area in Brazil rose from 1.3 million ha in 1970 to nearly 15 million ha in 1989. Argentina harvested 360,000 ha in 1970 and nearly 9 million ha in 1990. Planted area is expected to remain stagnant in North America, so that supplies will grow only from yield increases. Despite low to stagnant prices, low production costs will continue to make soybeans profitable in much of Latin America where production is expected to grow at slightly less than 4% p.a. during the projection period. A great deal of uncertainty about government policies continues to make projections concerning China difficult. In 1958, about 10 million tons of soybeans were produced in China. During the Cultural Revolution, production dropped to a low of 6.2 million tons and remained below the 1958 level for nearly 30 years (see Figure 13). Yields remain low by international standards. For the projection period, production is expected to expand at about 3% p.a. in China. This rate is rapid by recent standards in China; however, the potential exists for even more rapid growth under alternative policies. Coconut oil production stagnates. Over the past decade, palm kernel oil has gained an increased share of the lauric oil market at the expense of coconut oil. Supplies of copra have remained either stagnant or in decline in India, Malaysia, Papua New Guinea, the Philippines, and Sri Lanka. Area gains have come almost exclusively from smallholders in Indonesia. For the projection period, production in the Philippines, which historically has accounted for 40-50% of world output, is expected to decline from 1991 levels to less than 1.6 million tons in 2005. Production is expected to grow slightly in Indonesia so that world production will remain fairly close to 1991 levels. Price Forecasts Oilseed prices should genemly remain flat or trend downward following 1993. Following the generally depressed prices of 1990, vegetable oils and meals posted small gains in 1991 which are expected to continue in 1992 and 1993. The market for groundnut oil, which experienced a price rally in 1990, is the notable exception. A cyclical downturn in palm oil yields in Malaysia and Indonesia, which helped to deplete stocks and firm prices in 1991 and 1992 will reverse in the fourth quarter of 1992 and in 1993. Increasing yields, combined with new trees coming into production in Malaysia and Indonesia, should restore inventory levels and real prices are expected to average lower in 1994. 131 Figure 12: Area under oil palm, 1967-90 Fgure 13: Soybean production in China 1958-91 2, 000- 1,800 total Mldaydo 1.600- totLd 12.gud 1,400- ne e. dyl 1 , 2 0 0 n o w w har m 1 0 1.20C - Io l t, too now area, umwsaio 1, :00: 400 2 200 0637 la 777A 636 58 62 66 70 74 78 82 B 90 67 75 77 51 63 85 87 81 60 84 68 72 76 s0 a4 as 88 70 72 74 76 78 80 82 84 86 85 90 Source: QilWorIL World Bank. Source: Oil World Drought conditions in major coconut-growing areas in 1991 which reduced early 1992 supplies will have a limited effect and coconut prices are expected to continue to fall through the second half of 1992 and in 1993 as yields recover. Despite the low investment in new coconut trees outside Indonesia, the effects of limited supplies from new areas are expected to be offset by increasing supplies of palm kernel oil due to the recovering fruit-bunch yield gains in Malaysia and Indonesia. Table 8: Price Forecasts for Selected Oilseeds and Oilseed Products in Constant (1990) $/ton Palm Oil Coconut Oil Soybeans Soybean Meal -(historic)- 1980 811 937 411 364 1985 730 860 327 229 1990 290 337 247 209 1991 332 424 235 195 -----(projected)- 1992 371 554 221 195 1993 380 498 224 199 1994 353 509 233 204 1995 343 535 233 208 2000 303 564 219 185 2005 267 458 233 210 Source: World Bank, International Economics Department. 132 Following a severe drought in North America in 1988, soybean prices have declined steadily in real terms through 1992. During that period inventory levels have recovered, although the pace of the adjustment was slowed by a drop in Brazilian production in 1991. With normal production levels expected from Argentina, Brazil, and the United States in 1992, prices are expected to stabilized and remain so through 1995. With recent substantial harvests in the United States and India, groundnut oil prices are expected to continue their retreat from 1990 highs. Down from the weather-induced peak levels, groundnut oil prices are expected to remain, in real terms, close to 1988 levels. Nonetheless, groundnut oil remains the least traded of the major vegetable oils and volatility in price should be expected. For the longer term, vegetable oil prices are expected to remain flat to downward trending despite vigorous growth in demand. New investments in oilseed production have continued at a rapid pace, even with downward-trending real prices. Recent investment behavior and cost of production studies both indicate that production is expected to remain profitable in several countries, especially Argentina, Brazil, Indonesia, and Malaysia. Existing technology applications are expected to further increase yields, especially in palm oil, reducing costs even more. Palm oil is projected to remain the least expensive of the vegetable oils. Prices below $300/ton (constant 1990 US dollars) are forecast for the years beyond 2000. Coconut oil prices are expected to decline as well despite stagnant supplies because of abundant new supplies of palm kernel oil. Because little meal is produced by the oil palm fruit, the rapid expansion of oil palm will have a limited effect on the market for high protein meals such as soybean and groundnut meal. At the same time, projected demand growth is robust and meal prices are expected to remain fairly constant. Policy and Trade The 1990 US Fann Bill has had little effect on US oilseed production. Since 1965, US farm policy has operated under multi-year omnibus legislation known loosely as the Farm Bill. In 1990, the Food Security Act of 1985 was replaced with the Food, Agriculture, Conservation and Trade Act of 1990. The legislation was more of an amendment than a radical revision of earlier legislation. Designed to increase farmer planting flexibility, to lessen the government's ownership of commodity stocks, and to lower nominal support levels for a variety of agricultural products, the legislation has, to this point, had little effect on oilseed production in the United States-partly due to the level of oilseed prices. The United States produces roughly 50% of the world's soybean output so that provisions of the bill affecting US soybean production are reflected in global prices for vegetable meals and, to a lesser extent, oils. With regard to soybeans, the primary tool of US policy is a program that guarantees participants an effective minimum price through a nonrecourse loan. Participating farmers can receive a loan in the form of a minimum price or "loan rate" for a fixed period of time, with all or a portion of their crop used as collateral. Under the provisions of the new bill, farmers may choose to repay the loan, together with accumulated interest, or forfeit the crop to the Commodity Credit Corporation, or retain their crop and receive a loan deficiency payment equal to the difference between the loan rate and an established market price. Loan rates are generally calculated on a five-year moving average, with the high and low years excluded. The legislation brought a number of other oilseeds into the loan program for the first time. Eligible oilseeds include sunflowerseed, rapeseed, safflowerseed, flaxseed, mustard seed, and other oilseeds at the discretion of the Secretary of Agriculture. The loan rates are subject to Gram-Rudman spending cuts; in recent years, deficit-reduction measures have lowered the actual loan 133 rate to levels below the legislated rate. However, to this point, the provisions have gone untested. After falling from $4.77/bu in 1988 to $4.50/bu in 1990, the soybean loan rate has risen slightly in recent years but has remained below market prices, making the government's program unattractive to farmers and therefore having little effect on international markets. Oddly enough, a major impact of US farm legislation on the oilseed market comes not from provisions specifically addressing soybean production, but rather indirectly via the corn program. Much of the most productive soybean acreage in the United States lies in the US Midwest, which is also the country's corn belt. Farmers have traditionally switched production between corn and soybeans based on relative expected prices and yields for the two crops. Under current proposals, the minimum corn "target price" is fixed at 1990 levels of $2.75/bu for the life of the five-year bill. Using expected yields, many US farmers would therefore find soybean production more profitable than remaining in the corn program should soybean prices rise above $6.50/bu. Under past legislation, farmers have been reluctant to make the switch because of the way in which the area qualifying for target payments was determined. Corn program payments were based on a five-year moving average of acreage enrolled in the corn program. In return for price guarantees, farmers agreed to idle a portion of their acreage base while planting the rest to corn. If a farmer wanted to switch land from corn to soybean production, the land would first have to be withdrawn from the corn program, thereby reducing the acreage base for the current harvest-as well as for the ensuing four crop years. Under the proposed legislation, bases for all program crops, plus historical oilseed plantings, will be included in a "15% triple base." In order to fashion a $13.6 billion savings in the bill, 15% of the historic base was deemed ineligible for government target payments. In compensation, farmers are allowed to plant any crop (including additional soybeans) on this land (called the Normal Flex Acreage). In addition, under certain conditions farmers can plant another 10% (called the Optional Flex Acreage) of the acreage base in other crops. In doing so, they give up the right to receive any deficiency payments that they might otherwise be eligible to receive, but can respond to short-term price increases without suffering a reduction in subsequent acreage base calculations. The provisions should make US soybean farmers more supply responsive should soybean prices move into the $7/bu range. However, like changes to the loan provisions, the "flex" provisions remain untested as prices have remained high enough to avoid government loans, but too low to trigger a switch in plantings. The United States will continue to subsidize exports of vegetable oils under several progrms. Under the current Farm Bill, US farm exports, including vegetable oils and meals, will continue to receive subsidies. The Export Enhancement Program (EEP) was funded with a minimum expenditure level legislated at $500 million per year. In addition, a similar market promotion program, called Targeted Export Assistance (TEA) under the 1985 Act but renamed the Market Promotion Program (MPP), was continued with funding of at least $200 million per year for promotional efforts by agricultural trade associations, state departments of agriculture, and private companies. P.L. 480 food aid programs continue at current levels, with a provision allowing donations for Title 1 countries. Spending on the credit guarantee and credit subsidy programs, the three-year Short-Term Export Credit Guarantee Program (GSM-102) and the three-ten-year Intermediate-Term Export Credit Guarantee Program (GSM-103), was increased to $5 billion a year and $500 million a year, respectively. Under the proposals, an additional $1 billion annually was set aside for "emerging democracies." A $50 ' If corn prices drop below the "target price," program participants receive payments compensating them for the difference. 134 million-a-year fund was also established for the sole purpose of subsidizing cottonseed and sunflowerseed oil exports under the Sunflower Oil Assistance Program (SOAP) and the Cottonseed Oil Assistance Program (COAP). During 1991, the United States spent about $33 million directly subsidizing vegetable oil exports under the three programs. The subsidies backed the export of over 400,000 tons of vegetable oil (see Table 9). The export subsidy programs were originally intended to counter what the United States deemed unfair trading practices, primarily EC cereal exports subsidized under the EC's Common Agricultural Policy (CAP). The EC is a net importer of vegetable oil but traditional EC trading partners, primarily in North Africa, were targeted for vegetable oil subsides in the early years of the US program. In recent years the programs have expanded to encompass other goals, most importantly, transitional subsidies to emerging democracies. Since 1990, the list of countries receiving subsidized vegetable oils under the three programs has expanded to include El Salvador, the FSU, Mexico, and Venezuela. While EEP, SOAP, and COAP are perhaps the most visible subsidies for US vegetable oil exports, the bulk of the subsidies continue to come indirectly from the GSM and P.L. 480 programs. In 1991, the US backed credit on $139 million worth of vegetable oil exports, $89 million of vegetable meal exports, and $568 million in oilseed exports. $23.5 million in vegetable oil exports and $17 million in oilseed meal exports went to El Salvador and the Philippines in 1991 under PL 480. EC policy, under both internal and external pressures, has been revamped. In the 1970s, the EC began a program to reach self-sufficiency in oilseeds and protein meals which, while economically very costly, proved wildly successful. From a 1970 production level of about 1 million tons, total EC production has grown more than tenfold (see Figure 14). During this period of rapid expansion the central policy tool was a subsidy based on the difference between the international and the EC price, which was paid to EC oilseed crushers buying domestic oilseeds. A portion was retained by the crusher with the remainder passed on to oilseed farmers. The amount of the subsidy and therefore the costs to the EC fluctuate with international prices, increasing in times of low prices and falling as Table 9: Expenditures on US Export Subsidy Programs EEP SOAP COAP EEP SOAP COAP Total Total '000 '000 ---('000 tons)- --('000 US$)- tons US$ 1987 45 0 0 3,561 0 0 45 3,561 1988 355 34 0 50,205 3,282 0 389 53,488 1989 114 69 0 11,199 5,299 0 182 16,497 1990 18 36 14 2,161 3,323 2,251 68 7,735 1991 344 74 18 24,846 7,259 1,689 436 33,794 1992* 127 40 31 8,751 3,572 1,694 198 14,017 wTrough May 7, 1992. Source: US Department of Agriculture, Foreign Agricultural Service and World Bank calculations. 135 Figure 14: Oilseed production in Western Europe 1958-91 14 M oAINur W &rope 12 10 2- 58 60 82 84 46 88 70 72 74 76 78 80 82 84 BS 88 90 50 61 63 65 87 48 71 73 75 77 78 81 83 65 87 89 t1 1n-I. 198-1977, (0-12 I,7l-41. Source: Oil World. prices rise; however, in recent years, EC farmers have consistently received more than double international prices. The EC offers support through other related programs, including subsidies on production, consumption, and trade in olive oil; subsidies encouraging the utilization of peas, beans, and other protein crops as substitutes for imported protein meals; subsidies to encourage the use of nonfat dry milk in poultry and livestock feed; and subsidies on butter and butter oil exports. As oilseed prices fell to the lows of 1986 and 1987, a crisis developed in the EC budget as the costs of various oil/meal programs rose from 2 billion ECUs in 1979 to 6 billion ECUs in 1987 while the EC budget deficit grew to over 4 billion ECUs. In February 1988, the EC farm ministers announced Maximum Guaranteed Quantity levels (MGQs) for several grains and oilseeds. In addition, the Agricultural Commission revealed the details of a land set-aside program which would pay a premium of between 100 ECUs and 600 ECUs/ha to farmers who placed their land under conservation. Under the reforms, the EC intervention price for each commodity-the price at which the EC stands ready to buy-would be reduced by 0.5%1 for every 1% of production in excess of the corresponding MGQ. After initially setting the MGQs at 3.5 million tons for rapeseed, 1.7 million tons for sunflowerseed, and 1.3 million tons for soybeans in 1988/89, the MGQs were raised for rapeseed and sunflowerseed to 4.5 million tons and 1.6 million tons, respectively,in 1989/90 and were held constant for 1990/91.' Current intervention prices for rapeseed, sunflowerseed, and soybeans remained unchanged in 1990/91 at 423, 556, and 508.9 ECUs/ton, respectively. EC producer prices still greatly exceeded international prices and the measures did little to curb production. In 1991, production again exceeded 12 million tons. 2 The penalty rate for the 1988/89 crop year was 0.45%. 3 Spain and Portugal are not included in the rapeseed and sunflowerseed MGQs, but face separately negotiated limits. 136 Pressure to reform oilseed policies grew, not only from a realization that the 1988 reforms had been unsuccessful, but also from a coincidental GATT panel ruling (see below) which declared the oilseed regime illegal under binding GATT agreements. In addition, more general discussions regarding changes in EC policy were ongoing as a way to both solve continued EC budget problems and to revitalize stalled discussions on the Uruguay Round GATT negotiations. In December 1991, the EC established a new support system for soybeans, rapeseed and sunflowerseed for crops harvested after 1991. The agreement established an EC reference price. Regional payments would be made through a complicated formula based on average "regional" yields from 1986 to 1991 for individual oilseeds. A maximum "guaranteed area" was established. Producers would receive directly a payment based on regional yields and area. Once total area limits were exceeded the direct payments were to be reduced. The maximum area for soybeans was set at 509,000 ha, and 2.37 million ha for rapeseed. Sunflowerseed areas were set at 1.411 million ha for Spain, 0.122 million ha for Portugal, and 1.202 million ha for the rest of the EC. A 1962 agreement and frther CAP reform complicate oilseed policies in the EC. In 1962, as part of the Dillon Round of Multilateral Trade negotiations, the EC granted duty-free access to the EC market for soybeans and soybean meal along with low-tariff access to vegetable oils, in return for other trade concessions. At the time, the EC had a large crushing industry, but little oilseed production. Following global oilseed shortages and a US embargo in the 1970s, the EC looked to establish domestic oilseed production. Since previous concessions precluded the normal tariff protection, the strategy of subsidizing oilseed production indirectly through crushing subsidies was established. In 1987, the United States filed a petition drafted by the American Soybean Association charging that EC policies with regard to protein meals and oilseeds-particularly the crushing subsidies-violated the GATT agreement. In 1989 a three-member GATT panel agreed with the US that such an arrangement circumvented the 1962 zero-binding-duty agreement and recommended that the EC be given time to correct the problem before considering awarding damages. In 1990, the EC accepted the GATT ruling and worked to negotiate the new support system described above. The United States responded by asking the panel to reconvene in January 1992. In March 1992, the panel ruled the new system continued to impair US benefits from the 1962 agreement and recommended that "the Community should act expeditiously to eliminate the impairment of the tariff concessions-either by modifying its new support system for oilseeds or by renegotiating its tariff concessions... In the event that the dispute is not resolved expeditiously in either of these ways, the Contracting Parties should, if so requested by the United States, consider further action...." The EC responded to the panel by asking for time to reconsider its position as discussions on a more general CAP reform were under way. In May 1992, the EC's Council of Ministers reached agreement on a CAP reform package. Under the agreement, starting in 1993/94, target market prices are to be cut by about 29%. Regional "base" areas are to be established based on average area in 1989-91. Farmers who agree to set aside 15% of their "base" will be eligible to receive direct payments based on average area yields. The full effect of the set-aside program will undoubtedly be less than a 15% reduction in output, however, as farmers with less than 20 ha are exempted from the set-aside. Additionally, European farmers will do what their American counterparts have done: dividing farms among family members to maximize the effects of the small farm exemption, setting aside less productive land, and using the set-aside period to replenish soil productivity. Oilseeds would come under the set-aside provisions, but the exact mechanics have yet to be announced. Generally, relative prices between oilseeds and cereals are expected to remain fairly constant and the shares of cultivated area are not expected to change. 137 Following the conclusion of the CAP negotiations, the EC's "113 Committee" on trade affairs recommended that the EC offer compensation to the United States rather than further modify its policy on oilseeds. The EC could compensate the United States by offering concessions on access to other parts of the EC market, but it is likely that the EC will attempt to bundle the oilseed compensation with Uruguay Round concessions. Linked to these discussions is the issue of corn gluten imports. The EC contends that the US subsidies which go into the gasohol program allow corn gluten, a gasohol by product, to compete with domestic EC grains at an unfair price. The EC may attempt to make concessions on the gluten issue, or may offer to accelerate the set-aside schedule announced in the May reforms. Compensation would also be offered to Argentina and Brazil. Meanwhile the American Soybean Association, which originally pushed for the GATT panel ruling, is vigorously arguing that US soybean farmers should benefit directly from any EC compensation since soybean farmers suffered the consequences of the EC oilseed policies. The United States is not required under GATT rules to wait for EC action and is considering a set of punitive tariffs. The US Trade Representative announced a list of EC exports including wines, cheeses, beers, seafood, gin, vermouth, brandy, cut flowers and cooking oils which have been targeted for tariff increases. After the "hit" list is available for public comment for one month, it will be pared down to $1 billion worth of products. The tariffs could potentially triple the cost of those products in the United States. CAP reform and the soybean "wars" have implications for the Uruguay Round. Generally, the proposed CAP reform has been viewed as a positive development for the successful conclusion of the Uruguay Round negotiations. Disputes between the United States and the EC over agriculture have threatened agreements reached in other areas and all sides view the reduction of EC price supports positively. At the same time, the CAP reforms did not resolve the oilseed issue which continues to generate animosity between the two trading partners. Additionally, the time spent on internal CAP- reform debate has stalled GATT negotiations to the point where the "GATT trigger" written into the US Farm Bill in 1989 has been activated. Under a provision of the Farm Bill, the US Department of Agriculture was obligated to spend an extra $1 billion on export refund programs for fiscal years 1994 and 1995 unless the Uruguay Round was concluded by June 30, 1992. In addition, the Secretary of Agriculture may waive any minimum set-aside program for any 1993-95 program crops. Another "trigger" set for June 30, 1993 would obligate the Secretary to consider further expanding the export programs and to provide increased price supports. India's oilseed policies have made vegetable oU expensive to consners while encouraging a diversion of land into olseed production. Following a successful program to increase cereal production in India in the 1970s, India launched a program to gain greater self-sufficiency in oilseed in the 1980s. In order to accomplish this goal, exclusive control over trade in oilseed and oilseed products was granted to the Indian State Trading Corporation (STC) which, by limiting imports, has pushed domestic vegetable oil prices substantially above world price levels. Since 1981, the wholesale price of groundnut oil has ranged between 138% and 314% of the cost of imported oil; cottonseed oil has ranged between 130% and 320% of world prices; and for rapeseed oil the range has been 186% to 493%. Figure 15 shows monthly average domestic wholesale prices in India and in northern Europe for groundnut, rapeseed, and soybean oil for 1991. As can be seen, the imposition of quantitative restrictions distorts relative prices as well. 138 High domestic prices have substantially limited demand growth in India, despite strong income growth (recall Table 6). On the other hand, after a decade of sustained above-world prices, oilseed supplies in India have responded in recent years. There is little land in India which has not been cultivated so one of the effects of the pricing policy has been to divert land from other crops to oilseed production. Yields in recent years have been good, but remain highly dependent on weather patterns. When the monsoons are timely, as they were in 1988/89, yields and production climb; however, when rains are insufficient, as they were in 1987/88, production drops off, and imports climb (see Figure 16). Government controls not only affect consumers directly through high prices but also make for inefficient uses of oils in the country's domestic vanaspati industry. Vanaspati, a lard substitute, can be made from a variety of vegetable oils without affecting its taste or consistency. When a sustained drought drastically reduced the groundnut crop in 1987, the STC allowed imports of less expensive palm oil and subsidized soybean and rapeseed oil to compensate. However, in the period 1989-91, as the Indian groundnut crop recovered while the international price of groundnut oil rose, India chose not to trade expensive groundnut oil for inexpensive palm oil, but rather forced the local industry to make its vanaspati from domestic oils. The opportunity costs in terms of resource use and export revenues were substantial. Groundnut oil prices in Rotterdam averaged $775, $964 and $895/ton respectively, over the 1989-91 period, while palm oil sold for $350, $290 and $339/ton. In developing the price projection scenario, it was assumed that India would continue its pursuit of self-sufficiency in oilseeds. When shortfalls occur, India is likely to seek out less expensive vegetable oil sources again, as in 1988. Income gains will continue to push consumption levels beyond production gains, even when demand is rationed by high prices, so imports will continue to grow. However, imports and final consumption levels will remain below free-market levels. Figure 15: Monthly wholesale prices for selected Mgure 16: Oilseed production & vegetable oil oils in India and Europe, 1991 trade for India 2,200 s 2s 2. o00c- Iremese i1,200 U wo__ _ __ _ _ _ _ __ _ _ _ _ ro mwi n Sore Oil World. Souce U Wo 139 1e wordd mw*etfor grouadat oil w evndaw to dwta&e. Groundnt oil remains an important source of export revenue for many African countries, and yet, unlike many agricultural goods, groundnut oil is becoming more thinly traded (Figure 17). Trade in groundnut oil peaked i 1972, when 537,000 tons were exported worldwide. In recent years, despite slow growth In production, trade has remained fairly stable, at around 300-400,000 tons, and prospects for gains are not good. Of the 289,000 tons traded in 1991, 235,000 tons entered Europe, where demand has remained extremely stable. Slow population growth rates, stable consumption rates, and increasing consumption of sunflowerseed oil in Europe will all contribute to low, if not negative, growth rates in EC groundnut oil imports over the projection period. China and India, the world's largest consumers of groundnut oil, consume domestic production only, as does the United State, which exports groundnut oil. Ilgure 17: Werd trade in goundout eH 600. SM. 0 1970 1975 100 1185 1990 Soue: Oi World. As the international market for groundnut oil grows thinner, the international price of groundnut oil becomes less representative of the underlying value of the oil because markets become les efficient. This has several implications. While most vegetable oils have a ready and efficient international market that producers can supply, groundnt oil does not. For project evaluation, consideration must be given not only to production costs and market prices, but to marketing, as well. For exporting countries attempting to manage export revenue risk, thinly traded markets reduce risk- hedging options, and long-term marketing arrangements become much more important. 140 Table Al: Soybeans (Oil Equiv.) - Production By Main Countries and Economic Regions Actual Projected Growth Rates a/ Averages Countries/ ..-..-..---..--.- 1991- Economies 1969-71 1979-81 1990 1991 b/ 1992 1993 1994 1995 2000 2005 1961-90 1970-90 2005 -------------------------------------('000 Tons)----- ----------------------------- -------(% p.a.)------ High-Income 5,380 9,492 9,531 9,904 10,196 9,969 10,069 10,069 11,369 12,769 4.1 2.7 1.8 OECD 5,369 9,489 9,530 9,903 10,195 9,968 10,068 10,068 11,368 12 768 4.1 2.7 1.8 United States 5,300 9,326 8,891 9,435 9,727 9,500 9,600 9,600 10,900 12,300 4.0 2.5 1.9 LNICs 2,049 5,116 8,826 8,724 8,924 9,231 9,431 10,031 10,831 13,683 7.4 7.5 3.2 Americas 342 3,146 5,764 5,290 5,849 5,665 6,028 6,490 7,150 9,020 19.0 12.6 3.8 Brazil 263 2,300 3,458 2,721 3,392 3,200 3,500 3,800 4,000 5,100 18.2 10.7 4.5 Argentina 7. 612 1,827 2,088 1,926 1,950 1,980 2,100 2,500 3,100 35.2 30.7 2.8 Asia & Pacific 1,585 1,715 2,732 3,244 2,925 3,406 3,243 3,361 3,441 4,363 2.5 3.5 2.1 China, People's Rep. 1,414 1,401 1,870 1,980 1,764 1,850 1,990 2,000 2,400 3,010 1.8 2.5 3.0 Europe 110 187 238 190 150 160 160 180 240 300 5.3 5.0 3.3 W Morld 7,429 14,608 18,357 18,628 19,120 19,200 19,500 20,100 22,200 26,452 5.3 4.5 2.5 a/ Least squares trend for historical periods (1961-90); end-point for projected periods (1991-2005). b/ Estimate. Sources: USDA Foreign Agricultural Service (actual); World Bank, International Economics Department (projected). Table A2: soybeans (Of I Equiv.) - Apparent Consutf an By Nein Countrf es and Economic Regions Actual Projected Growth Rates a/ Averages Conmtries/ 1991- Economies 1969-71 1979-81 1990 1991 b/ 1992 1993 1994 1995 2000 2005 1961-90 1970-90 2005 (--------(000Tons)----- --------( p.a.)-------- High-Income 4,515 7,625 9,257 9,594 9,852 9,757 9,785 9,956 10,184 10,986 3.8 2.8 1.0 OECD 4,340 7,319 8,825 9,094 9,383 9,248 9,275 9,437 9,653 10,463 3.8 2.7 1.0 United States 2,631 4,459 5,999 5,591 5,800 5,700 5,700 5,800 5,900 6,400 3.6 3.1 1.0 Japan 531 776 779 775 780 780 800 820 880 980 4.2 2.3 1.7 LNICs 2,642 6,838 8,777 8,706 9,268 9,443 9,715 10,144 12,016 15,466 7.3 6.8 4.1 Americas 416 2,237 3,091 3,080 3,024 3,066 3,234 3,374 4,410 4,739 14.2 9.6 3.1 Brazil 216 1,402 1,878 2,000 1,980 1,990 2,100 2,200 2,900 3,200 16.3 10.0 3.4 Argentina 7 85 192 200 180 200 210 210 250 310 20.7 16.8 3.1 Asia & Pacific 1,754 2,875 3,712 4,826 5,44 5,527 5,581 5,670 6,406 8,500 4.5 4.9 4.0 China, People's Rep. 1,345 1,550 2,075 2,380 2,164 2,250 2,390 2,400 2,800 3,410 2.3 2.8 2.6 Europe 259 911 1,011 800 800 850 900 1,100 1,200 1,500 8.7 7.9 4.5 World 7,157 14,462 18,034 18,300 19,120 19,200 19,500 20,100 22,200 26,452 5.3 4.6 2.6 ------------------------------------------------------------------------------------------------------------------------------- a/ Least squares trend for historical periods (1961-90); end-point for projected periods (1991-2005). b/ Estimate. Sources: USDA Foreign Agricultural Service (actual); World Bank, International Economics Department (projected). Table A3: Soybeans (01L Equiv.) - Gross Exports By Main Countries and Economic Regions Actual Projected Growth Rates a/ Averages Countries/ 1991- Economies 1969-71 1979-81 1990 1991 h/ 1992 1993 1994 1995 2000 2005 1961-90 1970-90 2005 ---- -----------------------------------(0000 Tons)-----*----------------------- ------(S p.e.)------ Migh-Income 3,111 6,291 4.291 6,004 6,067 6,161 6,262 6.161 7,171 8,060 5.5 2.5 2.1 OECD 3,086 6,272 4,184 5,944 6,027 6,100 6,200 6,100 7,100 8000 5.5 2.4 2.1 United States 2,668 4,867 2,909 3,844 3,927 3,800 3,900 3,800 5,000 5,900 4.5 1.6 3.1 LNICs 148 1,752 3,931 3,288 4,024 3.772 4,060 4,483 4,319 6.257 17.0 15.8 4.6 Americas 52 1,648 3,568 2,949 3,629 3,389 3,641 4 015 3,806 5,368 29.9 18.5 4.3 Brauil 50 1,035 1,604 793 1,553 1,331 1,540 1.760 1,210 2,090 13.4 6.9 Argentina - 527 1,636 1,888 1,746 1,750 1,770 1,890 2,250 2,790 2.6 Europe 20 61 47 40 30 40 50 60 120 320 16.0 13.3 14.9 world 3,259 8,042 8,222 9,291 10.112 9,933 10,322 10,644 11,490 14,337 7.5 5.1 3.1 al Least squares trend for historical periods (1961-90); end-point for projected periods (1991-2005). bl Estimate. Sources: USDA Foreign Agricultural Service (actuat); World Sank, International Economics Department (projected). Table A4: Soybeans (011 Equiv.) - Grss Igports Sy Main Cowntries and Economic Regione Actual Projected Groth Rates a/ Averages Countrims/ 1991- Economies 1969-71 1979-81 1990 1991 b/ 1992 1993 1994 1995 2000 2005 1961-90 1970-90 2005 ................... ---- -- - ------------- ---..........--- -- --------0 -Tn----------------------------------------------------(--p.a.---------- Nigh-Incm 2,246 4,423 4,017 4,344 4,200 4,350 4,440 4,500 4,610 5,010 5.3 2.7 1.0 OECD 2,057 4,102 3,479 3,692 3,570 3,698 3,774 3,25 3,919 3,858 5.1 2.3 0.3 Japen 519 751 742 740 745 745 710 800 880 960 4.6 2.1 2.0 LNica 741 3,473 3,802 3,645 4,135 3,978 4,189 4,442 5,020 6,572 11.6 9.6 4.2 A~ricam 126 739 896 890 880 980 1,010 1,200 1,340 1,450 12.4 10.8 3.5 Asfa & Pacffic 243 1,201 1,292 1,954 2,665 2,48 2,59 2.552 2,790 4,132 13.8 11.0 5.3 Europ 170 784 821 801 590 590 640 690 890 990 11.1 9.4 1.5 world 2,967 7,896 7,899 9,291 10,112 9,933 10.322 10.644 11,490 14,337 7.4 5.3 3.1 ................----------------------- .-------------------------------------------------------------- -------------- 9/ Leest squares trend for historical period. (1961-90); end-point for projected period& (1991-2005>. bl Estimate. Sources: USDA Foreign Agriculturat Service (actuet); World Bank, International Economics Depertment (projected). Table A5: Soybeans (Meat Equiv.) - Production By Main Countries and Economic Regions ------------------------------------------------------------------------------------------------------------------------------- Actual Projected Growth Rates a/ --------------------------- ---------------------------------------------------- -------------------------- Averages Countries/ ----------------- 1991- Economies 1969-71 1979-81 1990 1991 b/ 1992 1993 1994 1995 2000 2005 1961-90 1970-90 2005 ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------('000 Tons)---------------------------------- --------(% p.a.)------ High-Income 25,463 44,949 45,134 44,018 45,316 44,307 44,751 44,751 50,529 56,751 4.1 2.7 1.8 OECD 25,411 44,935 45,127 44,014 45,311 44,302 44,747 44,747 50,524 56,747 4.1 2.7 1.8 United States 25,095 44,163 42,103 41,934 43,231 42,222 42,667 42,667 48,444 54,667 4.0 2.5 1.9 LMICs 9,754 24,226 41,794 38,774 39,664 41,027 41,916 44,582 48,138 60,813 7.4 7.5 3.2 Americas 1,613 14,898 27,292 23,510 25,997 25,178 26,791 28,844 31,7T 40,089 19.1 12.7 3.8 Brazil 1,246 10,893 16,374 12,093 15,074 14,222 15,556 16,889 17,778 22,667 18.3 10.9 4.5 Argentina 32 2,898 8,654 9,280 8,560 8,667 8,800 9,333 11,111 13,778 35.2 30.7 2.8 Asia & Pacific 7,541 8,120 12,936 14,419 13,000 15,138 14,413 14,938 15,293 19,391 2.5 3.5 2.1 China, People's Rep. 6,695 6,635 8,855 8,800 7,840 8,222 8,844 8,889 10,667 13,378 1.8 2.5 3.0 Europe 521 887 1,125 844 667 711 711 800 1,067 1,333 5.3 4.9 3.3 World 35,217 69,175 86,928 82,792 84,979 85,333 86,667 89,333 96,667 117,564 5.3 4.5 2.5 ------------------------------------------------------------------------------------------------------------------------------- a/ Least squares trend for historical periods (1961-90); end-point for projected periods (1991-2005). b/ Estimate. Sources: USDA Foreign Agricultural Service (actual); World Bank, International Economics Department (projected). Table A6: Soybeans (Neat Equfv.) - Apparent Consumption By Main Countries and Economic Regions Actust Projected Growth Rates a/ Averages Countries/ 1991- Economies 1969-71 1979-81 1990 1991 b/ 1992 1993 1994 1995 2000 2005 1961-90 1970-90 2005 ----('000 Tons) ---------------------------------- ---------(% p.a.)------ High-Income 25,757 45,339 54,909 53,009 51,991 53,460 54,648 52,580 56,511 62,597 4.7 3.6 1.2 OECD 25,011 43,973 52,622 46,095 44,820 48,600 49,680 49,140 53,820 57,960 4.6 3.5 1.6 United States 12,972 19,159 25,179 21,096 21,100 23,000 23,500 23,000 25,100 27,100 2.8 2.9 1.8 Japar- 2,576 3,822 4,377 3,820 3,800 4,000 4,100 4,300 4,800 5,100 4.4 2.8 2.1 LMICs 9,773 23,770 31,831 29,783 32,988 31,873 32,019 36,754 42,156 54,968 6.8 6.6 4.4 Americas 1,042 6,357 8,701 7,514 8,500 8,300 8,600 8,800 10,200 12,800 14.7 10.6 3.8 Brazil 454 3,508 3,983 3,084 3,400 3,800 4,000 4,200 4,600 5,300 14.8 10.7 3.9 Argentina 32 458 955 1,100 980 1,100 1,100 1,200 1,350 1,600 21.4 13.9 2.7 Asia & Pacific 7,256 9,428 11,843 15,169 17,688 16,473 15,219 17,854 19,556 27,968 2.8 3.2 4.4 China, PeopLe's Rep. 6,301 6,836 6,050 6,160 5,488 5,756 6,191 6,222 7,467 9,364 0.8 0.4 3.0 Europe 1,384 6,925 8,970 7,100 6,800 7,100 8,200 10,100 12,400 14,200 12.7 9.1 5.0 WorLd 35,531 69,109 86,740 82,792 84,979 85,333 86,667 89,333 98,667 117,564 5.3 4.6 2.5 a/ Least squares trend for historical periods (1961-90); end-point for projected periods (1991-2005). b/ Estimate. Sources: USDA Foreign Agricultural Service (actuaL); World Bank, InternationaL Economics Department (projected). Table A7: Soybeans (Neat Equiv.) - Gross Exports By Main Countries and Economic Regions Actual Projected Growth Rates at Averages Countries/ --------- 991- Economies 1969-71 1979-81 1990 1991 b/ 1992 1993 1994 1995 2000 2005 1961-90 1970-90 2005 . .**.**--.(000 Torn) --- --------(Z p.m.)--*--- Nigh-Incom 13,269 29,674 21,476 26,177 27,802 24,148 24,076 24.706 28,857 33,245 6.1 2.8 1.7 OECD 13,214 29,531 21,339 26,047 27,664 24,028 23,958 24,583 28,714 33,080 6.1 2.8 1.7 United States 12,123 25,004 16,986 20,838 22,131 19,222 19,167 19,667 23,344 27,567 5.6 2.1 2.0 LNICs 1,256 11,239 26,140 23,498 25,735 24,492 26,015 27,596 33,303 41,996 17.6 14.6 4.1 Americas 823 10,724 21,714 18,478 20,698 19,338 20,700 22,384 24,659 31,760 23.5 14.6 3.9 Brazil 792 7,831 12,391 9,009 11,674 10,422 11,556 12,689 13,178 17,367 21.3 11.3 4.7 Argentina - 2,440 7,699 8,180 7,580 7,567 7,700 8,133 9,761 12,178 2.8 Asia & Pacific 407 441 4,270 4,769 4,785 4,896 5,050 4,954 8,211 9,724 8.9 17.6 5.1 WorLd 14,525 40,914 47,615 49,675 53,537 48,640 50,093 52,305 62,160 75,241 8.6 6.0 3.0 ---------------------------------------------------------------------------------------------------------------------------------------------------------------------- a/ Least squares trend for historical periods (1961-90); end-point for projected periods (1991-2005). b/ Estimate. Sources: USDA Foreign Agriculturat Service (actual); WorLd Bank, International Economics Department (projected). Table A8: Soybeans (Meat Equtv.) - Gross Imports By Main Countries and Economic Regions Actual Projected Growth Rates a/ Averages Countries/ - v---- e------- 1991- Economies 1969-71 1979-81 1990 1991 b/ 1992 1993 1994 1995 2000 2005 1961-90 1970-90 2005 ---- -----------------------------------(000 Tons) ---------------------------------- --------(% p.a.)------ High-Income 13,563 30,064 31,251 32,786 33,728 32,102 33,062 33,475 32,945 36,116 7.0 4.3 0.7 OECD 12,814 28,569 28,834 29,613 30,464 28,996 29,862 30,235 29,757 32,621 6.9 4.1 0.7 Japan 2,473 3,670 4,202 4,400 4,400 4,500 4,500 4,600 4,800 5,520 4.9 2.6 1.6 LMICs 1,275 10,783 16,177 16,176 16,890 19,809 16,538 17,032 18,830 29,215 18.2 13.2 4.2 Americas 251 2,183 3,123 3,033 3,167 3,714 3,101 3,193 3,531 5,210 17.7 15.1 3.9 Asia & Pacific 122 1,749 3,176 4,044 4,222 4,952 4,134 4,258 4,707 7,304 21.1 18.6 4.2 Europe 879 6,051 7,991 7,077 6,334 7,428 6,202 6,387 7,061 10,956 17.1 10.4 3.1 World 14,838 40,847 47,427 49,675 53,537 48,640 50,093 52,305 62,160 75,241 8.7 6.1 3.0 a/ Least squares trend for historical periods (1961-90); end-point for projected periods (1991-2005). b/ Estimate. Sources: USDA Foreign Agricultural Service (actual); World Bank, International Economics Department (projected). Tablo A9: Pale Oil * Production By Main Countries and Economic Regions Actual Projected Growth Rates a/ COamtries/ Averages 199- Economies 1969-71 1979-81 1990 1991 b/ 1992 1993 1994 1995 2000 2005 1961-90 1970-90 2005 --('000 Tons)---------------------------------- --------(z p.a.)-------- High-Income 0 0 0 0 0 0 0 0 0 0 L1MICs 2,090 5,033 11,181 12,112 13,152 13,968 14,589 15,480 19,188 23,384 7.9 9.0 4.1 Africa 1,178 1,338 1,688 1,795 1,832 1,848 1,881 1,980 2,343 2,574 1.4 1.9 2.4 Nigeria 587 667 820 820 830 840 850 900 1,100 1,200 0.9 2.0 2.6 Cote d'Ivoire 46 158 214 268 280 280 290 300 320 360 11.3 5.1 1.8 Americas 107 191 629 630 650 680 720 900 1,200 1,700 7.7 10.4 6.9 Asia & Pacific 805 3,504 8,864 9,687 10,670 11,440 11,988 12,600 15,645 19,110 14.0 12.6 4.2 Malaysia 457 2,529 6,095 6,141 6,700 7,100 7,500 8,000 9,500 11,000 16.7 13.4 3.5 Indonesia 219 721 2,111 2,665 3,000 3,300 3,600 4,000 5,400 7,200 10.7 12.3 6.3 World 2,090 5,033 11,181 12,112 13,152 13,968 14,589 15,480 19,188 23,384 7.9 9.0 4.1 4--------------------------------------------------------------------------------------------------------------------------------------------.------------------------- s/ Least squares trend for historical periods (1961-90); end-point for projected periods (1991-2005). b/ Estimate. Sources: FAO, Trade Yearbook Tapes (actuat); World Bank, international Economics Department (projected). Table AID: Palm Ofi - Apparent Consumption By Main Countries and Economic Regions Actual Projected Growth Rates a/ Averages Countries/ ------------ 1991- Economies 1969-71 1979-81 1990 1991 b/ 1992 1993 1994 1995 2000 2005 1961-90 1970-90 2005 ---- -----------------------------------(000 Tons)----- ----------------------------- --------( p.e.)------ High-Income 663 1,025 2,189 2,985 3,473 3,838 3,809 3,690 4,248 4,996 5.4 3.7 2.6 OECD 653 987 1,878 2,010 2,672 2,952 2,930 2,838 3,268 3,843 4.9 3.1 2.6 United States 80 128 182 120 150 170 180 200 240 300 10.8 0.4 5.0 LMICs 1,422 3,881 8,705 9,127 9,679 10,130 10,780 11,790 14,940 18,388 8.5 10.7 4.6 Africa 1,014 1,409 1,831 1,900 1,950 1,950 1,980 2,100 2,500 3,100 3.1 3.5 3.3 Nigeria 575 723 828 820 830 840 850 900 1,100 1,200 2.1 2.6 2.6 Cote d'Ivoire 33 88 79 91 110 120 140 160 280 360 8.1 6.4 8.5 Americas 108 197 717 720 800 850 910 1,200 1,900 2,500 7.6 10.1 8.1 Asia & Pacific 190 1,917 4,985 5,417 5,699 6,020 6,510 7,070 8,540 10,248 17.4 19.2 4.2 China, People's Rep. 113 206 1,274 1,207 1,340 1,350 1,420 1,610 2,100 2,100 10.2 9.4 3.2 Indonesia 36 375 1,041 1,220 1,330 1,380 1,440 1,590 1,800 2,300 25.5 3.9 o Pakistan 1 215 597 875 880 870 890 900 1,100 1,200 2.2 India 0 525 668 309 380 700 900 950 1,100 1,720 10.8 Europe 26 160 478 380 510 560 600 620 1,100 1,580 14.7 18.3 8.1 Middle East & North Africa 84 198 694 710 720 750 780 800 900 960 11.3 11.9 2.1 Iraq 78 134 223 60 120 250 350 410 550 710 8.7 7.2 12.7 World 2,085 4,906 10,894 12,112 13,152 13,968 14,589 15,480 19,188 23,384 7.8 8.8 4.1 a/ Least squares trend for historical periods (1961-90); end-point for projected periods (1991-2005). b/ Estimate. Sources: FAO, Trade Yearbook Tapes (actual); World Bank, International Economics Department (projected). Table All: Palm Oil - Gross Exports By Main Countries and Economic Regions --------- ----------------------------------------------------------------------------------------------------------------------------- Actual Projected Growth Rates a/ --------------------------------------- ---------------------------------------------------- -------------------------- Averages Countries/ 1991- Economies 1969-71 1979-81 1990 1991 b/ 1992 1993 1994 1995 2000 2005 1961-90 1970-90 2005 --------------------------------------------------------------------------------------------------------------------------------------- ---- ----------------------------------(000 Tons)----------------------------------- --------(p.a.)-------- High-Income 184 618 867 1,186 1,351 1,493 1,481 1,435 1,652 2,027 11.7 8.2 2.9 OECD 37 110 200 250 285 315 312 303 348 385 9.7 6.6 2.1 Non-OECD 147 508 667 936 1,066 1,178 1,169 1,132 1,304 1,643 12.4 8.8 3.1 Singapore 147 508 625 908 1,034 1,143 1,134 1,098 1,265 1,593 12.2 8.5 3.1 LMICs 818 2,612 7,016 7,435 8,415 9,251 9,670 9,982 12,471 15,516 10.3 10.8 4.4 Africa 186 96 193 185 190 190 190 190 160 155 -3.9 -2.2 -1.5 Asia & Pacific 626 2,512 6,775 7,045 7,587 8,510 9,265 9,587 11,880 14,828 13.7 11.9 4.8 Malaysia 444 2,102 5,468 5,395 5,421 5,960 6,340 6,720 7,200 8,580 16.0 12.8 3.3 Indonesia 182 357 1,097 1,445 1,670 1,920 2,160 2,410 3,600 4,900 7.5 7.4 7.7 World 1,002 3,230 7,884 8,621 9,766 10,744 11,151 11,417 14,123 17,543 10.5 10.4 4.2 Ln --------------------------------------------------------------------------------------------------------------------------------------------------------------------- a/ Least squares trend for historical periods (1961-90); end-point for projected periods (1991-2005). b/ Estimate. Sources: FAD, Trade Yearbook Tapes (actual); World Bank, International Economics Department (projected). Table A12: Patm Oit - Gross Imports By Main Countries and Economic Regions Actual Projected Growth Rates a/ Averages Countries/ 1991- Economies 1969-71 1979-81 1990 1991 b/ 1992 1993 1994 1995 2000 2005 1961-90 1970-90 2005 ---- ----------------------------------('000 Tons)---------------------------------- --------(% p.e.)------ Nigh-Income 846 1,643 3,057 4,179 4,862 5,373 5,333 5,166 5,947 6,994 6.8 5.0 2.6 OECD 690 1.096 2,078 2,786 3,241 3,582 3,555 3,444 3,965 4,663 5.2 3.4 2.6 United States 80 128 184 120 150 170 180 200 240 300 10.9 0.5 5.0 Japan 41 143 276 320 330 350 360 380 420 510 11.5 7.9 3.1 LNICs 150 1,460 4,540 4,441 4,904 5,371 5,819 6,251 8,176 10,549 16.9 20.0 5.5 Africa 23 167 336 252 284 245 238 288 377 1,262 16.3 16.7 10.6 Asia & Pacific 11 925 2,896 2,869 3,120 3,504 3,852 4,152 5,160 6,024 23.3 31.5 4.7 China, People's Rep. - 40 1,133 1,207 1,340 1,350 1,420 1,610 2,100 2,100 3.2 Pakistan 1 215 597 875 880 870 890 900 1,100 1,200 2.2 India 0 525 669 309 380 700 900 950 1,100 1,720 24.6 46.9 10.8 Europe 27 160 478 399 546 616 672 713 1,350 1,800 14.6 18.2 8.5 Middle East & North Africa 84 198 694 710 720 750 780 800 900 960 11.3 11.9 2.1 Iraq 78 134 223 60 120 250 350 410 550 710 8.7 7.2 12.7 World 997 3,103 7,597 8,621 9,766 10,744 11,151 11,417 14,123 17,543 10.3 10.1 4.2 a/ Least squares trend for historical periods (1961-90); end-point for projected periods (1991-2005). b/ Estimate. Sources: FAO, Trade Yearbook Tapes (actual); World Bank, International Economics Department (projected). Table A13: Copra - Production By Main Countries and Economic Regions Actual Projected Growth Rates a/ Averages Countries/ ----------------- 1991- Economies 1969-71 1979-81 1990 1991 b/ 1992 1993 1994 1995 2000 2005 1961-90 1970-90 2005 ----------------------------------('000 Tons) ---------------------------------- --------(% p.a.)------ High-Income 24 0 0 0 0 0 0 0 0 0 OECD 0 0 0 0 0 0 0 0 0 0 LMICs 3,593 4,274 4,604 4,737 4,372 4,419 4,610 4,743 4,722 4,772 1.1 0.6 0.1 Africa 152 154 201 210 220 230 200 200 220 240 0.9 1.2 1.0 Americas 231 197 228 244 265 280 260 270 280 280 -1.6 -1.4 1.0 Asia & Pacific 3,211 3,924 4,175 4,283 3,887 3,909 4,150 4,273 4,222 4,252 1.3 0.7 -0.1 Philippines 1,334 1,921 1,967 1,950 1,700 1,600 1,890 1,880 1,680 1,590 1.6 0.7 -1.5 Indonesia 801 1,161 1,320 1,275 1,150 1,200 1,200 1,300 1,490 1,550 3.1 2.5 1.4 India 356 325 350 420 400 425 425 425 400 400 0.4 -0.5 -0.3 Malaysia 174 210 115 92 90 90 90 90 80 70 -0.7 -1.7 -2.0 Sri Lanka 204 131 128 87 100 99 100 120 120 120 -3.3 -1.9 2.3 World 3,617 4,274 4,604 4,737 4,372 4,419 4,619 4,743 4,722 4,772 1.0 0.6 0.1 a/ Least squares trend for historical periods (1961-90); end-point for projected periods (1991-2005). b/ Estimate. Sources: FAO, Trade Yearbook Tapes (actual); World Bank, International Economics Department (projected). Table A14: Copra (Oft Equf v.) - Apparent Consumption By Nein Countries and Economic Regions Actual Projected Growth Rates a/ Averages Countries/ ..---.-.-.--.---- 1991- Economfes 1969-71 1979-81 1990 1991 b/ 1992 1993 1994 1995 2000 2005 1961-90 1970-90 2005 -------(000 Tons)---- --------(% p.a.)-------- High-Income 972 1,115 1,181 1,192 1,023 1,021 1,116 1,166 1,133 1,073 0.3 0.3 -0.8 OECD 974 1,104 1,155 1,122 1,003 1,001 1,093 1,142 1,111 1,052 0.3 0.3 -0.5 United States 386 429 425 400 394 380 400 400 410 430 1.0 0.5 0.5 LNICs 1,184 1,614 1,648 1,650 1,600 1,630 1,650 1,680 1,700 1,790 2.0 1.3 0.6 Americas 148 128 161 155 160 155 161 161 165 172 -1.9 -1.4 0.7 Asia & Pacific 932 1,317 1,285 1,435 1,375 1,405 1,418 1,447 1,445 1,518 2.6 1.6 0.4 Philippines 130 155 173 294 291 270 280 280 340 375 2.3 1.7 Indonesia 388 676 598 557 600 570 610 640 700 780 3.7 1.9 2.4 India 224 227 215 252 240 255 255 255 240 240 -0.2 -0.5 -0.3 Sri Lanka 50 60 60 55 53 50 55 58 62 65 0.5 0.3 1.2 Europe 42 89 71 60 65 70 71 72 90 100 2.1 0.2 3.6 World 2,156 2,729 2,829 2,842 2,623 2,651 2,766 2,846 2,833 2,863 1.3 0.9 0.1 a/ Least squares trend for historical periods (1961-90); end-point for projected periods (1991-2005). b/ Estimate. Sources: FAD, Trade Yearbook Tapes (actual); World Bank, International Economics Department (projected). Table A1S: Copra (OIL Equiv.) - Gross Exports By Main Countries and Economic Regions -------------------------------------------------------------------------------------------------------------------------------------- Actual Projected Growth Rates a/ -------------------------------------- ---------------------------------------------------- -------------------------- Averages Countries/ ----------------- 1991- Economies 1969-71 1979-81 1990 1991 b/ 1992 1993 1994 1995 2000 2005 1961-90 1970-90 2005 ----------------------------------------------------------------- -------------------------------------------------------------------- -------------------------------------('000 Tons)---------------------------------- --------(% p.a.)------ High-Income 129 125 171 157 145 139 132 129 112 107 1.3 -1.2 -2.7 OECD 75 58 118 110 98 95 90 90 90 85 1.9 -1.9 -1.8 Non-OECD 54 67 53 47 47 44 42 32 22 22 0.4 0.3 -5.4 Singapore 44 67 48 45 45 42 40 30 20 20 2.0 1.6 -5.8 LMICs 1,129 1,221 1,409 1,194 1,180 1,126 1,256 1,260 1.239 1.168 0.0 0.0 -0.2 Asia & Pacific 1,058 1,180 1,362 1,126 1,114 1,062 1,185 1,189 1,169 1,043 0.1 0.1 -0.5 Malaysia 54 87 84 61 59 59 59 59 53 46 1.0 2.4 -2.0 Sri Lanka 73 18 16 2 7 9 5 14 10 7 -6.8 -4.3 8.9 Philippines 671 998 1,007 876 729 690 854 848 668 579 1.1 0.3 -3.0 World 1,258 1,346 1,580 1,351 1,325 1,265 1,388 1,389 1,351 1,275 0.1 -0.1 -0.4 U1 1--n------------------------------------------------------------------------------------------------------- a/ Least squares trend for historical periods (1961-90); end-point for projected periods (1991-2005). b/ Estimate. Sources: FAD, Trade Yearbook Tapes (actual); World Bank, International Economics Department (projected). Table A16: Copra (OiL Equiv.) - Gross Imports By Main Countries and Economic Regions Actual Projected Growth Rates a/ Averages Countries/ ----------------- 1991 Economies 1969-71 1979-81 1990 1991 b/ 1992 1993 1994 1995 2000 2005 1961-90 1970-90 2005 --------------------------------------(000Tons)----------------('00-Tns-------- ----(0 o--- ------ (-- --------( p.a.) High-Income 1.086 1,241 1,352 1,252 1,177 1,175 1,227 1,282 1,247 1,181 0.5 0.2 -0.4 OECD 1,048 1,163 1,273 1,234 1,103 1,101 1,203 1,257 1,222 1,157 0.4 0.1 -0.5 United States 392 437 450 400 394 380 400 400 410 430 1.1 0.7 0.5 LNICs 157 270 295 99 149 90 160 107 105 95 0.9 1.7 -0.3 Africa 22 13 29 12 12 14 14 15 18 22 -0.2 -1.5 4.3 Americas 18 17 26 18 17 16 17 19 21 25 -3.7 -2.2 2.3 Asia A Pacific 63 143 142 146 37 87 46 106 62 80 1.3 3.6 -4.3 China, Peopl's Rep. 26 26 30 0 10 10 10 10 0 0 2.1 2.1 0.0 WorLd 1,243 1,511 1,646 1,351 1,325 1,265 1,388 1,389 1,351 1,275 0.5 0.4 -0.4 a/ Least squares trend for historicat periods (1961-90); end-point for projected periods (1991-2005). b/ Estimate. Sources: FA, Trade Yearbook Tapes (actuat); World Bank, International Economics Department (projected). Tabl* A17: ayean - Prl% of 19501 (A~ual) an 1992-2005 (P~jectd) Cura~n I 1990 C0anat $ - -5MUVb/ G-7 CPI c/ 1950 114 698 919 1951 146 775 1,063 1952 112 568 782 1953 119 620 824 1954 122 650 832 1955 111 581 754 1956 116 586 771 1957 106 524 690 1958 95 462 607 1959 94 464 601 1960 92 444 578 1961 111 527 681 1962 100 466 597 1963 110 522 636 1964 110 513 620 1965 117 542 639 1966 126 564 665 1967 112 495 576 1968 106 473 531 1969 103 436 494 1970 117 466 529 1971 126 477 534 1972 140 486 538 1973 290 869 974 1974 277 681 840 1975 220 486 594 1976 231 504 604 1977 280 556 662 1978 268 463 518 1979 298 454 543 1980 296 412 483 1981 288 399 467 1982 245 344 401 1983 282 405 454 1984 282 414 456 1985 224 327 355 1986 208 257 273 1987 216 243 251 1988 304 318 328 1989 275 291 298 1990 247 247 247 1991 240 235 228 1992 235 221 210 1993 248 224 214 1994 263 234 222 1995 270 234 222 2000 300 219 204 2005 368 234 210 a/ US No. 2, bulk, ci.f. Ra a. b/ Defiatd by -5 Ma~iaung Uni Valu (MUV) Idex. c/ Ddof by G-7 Coanur Pri~s bdx (CPl). sourec: Oiorld (ctua~ ; Wod Bank, lantrnonau Bu=ma Dpur~nit (projcted). 157 Table Al8: Soban Ol - Prics, a/ 195041 ctual) and 1992-2005{ d ~mjecd) Currn - 1990 COam S - -5MUVb/ G-7CPIc/ 1950 314 1,923 2,532 1951 375 1,992 2,729 1952 380 1,926 2,652 1953 410 2,138 2,837 1954 333 1,776 2,270 1955 294 1,538 1,997 1956 339 1,712 2,254 1957 306 1,514 1,991 1958 254 1,235 1,622 1959 235 1,159 1,504 1960 225 1,087 1,412 1961 287 1,363 1,761 1962 227 1,057 1,354 1963 223 1,059 1,289 1964 205 957 1,155 1965 270 1,251 1,474 1966 261 1,168 1,378 1967 216 956 1,112 1968 178 795 891 1969 228 966 1,094 1970 307 1,224 1,389 1971 323 1,222 1,369 1972 270 937 1,037 1973 465 1,393 1,563 1974 795 1,955 2,412 1975 619 1,369 1,672 1976 438 956 1,145 1977 576 1,144 1,362 1978 607 1,048 1,171 1979 662 1,009 1,207 1980 597 829 973 1981 507 701 820 1982 447 629 733 1983 527 758 850 1984 724 1,064 1,171 1985 572 834 906 1986 342 423 449 1987 334 376 388 1988 463 486 500 1989 432 456 468 1990 447 447 447 1991 454 445 432 Proio~te 1992 430 404 385 1993 460 416 398 1994 499 443 422 1995 500 433 411 2000 562 409 383 2005 590 374 336 a/ For 1950-75, US, crude, buk, ej.f.1otrdam &om 1976 o~wazd, D onc, crude, f.o.b. ex-wil. bl Dflated by G-5 Manufacturng Uni Valu. (bfUV) Idsx. el Deflatd by 0-7 Conmor Pric Index (CPI). Source: il Wod (acua); Wodd Bank, Intenaional Eonm Dopat~t (projected). 158 Table A19: 80saMast-_Pril ati50-91 tA.mmu a 192aOlldum CunEGIs -1-990 c.gg 8 - m mVbi -7 CPH / 1950 95 582 766 1951 125 664 910 1952 100 507 698 1953 108 563 747 1954 89 475 607 1955 77 403 523 1956 76 384 505 1957 78 386 507 1958 74 360 473 1959 73 360 467 1960 78 377 490 1961 81 385 497 1962 89 414 531 1963 91 432 526 1964 89 415 501 1965 94 435 513 1966 101 452 533 1967 98 434 504 1968 98 438 491 1969 95 403 456 1970 103 411 466 1971 102 386 432 1972 129 448 495 1973 302 905 1,015 1974 184 453 558 1975 155 343 419 1976 19 432 518 1977 230 457 544 1978 213 368 411 1979 243 370 443 1980 262 364 427 1981 253 349 408 1982 219 307 358 1983 238 342 383 1984 197 290 319 1985 157 229 249 1986 185 229 243 1987 203 228 236 1988 268 281 289 1989 246 260 267 1990 209 209 209 1991 199 195 189 1992 208 195 186 1993 220 199 190 1994 230 204 194 1995 241 20 198 2000 254 185 173 2005 331 210 189 a/ US 44%, o.Lf. Roua. b/ D ~Ih,ed by 0-5 M ~ ~ ~~U~ Va. (8UV} Ihz. 9/ DBaed by 0-7 Cmm ~ s ( ~. 8owen: iLWord (siam ; Wmdd ak &uma INom D~.. Quus.). 159 Tabh A20: uk o - bin. a/ 1950.1(Atad and 1992005 mj ~g ~ Cumuseg $ ----990 Coaag 3 - G5 MUV b/ 0-7 CPI 0/ 1950 277 1,696 2,234 1951 29 1,581 2,166 1952 294 1,489 2,050 1953 227 1,181 1,567 1954 225 1,198 1,531 1955 240 1,257 1,632 1956 246 1,242 1,634 1957 259 1,281 1,685 1958 22 1,128 1,481 1959 248 1,223 1,587 1960 228 1,103 1,433 1961 232 1,102 1,423 1962 216 1,007 1,291 1963 222 1,056 1,286 1964 240 1,118 1,349 1965 273 1,262 1,487 1966 236 1,054 1,244 1967 224 989 1,151 1968 169 754 846 1969 181 768 869 1970 260 1,037 1,176 1971 261 988 1,106 1972 217 754 834 1973 378 1,131 1,268 1974 669 1,645 2,030 1975 434 961 1,173 1976 407 887 1,062 1977 530 1,053 1,253 1978 600 1,036 1,158 1979 654 997 1,193 1980 584 811 952 1981 571 790 923 1982 445 626 729 1983 501 721 809 1984 729 1,071 1,179 1985 501 730 794 1986 257 318 338 1987 343 386 399 1988 437 459 472 1989 350 370 380 1990 290 290 290 1991 339 332 323 1992 395 371 354 1993 420 380 363 1994 397 353 335 1995 396 343 325 2000 416 303 283 2005 420 266 239 a/ Malaa, 5%, ..f. N.W. Dusps qauotts prior t 1955 safe a usasa1 eB; tmhear tha of edible oil. bl Dw~stad by -5 ~...ad, U§i VaM 1UV) In. o/ D ~Md by 0-7 Co r . ~ (CPI . Su~c: 5MP ud FAO TE s <..muI, Wmd bhmk Zstad...I Boooios Dpartat 160 Table A21: 4inmrna - Pis, a/ 1950-91 (Aatal and 1992-2005 (Projeted) urn.I - 1990 Con~ana - G-5 MUV bl G-7 CPI c/ 1950 189 1.157 1,524 1951 220 1,169 1,601 1952 151 765 1,054 1953 176 918 1,218 1954 146 778 995 1955 143 748 971 1956 146 737 971 1957 141 697 917 1958 154 749 983 1959 194 957 1,241 1960 144 696 904 1961 137 651 840 1962 136 633 811 1953 153 726 884 1964 151 705 851 1965 179 829 977 1966 155 694 818 1967 162 717 834 1968 176 786 881 1969 153 648 734 1970 168 670 760 1971 145 549 614 1972 116 403 445 1973 259 776 870 1974 465 1.144 1,411 1975 207 457 558 1976 230 502 601 1977 326 648 771 1978 364 628 702 1979 500 762 912 1980 345 480 563 1981 317 439 513 1982 265 372 434 1983 365 525 589 1984 528 776 854 1985 291 424 461 1986 142 176 186 1987 181 204 210 1988 267 280 288 1989 251 265 272 1990 185 185 185 1991 220 216 209 Pcoiected 1992 230 216 206 1993 237 214 205 1994 246 219 208 1995 270 234 222 2000 334 243 228 2005 358 227 204 a/ Nigeran, o..f. European pot. bl Dflatd by 0-5 Mant~nwin Uni Valu. (MUV) Index. s/ Defted by 0-7 Conn Pris Index (CP. Sours: Oil Wod (a~tua); World Bank, IntnsiaaI Econis Departmen (procted); 161 Table A22: Copta - Prics, a/ 1950.91 (Actul) and 1992-2005 Projcted) Can~ $ 1990 CMa- - G-5MV bv/ G-7 CP / 1950 226 1,385 1,824 1951 243 1,290 1,767 1952 163 82 1,140 1953 221 1,151 1,527 1954 196 1,044 1,334 1955 181 944 1,226 1956 177 894 1,176 1957 172 851 1,119 1958 203 989 1,299 1959 251 1,239 1,607 1960 202 974 1,266 1961 165 783 1,011 1962 164 764 979 1963 184 871 1,061 1964 194 907 1,095 1965 227 1,049 1,236 1966 185 827 976 1967 204 903 1,051 1968 232 1,037 1,163 1969 202 856 969 1970 225 897 1,017 1971 189 713 799 1972 141 489 541 1973 353 1,058 1,186 1974 662 1,628 2,008 1975 256 567 692 1976 275 600 719 1977 402 799 951 1978 470 812 908 1979 673 1,026 1,227 1980 453 629 738 1981 379 525 613 1982 314 442 515 1983 496 713 800 1984 710 1,044 1,148 1985 386 563 612 1986 197 244 259 1987 309 348 359 1988 398 417 429 1989 348 368 377 1990 231 231 231 1991 286 281 272 Poected 1992 380 357 340 1993 360 326 311 1994 377 335 318 1995 404 350 132 2000 544 396 371 2005 508 322 289 a/ Philippnes/Indo~nSa, bulk, o.i.f. N. W. Europ. bl Doflated by 0-5 Mastasing Unit Valåm (h1UV) Index. a/ Doflatd by 0-7 Cn~ Pris. Index (CP. Sour3ce: Old Wodd (t W d Bak, Iiernon.~ Boaa~a D. ~ ~••• (projted). 162 Tabk A23: Cm~ 0 -PNes, al 1950-1 (At ud 1992-200 (k*.sd) CwNee 3 - 1990 Caa - MUv b/ G-7 CPI / 1950 292 1,789 2,356 1951 338 1,796 2,461 1952 263 1,332 1,835 1953 339 1,768 2,346 1954 306 1,633 2,087 1955 259 1,355 1,760 1956 265 1,338 1,761 1957 275 1,360 1,789 1958 312 1,517 1,992 1959 378 1,867 2,421 1960 312 1,507 1,959 1961 254 1,204 1,555 1962 251 1,170 1,499 1963 286 1,359 1,655 1964 297 1,383 1,670 1965 348 1,611 1,898 1966 324 1,449 1,710 1967 328 1,451 1,688 1968 399 1,783 1,999 1969 361 1,531 1,733 1970 397 1,584 1,797 1971 371 1,402 1,570 1972 234 812 899 1973 513 1,537 1,724 1974 998 2,454 3,028 1975 394 871 1,063 1976 418 912 1,093 1977 578 1,148 1,367 1978 683 1,179 1,319 1979 985 1,501 1,796 1980 674 936 1,099 1981 570 789 922 1982 464 653 761 1983 730 1,050 1,177 1984 1,155 1,697 1,867 1985 590 860 935 1986 297 367 390 1987 442 498 514 1988 565 593 610 1989 517 546 561 1990 337 337 337 1991 433 424 412 1992 590 554 528 1993 550 498 476 1994 573 509 484 1995 618 535 507 2000 774 564 527 2005 721 457 411 a/ For 1ml72, sd åaa, wie, 1, Ro-~mk kma ; 6cm 1973 ewd, 1ipn/dni,bulk, o.i. 0/ D ~datd by W-7 C. . Påls d (CPM. Soutos: Lm (am ; Ved lak, bgns.mdu.u mi k Dpam~t (poetd). 163 Table A24: Groundnut Oil - Prices, a/ 1950-91 (Actual) and 1992-2005 (Projected) ($/ton) Current $ - 1990 CoAnstant $-- G-5 MUV b/ G-7 CPI c/ Actual 1950 418 2,557 3,367 1951 476 2,529 3,466 1952 364 1,844 2,539 1953 386 2,012 2,670 1954 371 1,977 2,527 1955 288 1,507 1,957 1956 369 1,865 2,455 1957 360 1,779 2,340 1958 276 1,342 1,762 1959 300 1,478 1,917 1960 326 1,577 2,048 1961 331 1,571 2,029 1962 275 1,278 1,638 1963 268 1,274 1,551 1964 315 1,471 1,776 1965 324 1,500 1,767 1966 296 1,326 1,564 1967 283 1,253 1,458 1968 271 1,209 1,356 1969 332 1,405 1,591 1970 379 1,510 1,712 1971 441 1,667 1,867 1972 426 1,479 1,636 1973 546 1,636 1,835 1974 1,077 2,649 3,268 1975 858 1,898 2,317 1976 741 1,617 1,937 1977 852 1,692 2,015 1978 1,079 1,863 2,083 1979 888 1,353 1,619 1980 859 1,194 1,401 1981 1,043 1,443 1,687 1982 585 822 958 1983 711 1,023 1,146 1984 1,017 1,494 1,644 1985 905 1,319 1,434 1986 569 703 747 1987 500 563 581 1988 590 619 637 1989 775 819 841 1990 964 964 964 1991 894 876 850 Prooected 1992 605 568 542 1993 645 584 558 1994 656 583 554 1995 713 617 585 2000 760 554 518 2005 664 421 378 a/ Any origin, c.i.f. Rotterdam. b/ Deflated by G-5 Manufacturing Unit Value (MUV) Indox. c/ Deflated by G-7 Consumer Price Index (CPI). Sources: Oil World (actual); World Bank, International Economics Department (projected). 164 Table A25: Orou»d ~ Mmi - Price, al 1950-1991(AIUa0 19M20 (Pahu~ed Curret 8 - 1990 Canm - 4MUVb/ G-7 CPI 0/ 1950 95 582 766 1951 111 590 808 1952 98 497 684 1953 102 532 706 1954 98 523 668 1955 93 487 632 1956 92 465 612 1957 85 420 553 1958 74 360 473 1959 86 424 550 1960 84 406 527 1961 79 375 485 1962 87 405 519 1963 91 432 526 1964 93 434 524 1965 102 472 557 1966 95 425 502 1967 95 420 489 1968 90 402 451 1969 96 407 461 1970 102 407 461 1971 98 371 415 1972 122 423 469 1973 266 797 894 1974 174 428 528 1975 140 310 378 1976 176 384 460 1977 218 433 515 1978 205 354 396 1979 211 322 385 1980 240 334 392 1981 238 329 385 1982 189 266 310 1983 200 288 323 1984 187 275 302 1985 143 208 227 1986 165 204 217 1987 162 182 188 1988 210 220 226 1989 200 211 217 1990 185 185 185 1991 150 147 143 1992 157 147 141 1993 165 149 143 1994 184 163 155 1995 199 172 163 2000 216 157 147 2005 276 175 157 a/ Any origin, 48-50%, ci.f. N. W. Europ. bl Deated by -5 Mamu ri~g Uni V~al (bUV) Idex. el Doflatd by G-7 Con~an a Pri. Index (CPM. Sour~es: il Worl (acua>; Wold emak, ase0atonal Eanads. Dq (procd). 165 Meats Summary * The world meat market has changed in major ways since 1991. In April of that year, Japan ended its beef import quota system, replacing it with a non discriminatory tariff of 70%. In Eastern Europe and the FSU, beef and pork production dropped sharply in 1991 (-7.4%) as the political and economic changes resulted in the collapse of the communal farm system and state meat operations, as well as major disruptions in feed supplies. The collapse of the CMEA, the demise of bilateral trade agreements, and the shift of trade to convertible currency at world market prices resulted in a sharp decline in meat trade, a large drop in meat consumption, and a shift in demand between various types of meats, favoring poultry. * In the United States, the uptrend in beef import prices since the mid-1980s continued through the second half of the decade and into 1990 and 1991 as beef supplies were relatively tight and Asian countries continued their strong beef import demand. * US beef prices are expected to decline slightly in real terms over the next several years. Over the long term, the outlook for the US beef market will depend critically on how the major producing countries respond to the liberalization of the Japanese and Korean markets. Other countries in the East Asian region have high income elasticities of demand for meat and very low per capita meat consumption levels, so US beef prices in the long term should be supported by increases in exports to Asian markets. Beef Prices a/, 1950-2005 ccents/kg) 700 Constant 1990 $ b/ 500 - 400 - 300 200 A ' Ib II Current $ ../ \, 100 0 I s a s i e . . l . . . e . . t a s s l . . a l e s . l . s a l . . . 1. . . .. . . . .. 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 a/ Australian/New Zealand, frozen boneless, cif US b/ Deflated by G-5 MUV Index 166 * While the continuing improvements in technology and efficiency in meat production are likely to put downward pressure on real prices, this should be more evident in the poultry and pork sectors than in the beef sector where technical improvements are slower and support policies in several countries are likely to maintain prices above market-clearing levels. * Ongoing trade liberalization in Japan and the gradual opening of the beef market in the Republic of Korea have led to a major shift in beef trade from the traditional markets in North America and Western Europe to the Pacific Rim Asian countries. The Asian region is expected to continue to be the major source of growth in world beef trade in the 1990s. Production Trends Growth slowdown during 1989-91 continues, with poultry the exception. The slow growth in world meat production (beef and veal, pork, and poultry) since 1989 continued in the early 1990s. World meat output grew by less than 1% p.a. during 1989-91, less than the rate of increase of above 2% p.a. during the 1980s. The slowdown in growth reflects the moderate increase in global output of beef and pork, which largely offsets the more rapid growth in poultry. In 1991, the sharp reduction in output in the FSU largely balanced the higher production in several countries (Table 1). While poultry meat experienced the most rapid growth in production, it still holds the smallest share (about 25%) in total meat output. Pork has the largest share with more than 40% of the total, followed by beef and veal with about 30%. The United States, the EC, and the FSU account for nearly two thirds of beef and veal production. The United States continues to be the largest producer with a 21% share in 1991. The FSU ranked second until 1991 when its output sharply declined (-7.4%), reducing its share to 16%. The EC became the second largest producer with about 17%. Argentina and Brazil account for about 8% and 7%, respectively. Beef and veal production has grown more slowly than other meats, with a growth rate less than 1% p.a. since the mid-1980s. After declining in 1991, world production of beef and veal is estimated to fall again in 1992 to 49.9 million tons as gains in several other countries are largely offset by declines in Australia and the FSU. The slow growth in beef output reflects the moderate herd expansion occurring in several countries since 1989. Drought conditions in Australia resulted in lower average slaughter weight and output in 1991, while in the FSU the collapse of the communal farm system and poor forage supplies resulted in sharp declines in output. In contrast, a cyclical upturn in EC production occurred in 1990 and 1991, reflecting the sharp increase in dairy cow cullings and an increase in heifer slaughter. The United States produces about one third of the world's poultry meat, followed by the EC with about 18%. Other major producers include China, the FSU, Brazil, Japan, and Thailand. While production of poultry meat remains concentrated in a few countries and regions, world production continues to grow at a rapid rate. World production in 1991 increased by 5.7%, and about the same growth is forecast for 1992. Brazil and Thailand expanded output by over 10% in 1991. With a growth rate of 20% in 1991, Mexico became the most rapidly growing poultry meat producer. Other developing countries have also experienced rapid growth. Turkey increased its output of poultry meat by more than 150% between 1985 and 1990 while India's output grew by more than 100% during the same period. However, these countries remain relatively small producers. 167 Table 1: World Meat Production Percentage Percentage Change Change 1979-81 1985 1989 1990 1989-90 1991 1990-91 ('000 tons) % ('000 tons) % A. Beef and Veal United States 10,092 10,996 10,633 10,464 -1.59 10,530 0.63 FSU 6,720 7,370 8,800 8,814 0.16 8,160 -7.42 EC-12* 7,509 7,845 7,851 8,302 5.74 8,627 3.91 Argentina 2,933 2,760 2,600 2,650 1.92 2,640 -0.38 Brazil 2,104 2,223 3,800 3,600 -5.26 3,700 2.78 Australia 1,683 1,310 1,565 1,718 9.78 1,675 -2.50 Japan 430 555 548 549 0.18 573 4.37 Others 12.63 13,751 11jg 15M 2.10 1,463 -3.93 World 44,110 46,810 50,542 51,152 1.21 50,368 -1.53 B. Poultry Meat United States 6,713 7,911 10,105 10,878 7.65 11,476 5.50 EC-12* 5,115 5,359 6,123 6,326 3.32 6,500 2.75 FSU 2,143 2,816 3,300 3,284 -0.48 3,200 -2.56 Brazil 1,345 1,549 2,139 2,416 12.95 2,663 10.22 Eastern Europe 1,806 1,836 1,989 1,939 -2.51 1,985 2.37 Japan 1,115 1,362 1,482 1,451 -2.09 1,417 -2.34 Thailand 373 470 553 595 7.59 655 10.08 Others 7.829 10291 12.9 12,973 3.00 14,229 9.68 World 26,439 31,394 38,283 39,862 4.12 42,125 5.68 C. Pork China 11,704 17,337 21,228 22,811 7.46 23,009 0.87 EC-12* 12,511 13,315 13,979 14,084 0.75 13,703 -2.71 Eastern Europe 5,422 5,478 6,740 6,555 -2.74 7,187 9.64 United States 7,248 6,716 7,173 6,964 -2.91 7,258 4.22 FSU 5,223 5,853 6,700 6,646 -0.81 6,150 -7.46 Japan 1,434 1,532 1,594 1,555 -2.45 1,490 -4.18 Others 8.432 8.892 10.259 10,843 5.69 10078 -7.06 World 51,974 59,123 67,673 69,458 2.64 68,875 -0.84 * Includes former East Germany. Sources: FAO and US Department of Agriculture. 168 Over 80% of the world's pork is produced in five countries (China, the United States, the EC, Eastern Europe, and the FSU). China is the largest producer, with about one third of world production. The United States holds a 12% share of world production, followed by the EC with 10%. After increasing at about 3% p.a. during 1985-90, world pork production declined slightly in 1991 (-0.84%). The sharp declines in the FSU, Japan, the EC, and other countries largely offset growth in China, the United States, and Eastern Europe. Herd restructuring following the collapse of the FSU's farm system led to sharp declines in animal numbers and output. The pork sector in Japan is declining as environmental concerns and high feed costs force out small- and medium-sized producers. EC pork production also declined in 1991 due to significant reductions in the former East Germany. However, the continued rise in carcass weights compensated to some degree for the substantial decline in slaughter numbers. US pork output increased in 1991 as slaughter increased following herd expansion from the beginning of the year. Herd expansion continued in 1992, but at a slower rate due to low returns. Table 2 shows annual growth rates of meat production by income and geographical groupings. A comparison of production trends between decades shows that except in China, India, the low-income countries in East Asia and the Pacific, South Asia, and North Africa, the average annual growth rate of meat output slowed from the 1960s to the 1980s. Poultry experienced double digit growth rates in most middle- and high-income countries. This rapid growth in poultry output has been largely due to the industrialization of production in most countries. Modern, large-scale production and processing enterprises have been established in many developing countries following the pattern begun in North America in the late 1940s. In the high-income countries, the long-run trend towards fewer, larger, and more vertically-integrated firms has allowed large efficiency gains. Use of modern technology in production, such as automated feeding, and use of high-energy rations and hybrid birds have improved the conversion of grain into poultry meat. Supply Prospects Modest growth in beef production expected. The recent high beef prices and strong export demand in the foot and mouth disease (FMD)-free areas will continue to stimulate herd rebuilding in major producing countries. However, the trend towards modest growth in the cattle inventory in several countries is likely to continue over the medium term and the growth in beef production will depend more on genetic developments and feeding technology than on increased cattle numbers. In North America and Oceania, continued improvements in breeding and finishing technology are projected to result in further growth in carcass weights which should compensate to some degree for the slow growth in animal numbers. Beef output in North America and Oceania is projected to continue its upward trend through the mid-1990s, before contracting slightly over the remainder of the decade. Likewise, pork production is projected to rise in major producing countries as the trend towards slaughtering heavier animals is likely to continue. In poultry, productivity improvements in feed conversion in an increasing number of countries are forecast to result in continued growth in world supplies during the 1990s. In developing countries, the outlook for meat production will be determined by a broad set of factors including available technology, patterns of land tenure, farm structure, feed availability, and socioeconomic conditions. The type of meat that will be produced will be determined by land resources as well as supply and costs of feeds. In countries with rapid economic growth and industrialization, the most rapid expansion of meat production has occurred in the poultry sector. With the emergence of 169 Tabe 2: Anmnal Growth Rat~ of Meat Pirat oa, 1961-90 al Ål UM --1961-0---- 1961-70 1970-80 1980-90 Bæf PO y Low-Inco~, Total 5.2 4.0 6.5 3.1 3.7 Larg 7.1 5.2 7.9 9.3 3.5 China 3.2 2.7 5.1 3.7 1.9 India Sial Ena & Southem Afica 1.9 2.4 1.3 2.5 5.1 West Africa 2.4 2.8 1.7 3.3 4.3 Eta Asia & Pacifik 4.1 2.1 7.4 2.3 13 South Asia 3.5 3.1 5.0 2.7 5.2 Midd last 1.7 3.4 -1.7 6.3 6.3 North Africa 4.0 1.3 7.7 3.1 1.3 Latin America & Caribbe a 3.0 3.5 2.0 5.0 9.1 Middlø-Income, Total 3.0 3.4 2.5 4.6 7.0 Lwr 2.6 3.8 1.8 2.9 8.8 East & Souhem Africa 2.5 1.5 2.0 4.7 4.2 West Africa 3.3 3.0 3.2 6.9 6.2 East Asia & Pacifi 4.0 4.0 3.8 2.6 9.0 Easter Europe & fSU 2.9 5.1 0.9 4.6 8.1 Rst of Europe 2.3 2.6 2.0 2.7 4.7 Middle East 4.7 6.2 1.8 -0.6 9.8 North Africa 3.7 3.5 3.6 4.7 4.7 Latin America & Caribbean 1.9 3.1 1.5 2.5 11.4 Upper 3.2 3.2 2.8 5.7 6.0 East & Southem Africa 3.2 3.9 2.3 -0.9 13.7 East Asia & Pacific 7.9 10.6 5.7 3.6 12.5 Eastem Europe & FSU 2.8 2.3 2.8 7.4 3.5 R~st of Europe 4.1 5.3 0.7 9.5 15.4 Middle East 6.8 5.9 8.6 1.4 15.8 Latin America 4.0 4.8 2.8 3.5 9.1 igh-Income, Total 2.4 2.4 1.6 3.3 5.9 OECD 2.3 2.3 1.5 3.2 5.8 East Asia & Pacifie Australia 2.1 3.3 1.3 2.8 11.8 Japan 5.8 6.1 2.0 4.7 11.8 Eu 2.5 7.4 North America 2.6 2.8 1.3 Canada 2.3 1.7 1.4 3.4 6.4 United States 1.7 1.4 1.7 3.8 4.2 Non-OECD 6.0 5.9 5.0 4.7 7.8 East Asia & Pacice 3.8 4.3 2.0 3.5 13.3 Middle East 5.3 6.1 2.9 3.0 6.1 Latin Ameica & Caribbean 5.8 3.1 1.1 6.8 19.0 a/ Last .quare trend growth rate fmr the peraod 1961-90. Souroes: FAO Production databas. Calaut. do~ by Ward ban, bteanl Em~mioa Departntu. 170 large-scale integrated operations, production in this sector has become less tied to the land base. Animal feeds are either produced domestically or supplied through imports. Given the faster improvements in technical efficiency in the poultry and pork sectors, the cost disadvantages in these sectors are less than those incurred in cattle production. In some cases, beef can be supplied at a lower cost through imports from the industrial countries than through domestic production. The outlook for meat production in developing countries, therefore, is for faster growth in poultry and pork production relative to bovine meat (beef and veal, buffalo meat). In middle-income developing countries, where land and/or labor costs are increasing, the trend is likely to be towards larger-scale and integrated poultry production. In the United States, the current herd expansion is slow and modest compared to the last cattle cycle. 1992 marked the third year of expansion, but the inventory expanded by only 2 million head from the cyclical low in 1990. During the last cattle cycle, the third year (1982) was the last year of expansion, and saw the herd growing 4.6 million head from the cyclical low in 1979. US beef and veal production is estimated to increase only 2% in 1992, following a 1% increase in 1991. Herd rebuilding is projected to continue through the mid-1990s, but with modest rates of growth of 1-2%, before entering a contraction phase for the remainder of the decade. Hence, the outlook for US beef production is one of modest increases during the next few years, with the cyclical peak projected in the mid-1990s. In the pork sector, low returns in 1991-92 prompted producers to increase culling and reduce retention of productive stock. US pork production is projected to continue its upward swing through early 1993 and then enter a contraction phase through the mid-1990s. Lower net returns in 1991 also resulted in slower growth in poultry output. Chicken meat supplies increased 4% over 1991, compared with 6% growth in previous years. However, further improvements in feed conversion and processing technology combined with strong domestic and export demand will boost US poultry production during the 1990s. Strong export demand is expected to encourage continued herd rebuilding in Oceania. In Australia, cattle numbers are projected to expand slowly in the next two years, with slaughtering and output declining from current levels. After 1993, beef and veal production is projected to increase in line with the growth in cattle numbers. Expansion in Australian beef output is projected to continue until the mid-1990s. In New Zealand, beef production recovered significantly in 1991 from the 1988/89 drought. Beef output has continued its upward trend in 1992 following the increase in cattle numbers due to increased retention of dairy calves because of the high domestic beef prices and low milk prices. Also, improved seasonal conditions resulted in plentiful feed supplies supportive of longer feeding periods and higher slaughter weights. The outlook is for continued moderate herd rebuilding and increases in beef output over the medium term. The continuing upswing in the Japanese Wagyu beef production cycle and the slight increase in the Holstein sector resulted in a modest rise in output in 1991 and 1992. Japanese beef production is expected to continue its slight upward trend in the next few years, with the bulk of the increase in Wagyu beef because of strong consumer demand. However, production of lower-quality beef is projected to level off over the next several years due to reduced prices as a result of import liberalization. In the Republic of Korea, prices for domestic beef have continued their upward trend, despite the rapid increase in imports. Korean calf production increased in 1991 as producers tried to expand herds to take advantage of the high prices. However, increases in the beef import quota may put some downward pressure on domestic prices in the near term. The prospects for meat production in the FMD areas will depend largely on developments in the EC, Eastern Europe, and the FSU. In the EC, the medium- and long-run outlook for the beef sector will be influenced by a number of factors including the continuation of the dairy quota system, the provision of direct payments to extensive producers and the development of feedlot operations. The 171 political and economic reforms in Eastern Europe and the FSU have led to restructuring of livestock production. Livestock productivity is low in these countries due to outdated technology, inefficient resource use, and poor farm management practices. In the FSU, the combination of greater market orientation and lower feed grain supplies will result in a decline in meat output during most of the 1990s. Meanwhile, stability in production is beginning to be seen in parts of Central and Eastern Europe. However, farm profits continue to be squeezed as market forces begin to be felt through changes in input and output prices. In the EC, a cyclical upturn in beef and veal output took place in 1990 and 1991 due to a number of factors: (i) the increases in beef cow numbers more than offset the fall in dairy cow numbers as a result of a tightening of the dairy quota system; (ii) the increasing importance of feedlot operations and the consequent increase in the share of fed cattle in total slaughter, leading to higher weight per animal; (iii) the German reunification resulting in an increase in the cattle herd and in slaughter numbers. The cumulative effect of these factors combined with stagnant demand resulted in the acceptance of massive quantities of beef into intervention stocks. The EC is proposing an extension of the milk quota system for a further eight years. The continuation of the dairy quota system and developments in feedlot operations are projected to result in a general rise in EC beef production over the medium term and through the second half of the decade. Beef output is expected to decline in Central and Eastern Europe due to falling cattle numbers. In the FSU, the livestock sector is one of many in agriculture suffering from the sharp fall in economic activity and the changeover from centralized government control. Cattle inventories have declined for several years due to intensive culling, and growing death rates. The industry's productivity continues to be constrained by poor roughage and mixed-feed supplies and poor genetic material. The outlook is for a further fall in inventories, with the magnitude of the decline heavily dependent on the availability of inputs and the development of marketing channels. The breakdown of the grain procurement and distribution system, acute shortages of hard currency and limited foreign credits have resulted in very uncertain and limited supplies of feed grains and protein meals. As a primary user of imported feed grains, poultry production in the FSU is expected to decline over the next several years. The lag in genetic improvement notwithstanding, insufficient supplies of appropriate feeds will prevent any significant advances in FSU meat output in the 1990s. In fact, production is likely to continue to decline over the decade. Brazilian beef production rose 6% in 1991, due to good pasture conditions and favorable producer returns which increased the average dressed carcass weight by nearly 2% over 1990. The cattle inventory in Brazil reached its peak in 1991 and is expected to begin a contraction phase in 1992. Government policies of price controls, subsidized imports, and export bans have been major deterrents to beef production. Investments to improve pasture conditions, management practices, and animal nutrition have been made only by the large ranchers which represent a minority among cattle producers. Production of beef has also been adversely affected by record poultry production as well as steady production of pork. Beef production is very sensitive to poultry prices which have been more attractive to consumers during a period of recession. Technology improvements boost pork and poultry production. As in the beef sector, changing patterns of production and developments in feeding technology and animal genetics will largely influence the outlook for pork and poultry. Likewise, the demand for low-fat products will influence the type of meat produced in the industrial countries. The adoption of Western animal genetics and other technology has led to a rapid growth in output, improvements in feed efficiency and meat quality. While 172 small-scale operations still exist in developing countries, there is an increasing trend towards commercialization and vertical integration in poultry production in several countries in Asia, Latin America, the Middle East, and North Africa. In countries where central planning is no longer used to determine production targets, market pressures will force out inefficient producers. The steady growth in China's hog inventory since 1986 was halted in 1991 due to floods, reduction in prices, and government policies to stabilize hog numbers. While China's hog sector is dominated by small-scale producers, large-scale hog operations will have more impact on future production growth. Also, as market forces play an increasing role in production and marketing decisions, more efficient operations will dominate. These factors are expected to result in continued production growth. In other developing countries, the adoption of US swine genetics and other technology improvements have led to rapid growth in pork production, improvements in meat quality, and integration of operations. In Brazil, the demand for low-fat products has increased significantly in recent years. More large-scale poultry operations mean higher growth in output. In Thailand, chicken meat production has been growing at rates of 7-8% p.a. since the mid-1980s. The strong growth is likely to continue due to expansion of broiler operations (both contract and independent farms) and the emergence of integrated poultry operations. Poultry production technology is similar to that of the industrial countries. Feeding technology is developed by the integrated poultry companies which produce poultry feed. Thai producers meet quality requirements of major import markets including Japan, the EC, and Asia. Since about 90% of Thai chicken meat is exported in the form of fancy cuts and deboned products, all processing plants employ labor-intensive processing technology. A similar trend is occurring in other countries including the Philippines and the Republic of Korea. In the Republic of Korea, the growing domestic meat demand, and increasing labor costs are contributing towards increased mechanization and continued growth of large-scale operations in the poultry sector. The recent liberalization of imports of several feed ingredients, including soybean meal, is expected to put downward pressure on feed prices, at least in the near term, and will help boost poultry production. The process of integrating operations (production, processing, and marketing) in the Republic of Korea's broiler industry has recently begun and is expected to mitigate the limiting factors such as land scarcity and pollution controls. Productivity indicators such as daily gains, feeding days, and death rates show continued improvements. Consumption Trends and Demand Prospects Meat consumption slows in high-income countries, grows elsewhere. Total consumption of meats has grown at a much faster rate in developing countries than in industrial countries during the past two decades. In the 1970s and 1980s, the Asian region experienced the fastest increase in meat consumption among the developing regions, with most of the growth occurring in pork and poultry. In contrast, the growth in meat consumption has slowed in the industrial countries since the mid-1970s. 173 The trends in total and per capita meat consumption by income group' and type of meat are shown in Table 3 and Figure 1. In high-income countries, the decline in per capita beef consumption since the mid-1970s has been accompanied by a steady increase in poultry consumption. Pork consumption showed a slight upward trend while mutton and lamb consumption remained constant. In the United States, per capita beef consumption has declined 28% since the mid-1970s, from 40.28 kg/person in 1976 to 28.71 kg/person (boneless equivalent basis) in 1991 (Table 4). In contrast, US per capita consumption of poultry meat increased over 80% during the same period (from 16.55 kg/person to 30.25 kg/person). Similar trends are occurring in other high income countries, particularly in Oceania, traditionally a beef and sheep meat consumption region. In middle-income countries, beef and veal still occupies the largest share in meat consumption, but poultry consumption has grown more rapidly than beef and veal during the last two decades. Following the decline from the mid-1970s to early 1980s, beef and veal consumption has resumed its upward trend since the mid-1980s. Pork remains the most popular meat consumed in low- income countries, but the total consumption of beef and poultry has grown steadily since the mid-1980s. However, total and per capita meat consumption in these countries remains very low relative to the middle- and high-income countries. Consumption patterns change with income growth, demographic factors, and health concerns. The changes in consumption patterns for meat products have been determined by several factors. First, the sharp gain in poultry productivity due to vertical integration and developments in processing and distribution-which has led to lower prices relative to other meats--can partly explain the shift towards poultry products in many countries. In the United States, retail prices for whole chicken in 1960 were about one half those of the weighted average of all Choice cuts of beef. Whole chicken prices in 1991 were about 31% of the average composite Choice beef price (Table 5). In LMICs, increases in per capita income, urbanization, and changes in relative prices have been the main determinants of increased per capita demand for meat. In high-income countries, other factors aside from income have become important determinants of consumption patterns. These factors include diet and health concerns, increasing demand for convenience foods, and changes in demographic characteristics. Income remains the most important factor influencing demand for meat. ]Demand generally increases with higher incomes. However, the relationship is nonlinear-at a certain income level, consumption tends to stabilize and then declines at the highest incomes. Rising incomes also affect the types of meat demanded, with more expensive cuts of meat demanded at higher income levels. Countries in East Asia provide examples of rapidly increased meat consumption accompanying fast economic growth. Lower incomes, on the other hand, reduce meat consumption or result in substituton towards lower priced meats. For instance, in Latin America, total meat consumption declined as real incomes fell during the 1980s and there was a shift from beef and pork to lower-priced poultry. Changes in demographic characteristics of the population affect lifestyles and eating habits. For instance, the long-run trend towards smaller households, more two-income households, more single-person households, and increasing proportions of ethnic minorities and elderly have been fueling demand for convenience cuts and leaner meat and away-from-home consumption. Health consciousness in North America has also affected the types of meat demanded, with consumers demanding less fat, fewer calories, and better nutrition. 1 The 185 countries are divided into four income groups using the World Bank's Global Economic Prosects classification. Using GNP per capita in 1990 US dollars: low-income, $610 or less; lower middle-income, $611- 2,465; upper middle-income, $2,466-7,619; and high-income, $7,620 or more. 174 Tab~. 3: AvuMg.er Capla Meat Car~mu,pénby ncom ~. roup, 1961-89 h~nrmupFoodCn~nney 1961-63 1964-66 1969-71 1972-74 1974-76 1976-78 1979-81 1982-84 1984-86 1987-89 Bovm~ 24.64 26.67 29.16 28.96 30.91 31.74 28.48 28.50 28.84 28.29 s~e==t3.24 3.04 3.00 2.80 2.49 2.34 2.32 2.41 2.45 2.45 Pg ~ 22.15 22.33 25.39 26.52 26.15 27.04 30.92 30.38 30.81 31.82 Pou~ixy ~ 8.80 10.21 12.77 14.25 14.65 15.87 17.87 19.04 20.09 22.76 O&r mm 1.68 1.72 1.79 1.83 1.85 1.90 1.90 1.74 1.71 1.63 Mik & pdu 186.48 188.57 191.16 193.17 192.75 195.40 201.02 203.73 208.09 212.55 Ab & u~d 20.91 21.60 23.52 25.00 24.71 24.41 24.46 25.81 27.21 29.11 Upperfflånlb .Com.ftiffi B~vi .t 13.40 14.70 17.29 18.20 19.61 20.16 19.21 19.16 19.38 21.50 beme 3.29 3.07 3.03 2.84 2.70 2.58 2.63 2.50 2.48 2.59 ig 14.01 13.37 13.11 15.90 16.22 16.08 16.76 17.13 16.67 16.64 Ph~y m 3.20 3.21 4.64 5.63 6.20 7.07 9.14 10.22 10.59 11.89 0&«e mt 0.90 0.70 0.82 0.90 0.91 0.82 0.75 0.70 0.71 0.72 1i & 1, . 115.88 113.87 130.27 127.36 135.06 132.53 129.49 124.67 127.95 127.45 Fi & uN~fod 11.45 13.57 15.83 18.00 18.96 17.99 17.56 18.36 19.14 19.33 I W ^ coC Bevi 12.29 11.17 11.0 10.67 12.12 12.86 12.37 11.07 11.15 10.91 3u9p 3.34 3.18 3.32 3.10 3.08 3.09 2.95 2. 2.94 2.89 6.90 7.13 7.27 8.23 8.34 m 7.97 8.A9 7.86 7.81 8.18 2.22 2.67 3.57 4.36 5.80 5.53 6.70 6.a 6.78 7.22 0.96 0.85 0.78 0.76 0.75 0.72 0.71 0.71 0.69 0.63 Nik & pudu~t 70.14 71.71 74.84 76.03 77.13 78.80 79.56 74.5 74.40 72.79 16å & u~.1ood 8.31 9.46 11.51 12.22 12.40 12.68 13.38 13.76 13.89 14.05 I~ ~comCa i B~=in 1.39 1.40 1.43 1.37 1.38 1.39 1.45 1.53 1.62 1.80 Sbuup mest 0.79 0.81 0.79 0.76 0.78 0.82 0.89 0.93 0.94 1.02 ig 1.67 3.23 3.33 3.71 3.61 3.58 4.83 5.51 6.38 7.30 P.nsay 0.77 0.80 0.84 0.89 0.93 0.99 1.16 1.36 1.47 1.69 mia & pred~ce 19.30 18.23 18.27 18.14 18.54 19.58 20.3 23.25 24.67 25.81 i & eafood 4.30 5.00 4.88 5.07 5.18 5.28 5.20 5.59 6.04 7.11 Somes FAO ~qz* ad Utiisod ~uui aI .. do~. by Wai Budk, amti E~ae" D~paa Jge1: Ment Cs.mumpdm. ]BY h. Gr~up lfghi Incorm: Total Conaumptiori Rgh hiwmw:Per Capita Conisumption --------- 11 M 12åi i*ii 120 WS7 iåi" «20 ifiliS 1 0 19 73 1977 19»1 111114s Lowdi Incone: Totdl_Consumiton Lowd Income: Per Capita Consumption 25 1 -ii -ii- Ekw a vbef k~i& - ~ 176 Table 4: US Per Capita Consumption of Red Meat, Poultry, and Fish Year Poultry Beef Pork Veal & Fish & Chicken Turkey lamb Shellfish Total 1966 11.11 2.86 33.43 19.37 2.63 4.94 74.34 1970 12.56 2.90 36.20 21.91 1.86 5.31 80.69 1976 13.29 3.26 40.28 18.28 1.77 5.85 82.74 1980 15.56 3.76 32.70 23.63 1.04 5.62 82.33 1987 19.69 5.49 31.52 20.68 1.04 7.30 85.73 1989 21.45 6.17 29.66 21.95 0.95 7.08 87.27 1990 22.41 6.58 28.98 21.05 0.91 6.98 86.91 1991 23.45 6.80 28.71 21.27 0.86 6.98 88.09 Source: US Livestock and Poultry Situation and Outlook Report, ERS-US Department of Agriculture. The poultry marketing and processing sector has been able to meet the demand for convenience faster than the red meat sector, although leaner meat cuts of beef and pork have recently been introduced, particularly in North America. Rapid expansion has occurred in cut-up poultry products rather than in whole birds. Consumers can choose from an array of products, including leg packs, skinless breast fillets, ground turkey, turkey hams, etc. One of the biggest boosts to poultry consumption is the proliferation of chicken meat in fast-food menus. The beef industry in the United States responded to the increasing demand for leaner meat by introducing fat-reduced beef products in fast-food and retail sectors. However, the sales of lean beef hamburgers in the fast-food sector was limited by consumers' perceptions about the technology for reducing the fat content. In general, the substitutes used to replace the fat and maintain flavor were perceived as "not natural". Further, reducing the fat in beef products is effectively a means of value-adding and product differentiation (characterized by fat and calorie content, and flavor), so that the product can be sold at a premium. Future developments in the technology to reduce fat content at a lower cost while maintaining flavor will affect the demand for low- fat beef products. In Japan, the decline in the average number of persons per household (from 4.9 in 1955 to 3.2 in 1991) and the increase in the female labor force participation rate (from 45% in 1970 to 50% in 1989) have increased the demand for convenience foods and led to less frequent purchasing of food for in-home consumption. The demand for "value-added" meat products, and easy-to-prepare cuts of meat and processed products has increased. The import liberalization has also increased the availability of lower-priced beef and contributed to recent gains in beef consumption. Increased urbanization and changes in demographic characteristics in developing countries have also increased the consumption of food away from the home and led to growth in demand for fast- food products such as hamburgers and fried chicken. Poultry meat is becoming more popular in developing countries because it is a relatively low-cost protein source and it is being used in a large variety of foods, from traditional in-home consumption to the increasingly popular away-from-home 177 Table 5: US Average Retail Prices of Red Meat and Poultry a/ Year Poultry Choice Beef Pork Chicken Turkey (UT$/k~g) 1960 0.92 1.23 1.78 1.21 1970 0.92 1.26 2.20 1.70 1980 1.58 1.96 5.16 3.06 1989 2.05 2.18 5.86 4.03 1990 1.98 2.18 6.19 4.70 1991 1.94 2.20 6.35 4.67 a/ ]Prices are unweighted annual averages. Prices include some bone and exterior fat for beef and pork, and bone and interior parts for chickens and turkeys. Source: US Livestock and Poultry Situation and Outlook Report, ERS-US Department of Agriculture. consumption. In addition, the expansion of fast-food franchises (Kentucky Fried Chicken, McDonald's, Burger King, Pizza Hut, etc.) in developing countries is leading to increasing availability and variety of chicken-based processed meat. In Thailand, some integrated processors are diversifying their operations to include chicken meat products such as sausage, grilled chicken, etc. In developing countries where religion prohibits eating pork, chicken meat consumption is also increasing rapidly. Several studies of meat demand in the United States have reported changes in demand elasticities. Although the results of these studies are not always comparable due to differences in methodology and data, most indicate that since the mid- to late 1970s, US beef demand has become less elastic with respect to own-price and income,' while demand for chicken has become a stronger substitute for beef or more responsive to income.' Evidence of change in pork demand is much weaker, but it might have become less responsive to its own-price. Overall, this evidence suggests a saturated but stable market for red meat and an increased preference for poultry. The downtrend in the demand for red meat relative to white meat in North America is likely to continue, slowing in the 1990s, but not ending (Figure 2). US per capita consumption of beef is projected to continue to decline in the near to medium term, while the upward trend in demand for poultry is projected to continue. Per capita consumption of poultry meat in the United States and in the high-income countries in aggregate is projected to continue to exceed beef and veal consumption throughout the 1990s. Chicken meat is likely to continue to have the largest share in total poultry meat 2 See Chavas, J.P. wStructural Change in the Demand for Meat," American Journal of Airicultural Economics 65(1983):pp. 148-153. 3 See Braschler, C. OThe Changing Demand Structure for Pork and Beef in the 1970s: Implications for the 1980s," Southern Journal of Agricultural Economics 15(1983), pp. 105-110; Moschini, M.A. and K.D. Mielke, 'The US Demand for Beef," Western Journal of Agricultural Eonomic9 9(1984), pp. 271-282. 178 Figure 2: US Per Capita Meat Consumption 45 Beef & Veal 40 Poultry 35- Pork 25 20- 10 1965 1975 . 195 1995 2005 Source: World Bank, International Economics Department. consumption. In the longer run, the shift towards poultry meat may slow due to increased marketing efforts by the beef industry, combined with the production of leaner meat and/or the sale of heavily- trimmed meat. In developing countries, high income elasticities and the currently low average consumption levels indicate a large potential for growth in meat demand. Income growth will be the major factor determining future levels of consumption and imports. Middle-income countries in Asia, Latin America, and the Middle East are likely to continue to experience the fastest growth in meat consumption among the developing regions, with East Asia being the main growth area. Pork is likely to continue to hold the largest share, but the proportion of poultry should increase. Falling trade barriers and continued growth in incomes in East Asian meat markets should result in high growth in meat consumption in East Asia during the 1990s. In the FSU and Eastern Europe, the demand for meat is expected to weaken due to recent declines in real incomes and projected slow economic growth. This will lead to lower meat consumption and imports during most of the 1990s. Considerable efficiency gains are believed to be possible in production, but the timing of such gains is very uncertain. Rade Prospects Liberalization of barriers to beef trade encourages growth in Asia. The volume of meat traded remains a very small proportion of world production, in part due to trade restrictions. In 1991, only about 10% of beef output, 3% of pork, and 7.6% of poultry was exported (excluding intra-EC 179 trade). However, recent changes in supply and demand in various countries have increased the total quantity traded and changed the mix of meat exported. Meat exports increased 25% from 1985 to 1991, led by a 70% gain in poultry meat. Beef exports rose more than 20%, while pork exports increased 20%. The international trade in meat remains highly segmented and continues to be limited by trade barriers in many countries. The outlook is promising in the FMD-free areas, as liberalization policies in several countries are facilitating growth in imports. Most of the future growth in trade is projected to occur in the Pacific Rim countries whose market share in world beef trade has increased significantly since the mid-1980s. Recent changes in market access policies in Asia, coupled with continued income growth, will fuel further increases in meat demand and imports. In contrast, the prospects for meat trade in the FMD areas is less promising. Import demand is dependent on less predictable factors. On the supply side, the accumulation of beef stocks in the EC will have a major impact on trade. Likewise, supplies and trade are clouded by future policy developments in the EC. Imports into the FSU over the medium term are projected to decline-limited by reduced incomes and scarce foreign exchange and credit. Recent trends in beef and veal trade in major countries are shown in Tables 6 and 7. The United States remains the world's largest beef importer. However, the importance of Asian countries has increased significantly since the mid-1980s. Japan's share in world beef imports increased from 11% in 1987 to 14.6% in 1991 (excluding intra-EC trade). In contrast, the shares of the United States and the EC declined from 37% to 31% and from 14.5% to 11.5%, respectively, during the same period. The EC is the largest beef exporter, accounting for about 26% of world exports in 1991, followed by Australia with about 21%. US beef exports have increased significantly since the mid-1980s and accounted for about 11% in 1991, compared with only 7% in 1987. Beef exports by some developing countries have also increased since the mid-1980s, with major gains reported in Argentina and China. China's beef production and exports expanded rapidly in recent years, driven by domestic and export demand. Exports of chilled, frozen, and canned beef have increased. China has become a major exporter of frozen and canned beef to the FSU. As in other developing countries in Asia, the fast- food revolution has also reached China with the opening of the first McDonald's in Shenzhen and a planned opening in Beijing. Japan and the Republic of Korea are the two fastest growing markets for beef in Asia. Both countries are experiencing rapid growth in meat demand, and the majority of the increase, particularly of beef, is being met by increased imports. In Japan, beef imports have grown significantly since the mid-1980s (Figure 3). Japanese beef imports now account for almost one half of total beef consumption, a 28% increase since 1985. Australia and the United States are the two major suppliers of beef to Japan, accounting for over 95% of total imports. Japanese beef imports rose strongly in 1992 as beef stocks were drawn down and the tariff lowered from 70% to 60%. The tariff will be further reduced to 50% in 1993. There are many uncertain factors in the Japanese market, however; while future tariff reductions, combined with forecast strong demand for beef, are projected to lead to rapid growth in imports during the 1990s these further reductions will depend on the outcome of the GATT Uruguay Round. Forecast levels of Japanese beef consumption and production imply that Japan must increase beef imports to about 500,000 tons (boneless basis) over the next few years. Growth in beef imports in the Republic of Korea has spiralled since the implementation of bilateral agreements with the United States and Australia (Figure 4). Beef consumption has increased by 55% since 1988-from 142,000 tons to 220,000 tons in 1991. With the growth in demand, imports have been consistently above the base quota level which was increased from 14,500 tons to 115,000 tons 180 Table 6: Beef and Veal Imports, Selected Countries, 1987-92 (curcas-weight equivalent) Country 1987 1988 1989 1990 1991 1992 b North America Canada 135 153 158 185 210 210 United States 1,040 1,092 988 1,069 1,091 1,048 Latin America Argentina 0 0 0 0 2 15 Brazil 167 26 218 250 150 70 Peru 25 5 4 5 6 10 Venezuela 21 8 3 2 10 10 Mexico 4 15 40 60 100 140 EC-12 a/ 410 467 449 401 405 410 Eastern Europe 64 125 185 169 69 96 FSU 142 117 150 250 400 430 Middle East Saudi Arabia 55 26 15 18 20 22 Africa Egypt 170 150 181 120 115 135 South Africa 48 68 58 33 23 25 Asia Japan 315 380 498 537 515 580 Korea, Rep. of 0 20 83 117 172 210 Philippines 6 7 13 11 12 15 World Incl. intra-EC trade 4,244 4,336 4,738 4,932 5,211 5,246 Excl. intra-EC trade 2,830 2,909 3,260 3,432 3,531 3,653 a/ Excluding intra-EC trade. b/ Estimate. Source: US Department of Agriculture. 181 Table 7: Beef and Veal Exports, Selected Countries, 1987-92 (carcass-weight equivalent) Country 1987 1988 1989 1990 1991 1992 b/ (000 tons) North America Canada 93 86 108 110 106 110 United States 277 313 464 456 539 612 Oceania Australia 908 890 872 1,064 1,031 1,032 New Zealand 432 435 435 359 435 448 Latin America Costa Rica 27 23 21 19 23 20 Guatemala 12 10 16 18 13 13 Honduras 6 6 9 11 13 13 Argentina 287 320 360 451 372 280 Brazil 302 550 323 230 300 380 Uruguay 93 132 177 192 110 110 EC-12 a/ 910 886 1,180 1,060 1,284 1,133 Eastern Europe 294 296 281 173 129 147 Asia India 134 132 126 126 140 132 China 34 54 57 155 219 250 World Incl. intra-EC trade 5,361 5,675 6,040 6,040 6,530 6,381 Excl. intra-EC trade 3,947 4,248 4,537 4,537 4,857 4,793 a/ Excluding intra-EC trade. b/ Estimate. Source: US Department of Agriculture. 182 Figure 3: Japanese Beef Imports, 1978-90 Beef, Bone-In Beef, Boneless 35 350 N"e Z NeMZe 30 - 300 Antrdlard 25 - 250 20 ....00 10 100 1978 1981 1984 1987 1990 1978 1981 1984 1997 1990 Source: World Bank, International Economics Department. (boneless basis) between July 1988 and 1991. Korean beef production is estimated to increase in 1992 as producers expand herds in anticipation of higher beef prices. Despite this anticipated rise, the minimum beef quota for 1992 was raised to about 185,000 tons (carcass weight). Australia is the Republic of Korea's main supplier of beef. However, imports from the United States rose from 21,500 tons (product weight) in 1989 to 49,000 tons in 1991, resulting in an increase in the US share from 19% to 30%. In the US-Korean Beef Agreement of April 1990, the Republic of Korea agreed to eliminate beef import restrictions before July 1997. The Asian region is potentially a huge market for beef trade in the 1990s due to high income elasticities of demand for meat and the current very low per capita consumption levels. The combination of population and income growth with trade liberalization policies should result in beef trade diversion from the United States to Asian markets, and contribute to upward pressures on US beef prices. USDA reports indicate an increase in Japanese investment in the beef industry in the United States, Australia, and New Zealand through purchases of ranches, feedlots, and processing plants to supply beef to the Japanese market. The US Department of Agriculture estimated that Japanese firms in the United States accounted for about 15% of total US beef exports to Japan in 1991; while in Australia, Japanese firms accounted for almost 50% of beef exported in 1991. US beef exports likely to exceed imports by mid-1990s. US beef and veal imports rose 2% in 1991. Supplies from Australia were drawn into the United States due to tight US supplies and relatively high prices of US cow beef, along with favorable exchange rate movements. Also, demand was down in Japan due to the large stock of frozen beef accumulated prior to the April 1991 relaxation of import restraints. 183 Figure 4: Republic of Korea's Beef Imports, 1978-90 Beef, Bone-In Beef, Boneless so 30- a m 700 20Asta 00 1178 1980 1982 1984 1988 1988 1990 1978 1980 1982 1984 1986 1988 1990 US meat imports from Australia and New Zealand have been governed by the US Meat Import Law since 1964. The law was revised to include a countercyclical formula to set the level of imports inversely with US cow beef production to offset production variations in each cycle. The US Meat Import Law provides for a minimum level of meat imports (including beef and veal, buffalo, mutton and goat meat) at 567,000 tons. If the expected quantity of imports is likely to exceed the "trigger level,"4 quotas are required. These quota requirements can be superseded by the US government negotiating voluntary restraints with supplying countries. In 1992, the trigger level was set by the US Department of Agriculture at 594,750 tons, only slightly below the 1991 trigger level of 598,062 tons. Voluntary restraint agreements (VRAs) were negotiated in 1991 between the United States and Australia and New Zealand of 337,000 and 202,000 tons, respectively. US beef imports from countries not included under the law (Argentina and Brazil) increased in 1991. US exports of meat have grown significantly in recent years because of increased beef and veal exports to Canada, Japan, Mexico, and the Republic of Korea. With likely declines in domestic per capita consumption and continued liberalization in major export markets, US meat exports are likely to exceed imports by the second half of the decade. Japan continues to be the single most important market, accounting for 75% of US exports of beef, and 60% of pork and variety meat exports. US beef and veal exports to the Republic of Korea in 1991 were up more than 50% from 1990. EC beef exports (excluding intra-EC trade) rose 20% in 1991 to about 1.3 million tons despite the disruption of traditional export markets. Concerns over Bovine Spongiform Encephalopathy (BSE) continued to adversely affect EC exports to traditional markets in the Middle East (Iran, Algeria, and Libya). However, this was more than offset by larger exports to Brazil and the newly independent states of the FSU. Equivalent to the base quota for the year times 10%. 184 1Igure 5: United States Beef Imports, 1979-91 Beef, Bone-In Beef, Boneless As5 700 ;;Amidlo AuWoe Soo 30 J25 S20 300 200 10 1970 1981 1985 1985 1987 1989 1991 1070 1981 1983 1985 1987 1989 1991 Growth in poultry markets elsewhere compensates for FSU dedine. In the poultry market, the leading exporters are the EC, the United States, Brazil, Hungary, and Thailand. The world market for poultry meat has continued to expand in recent years, with world exports increasing to 2.7 million tons in 1991 (rable 8). In 1991, the Netherlands and Thailand experienced the most rapid growth in poultry meat exports, with growth rates of 17% and 14%, respectively. The United States remains the world's largest exporter of poultry meat, with 588,000 tons exported in 1991. Exports to the FSU declined in 1991, but exports to Asian markets continued to be robust. With a decline in FSU's poultry meat imports in 1991 of 50%, the total import market for chicken meat was estimated to shrink by 3% compared with 1990. However, import markets in Japan, Hong Kong, and Mexico showed continued rapid growth in 1991, with growth rates of 13%, 12%, and 41%, respectively. At least in the near term, the availability of foreign credit will determine future imports level by the FSU. Thailand is the largest poultry exporter in Asia and the fourth largest in the world. Fueled by strong demand in Japan and other Asian countries as well as success in European markets, exports increased to 138,000 tons in 1990, following a 12.5% growth in 1989. Japan imports thigh meat and deboned breast. Exports to the European market are mostly skinless, boneless breast, while exports to the Middle East are mainly whole frozen broilers and bone-in-leg parts. Exporters foresee continued growth in demand from both Japan and the EC. Steady growth in Thai frozen chicken production will boost exports to Japan in the 1990s. Although the Republic of Korea has begun to liberalize agricultural imports, the poultry sector is still highly protected. Currently, imports of fresh, chilled or frozen chicken meat are prohibited. However, under an agreement with the United States, fresh and chilled chicken meat imports are scheduled to be liberalized in 1994. 185 Table 8: Poultry Meat Trade, Selected Comuntries, 1989-92 (Ready-o-Cook Equivaknt) Countries 1989 1990 1991 1992 a/ Exports United States 398 554 588 579 Brazil 248 305 295 325 France 474 497 530 550 Netherlands 340 376 440 460 Thailand 111 144 165 185 Others 786 762 719 779 Imports Japan 281 301 341 387 Hong Kong 198 239 255 260 Saudi Arabia 194 209 203 209 FSU 210 277 130 150 Netherlands 76 113 150 175 France 71 67 80 80 Mexico 51 46 80 89 Canada 42 53 48 48 Others 799 952 997 1,062 a/ Projection. Source: US Department of Agriculture. Chicken parts represented more than 90% of 1991 US chicken exports, about the same as in 1990. While US chicken meat exports to the FSU were down about 5%, due mostly to credit limitations, exports were strong to most other markets-up over 20% from 1990 (Table 9). Japan and Hong Kong were the largest markets, with increases of nearly 40% and 26%, respectively. US exports to Mexico increased about 55% as consumption of relatively low-priced chicken meat continues to rise rapidly. US exports to the Middle East also rose substantially, where over 60% are whole birds, in contrast to only 7-8% whole birds among all exports. The growth of US chicken meat exports to Pacific Rim countries is likely to continue in the 1990s. Poultry meat consumption in these countries is steadily growing. Other markets include Canada, the Caribbean, Mexico, and the Middle East. In the past, exports to the Middle East have consisted mainly of whole birds under the Export Enhancement Program (EEP). In the EC, the policies on poultry meat exports to nn-member countries were changed to reflect world market conditions and export refunds were reduced, although they still vary according to destination. In 1991, the concession to reduce levies by 50% granted by the EC under the generalized system of preferences to ACP countries, as well as Hungary and Poland, was extended to Czechoslovakia and Bulgaria. 186 Table 9: US Exports of Poultry Meat, 1989-91 Quantity Unit Value Destination 1989 1990 1991 1989 1990 1991 (tons) ---- -(f.o.b.US$/kg)- Chicken Parts Japan 101,285 87,903 122,430 1.26 1.21 1.19 Hong Kong 74,553 80,463 101,964 1.07 0.96 0.96 Canada 27,201 30,437 29,043 1.43 1.92 2.39 FSU 11,703 136,458 83,039 0.77 0.71 0.79 Mexico 38,023 34,628 53,816 0.95 0.97 0.95 EC-12 10,391 17,777 21,904 0.97 0.92 0.99 Saudi Arabia 2,156 5,326 5,788 1.14 1.29 1.38 United Arab Emirates 1,308 2,299 2,285 1.26 1.28 1.61 Bermuda 1,128 1,460 1,570 2.27 2.30 1.98 Republic of Korea 67 1,386 934 1.96 1.65 2.27 Bahrain 279 299 824 1.22 1.55 1.60 Western Samoa 516 1,065 1,073 0.64 0.69 0.74 Colombia 862 422 829 0.98 0.99 0.88 Whole Broilers Jordan 0 3,386 6,511 0 1.10 1.37 United Arab Emirates 0 1,271 5,129 0 1.23 1.25 Saudi Arabia 176 1,517 5,459 1.34 1.27 1.16 Mexico 2,852 3,872 5,761 1.14 1.03 1.10 Canada 2,885 4,371 3,471 1.34 1.33 1.30 Oman 0 1,318 2,972 0.00 1.23 1.31 Japan 155 5,533 3,041 1.02 1.02 1.08 Hong Kong 56 216 3,340 2.93 1.01 0.91 Singapore 105 547 729 1.28 1.01 0.98 Micronesia 648 1,244 1,394 1.43 0.97 0.96 Guatemala 34 19 814 1.21 0.74 1.24 Bermuda 522 517 558 1.49 1.41 1.34 Bahrain 0 331 552 0 1.25 1.30 Nicaragua 0 0 475 0 0 1.10 Angola 79 129 329 1.41 1.44 1.40 EC-12 34 318 173 1.91 1.39 1.21 Source: US Department of Agriculture. 187 Developments in Eastern Europe and the FSU Lower incomes mean decreases in meat impoits. Political and economic reforms in Eastern Europe since 1990 and the collapse of the FSU in 1991 continue to present major uncertainties in the outlook for meat trade. As with the rest of the FSU's agriculture, meat production has sharply declined (-7%) from 1989 and 1990 levels. Projections for 1992 show another 6% drop to 7.7 million tons, In recent years, major reforms to the meat industry include price liberalization, elimination of subsidies, and adoption of market-oriented marketing and distribution systems; further changes are expected during the decade. In most of these countries, meat production is adversely affected by inefficient production systems, poor farm management and genetic material, feed shortages, and distribution difficulties. The FSU has been a significant net importer of agricultural products. Meat imports by the FSU rose markedly in the 1970s and remained high during the 1980s. Beef imports, mostly in the form of food aid, increased in 1991 and 1992. Until 1991, the FSU imported significant amounts of meat and grain from Eastern Europe, largely on a barter basis using a nonconvertible accounting unit called the transferable rouble. Since 1990, countries in Eastern Europe have reduced their trade ties with the FSU and begun to develop closer relations with Western countries, particularly the EC. With the collapse of the CMEA and the changes in the FSU, trade between Eastern Europe and the FSU virtually disappeared in 1991. With greater independence of the republics and adoption of market systems, imports will depend on many factors including: (i) effects of the price liberalization on production and consumption; (ii) ability to earn foreign exchange; and (iii) policy developments in the EC. The changes in the FSU seem likely to result in further reductions in the region's meat production, consumption, and imports. In addition to current inefficiencies in production, meat output will be adversely affected by further reductions in feedgrain imports due to shortages of foreign exchange, while these reductions in grain production and imports are likely to lead to some diversion in utilization of grains from livestock to direct human consumption. The combination of greater market orientation, reduced incomes, limited foreign exchange, and much lower grain crops could result in a decline in livestock and meat production at least through the mid-1990s. Lower meat output, however, is unlikely to result in higher meat imports unless incomes recover and foreign exchange earnings increase or more aid and credit assistance are extended. In the long run, imports of meat products could rise as incomes and foreign exchange earnings increase. Policies of Western countries will also influence the FS U's meat trade. The continuation of policies to support production and subsidize exports in the industrial countries will result in greater FSU imports than if these policies were eliminated. In the near to medium term,, most imports are likely to be in the form of food aid from North America and Western Europe. Price Prospects Beef prices to rise in long term. The uptrend in US prices of imported beef since 1986 continued through the second half of the decade and the early 1990s (Figure 6). Prices of US imported frozen boneless beef (85% lean) averaged US0266.3/kg in 1991-3.9% above the previous year and 27.4% above the 1986 level. The recent upturn in prices was due to relatively tight US supplies and lower production in Australia and New Zealand. Also, concerns about the US quota trigger levels during the second and third quarters caused a sharp price increase going into the fall of 1991 (Figure 7). Prices declined in 1992, however, as record total meat supplies and a weakening economy weighed on prices. 188 Figure 6: US Beef Import Prices, 1961-91 Figure 7: US Beef Import Prices, 1989-91(monthly) (85% Lean Frozen Boneless, c.i.f. US (85% Lean Frozen Boneless, c.i.f. US port) port) 300 290 285 250 290 MNFB u2ARhaOJN.LA SE2CTNV E 275 198 1984 1971729317K9918 98 9819 18 19 9 2K 250 100 245 30 MXJA FEB MAR PR WA JL0 AL AUD SEP OCT NOV E 1 1 4 167 1 73 ig'7i 6 il79 i9iijN i9i i iil9 99 - t 9 The outlook for beef markets in the FMD-free areas will depend critically on how the major producing countries respond to the liberalization of the Japanese and Korean markets. The beef trade liberalization policies implemented in Japan since 1988 and the gradual opening of the beef market in the Republic of Korea have shifted trade from the traditional markets in North America towards the Pacific Rim Asian countries. Excluding intra-EC trade, Japan became the world's largest net importer of meat and meat products in 1989, with total imports reaching nearly 1.5 million tons (carcass-weight basis)-twice the level of the early 1980s. Other factors that will influence the outlook for the beef markets in FMD-free areas are: (i) negotiations on further reductions of the tariff on Japanese beef imports; (ii) quota increases by the Republic of Korea; and (iii) supply and demand conditions in the major producing and consuming countries. It is likely that the continued growth in demand for beef in the Pacific Rim countries will be met by increases in imports as domestic consumption continues to outpace production. Continued improvements in market access in Japan and other rapidly growing Asian countries will contribute to upward price pressures in the medium and long term. However, in the next several years, the abundant supplies of competing meats and slow economic growth will hold down the price gains. US beef import prices (in nominal terms) are projected to rise only modestly to average around USC264/kg by 1995 or USC228/kg in constant 1990 dollars. Real prices are projected to rise during the second half of decade due to several factors including declines in US output as the beef cycle enters its contraction phase in the mid-1990s, expected increase in exports of US beef to Asian markets, and lower beef exports from Australia to the United States-also as a result of increased shipments of Australian beef to Asia. However, the price increases will be tempered by abundant supplies of competing meats, particularly poultry. 189 Table 10: US Poultry Average Export Prices, 1999-91 Commodity 1989 1990 1991 (f.o.b. US$/kg) Whole Broilers Chicken Parts 1.22 1.14 1.19 Whole Turkeys 1.12 1.01 1.09 Turkey Parts 1.67 1.79 1.43 1.26 1.26 1.49 Source: US Department of Agriculture. Pork prices to move cyclicaUy with onupt. In the pork sector, aggressive expansion of the North American hog inventory in 1991, combined with a slowing economy, and abundant supplies of competing meats, were the major factors behind the large pork price declines that occurred during the second half of 1991 (Figure 11). These same factors are also expected to hold pork prices down in 1992, before prices begin to increase again with cyclical output declines. Expansion in 1992-93 is expected to be followed by contraction in 1994-95, expansion in 1996-97, and contraction once again in 1998-99. Pork and poultry's real long-run prices to faU with cost deereases. Continued strong demand for poultry meat contributed to chicken price increases in recent years (Table 8 and Figure 8). Average US export prices of chicken meat are projected to decline slightly in real terms through the mid- 1990s. Large supplies of reasonably priced legs and leg quarters helped the United States compete for market share in world trade. US chicken exports in the near term are expected to continue growing strongly, but volume is likely to be down slightly from 1991. Demand for poultry in the Pacific Rim countries is rapidly expanding from a low base, and this is likely to remain a large growth market in the 1990s, taking over 50% of total US chicken exports. Although rising demand will bid up prices, continuing improvements in technology and efficiency in production should result in further declines in production costs and, thus, in real meat prices in the long term. As in the past decade, this is likely to be more pronounced in the poultry and pork sector than in the beef sector, where technical developments are slower and where support policies in several countries are likely to maintain prices above market-clearing levels. In developing countries, pork and poultry production is rising much faster than beef, sheep, and goat meat production. Investments in poultry and hog industries in middle-income developing countries are likely to lead to similar levels of feed conversion efficiency as in the industrial countries, causing real prices of poultry and pork meat to decline. 190 Iligre 5: US Pol~ry E!port I^c, 1979-91 ..b.) ~gMe 9: US Pus Imprt Pdc, 1k91 j(c..f.) 2.2. C~ 2. La 1.t 31.48 'V f\ . 1.2 1.1 1. N 178 19a1 ' 1ais 19s7 ISH logi 1978 1161 196s 195 1s7 1s 191 Source: US Dtpartmn of Agriclture. Source: US Departmot of Agriculue. igare 10: Canadin= Pork E!port Pricm, 197991 (f.o.b.) Ilgwr 11: US Park Carcum P~a, 1990,1991 (L.b. M wet rier) 2.2 I 21 4sJ J v .. 8 5.. W . . 1979 19'a 11183 1M8 1u7 lus logi --eI - i Sore:Arculur Canada and Statistics Canøda. So~c: The National Poiinr 191 Table Al: ]ed - Prices, a/ 1950-91(Aonal) and 1992-2005(Projeuaed) Cure $ 1990 Coana - 0-5 MUV b/ 0-7 CPI sl 1950 69 425 560 1951 75 398 546 1952 67 340 468 1953 67 347 460 1954 66 353 451 1955 63 331 429 1956 57 289 380 1957 62 304 400 1958 65 318 417 1959 72 356 462 1960 74 356 463 1961 68 324 418 1962 71 332 426 1963 67 317 386 1964 84 392 474 1965 88 409 481 1966 102 457 540 1967 104 461 536 1968 109 485 543 1969 122 518 587 1970 130 520 590 1971 135 509 570 1972 148 514 568 1973 201 603 676 1974 158 389 480 1975 133 294 358 1976 158 345 413 1977 151 299 356 1978 214 369 413 1979 288 440 526 1980 276 384 450 1981 248 343 400 1982 239 336 392 1983 244 351 393 1984 227 334 368 1985 215 314 341 1986 209 259 275 1987 239 269 277 1988 252 264 272 1989 257 271 279 1990 256 256 256 1991 266 261 253 1992 244 229 219 1993 252 228 218 1994 256 227 216 1995 264 228 217 2000 376 274 256 2005 399 253 227 a/ AustrliaNew Zaland, cow bo~quar, frozenils , .i.f. US portm. For 1950-75, 90% viiblo ben; from 1976, 85% chemical Iean. bl Defiatd by -5 Manufacturing Unit Valu (MUV) Index. s/ Deflaitd by G-7 Consr Prioe Index (CP». sour~e: UsDepat The Th atoa ; The Ne Prov~ Da19y Ma2 Se , Ean14 bn~.iaa Ecoinomnice ~ ~utme (prj~ 192  Dairy Products Sumnary * Around 70% of international trade in dairy products is supplied by the highly regulated markets of the EC and the United States. Price movements are largely determined by the dairy policies of these exporters. * New Zealand exports around 80% of its total production and is the second largest supplier to the international market after the EC. The FSU had become a major market for New Zealand, but with reduced consumer demand there and more food aid and subsidized exports from elsewhere, New Zealand will have to maintain its drive to expand in other export destinations. * Production in the FSU and Eastern Europe is expected to recover only slowly, and probably not fully, from the much reduced levels of the past three years. * The outlook for the butter/butteroil market in the short term is one of demand well below desired exports, and large stocks, especially in the United States. So the downward pressure on prices is likely to continue. In the second half of the 1990s, some recovery is possible. * For milk powders, prices are strongly influenced by production levels and domestic disposals in the EC. Production levels in 1992 have been reduced by quota cuts and drought conditions in some countries, and intervention stocks are low. At the same time, demand is quite strong. So milk powder prices are expected to stay around the US$1,800-1,900/ton range. For the 1993-94 period, supply for export is likely to increase while demand prospects are mixed, so prices are expected to decrease, possibly to US$1,400/ton. In the second half of the 1990s, import liberalization in some markets, growing consumer demand in others, and the probability of lower levels of subsidized production as an outcome of the Uruguay Round, suggest that prices may be higher, probably in the range of US$1,600-2,000/ton. Introduction Internationally traded dairy products (excluding intra EC and FSU trade) represent a relatively small residual market, accounting for around 5% of total world milk production. Approximately 70% of this trade is supplied by countries with protectionist policies which largely isolate production from prices on the international market. In this environment, price movements and expectations are generally dominated by dairy policy management in a few key countries. During the 1980s, on average, about one half of all product entering the market was supplied by the EC. With its domestic market four times the size of the international market, highly regulated, and supported by large export subsidies, EC policy management and pricing is the single most important determinant of international prices. The United States is generally the most important of the other institutionally driven exporters. Over the past two decades, its influence on the international market has fluctuated in line with 193 the wide variation in its export volumes. However, it is important as (i) it has been the third or fourth largest supplier over the last decade its exports are typically well above the next largest of the protectionist exporters (Canada and the Nordic countries); and (ii) of the institutional exporters, its internal pricing is the closest to the international market. Because of the large size of the US market relative to the international market, these prices place a cap on international prices, i.e., if international prices reach the level of the US market, its exports enter the market on a commercial basis, considerably expanding the effective supply base. While New Zealand is the second largest supplier to the international market, it is relatively unimportant to the formation of prices. With a small domestic market, relatively price inelastic supply (at least in the short term), and little support or protection for the dairy industry, it is predominantly a price taker with relatively fixed supply. Like exports, dairy product imports are also strongly affected by policy considerations. Most markets are subject to some form of trade restriction, with nontariff barriers (e.g., quotas and state trading) being widely used. Overall, however, fluctuations in effective demand have not been as important to international market prices as supply-side considerations. A major exception is the impact on international butter demand of the recent changes in the FSU. This has major short- and long-term implications for the market. From a longer-term perspective, demand-side considerations become more important. Population and income growth and taste changes (associated with income growth and globalization) are the major factors in demand growth. In many growing markets, pressures for contraction in domestic support and trade liberalization are likely to limit expansion of domestic supply, causing import demand to increase. Recent Developments (i) MAJOR EXPORTERS EC. May '92 reforn package weakens commitment to fmther quota cuts. EC production (excluding former East Germany) declined in 1991 and is expected to decline by a similar degree in 1992. In the main, these declines reflect production quota cuts. Production quotas were reduced by 2.15% in June 1991. Further cuts were proposed by the European Commission as part of its CAP reform proposals, but the reform package agreed in May 1992 substantially weakened commitments to quota cuts, with none being imposed for 1992/93, and the 1% cuts for each of the following years, subject to market review by the Commission. Production quotas for Spain and Greece were increased substantially (900,000 tons). The impact of this on actual supply is not clear, although the countries themselves argue that the increased quotas will be more strongly enforced and over-quota production reduced since their initial quotas did not reflect actual production. Italy has also requested quota increases using this argument. (It is reporting higher production in 1992 but this is said not to reflect an actual increase in production.) Political obstacles remain despite economic rationality of quota reductions. What is clear is the permanency of the quota regime. Introduced in 1986, it is now the principle medium-term management tool for the Commission and a significant asset for current quota holders. While these forces 194 ensure its continued existence, the regime's future in terms of quota allocations and management is less sure. Factors suggesting a continuing decline in quota allocations include: - The persistent structural surplus. Commercial disposals account for only about 80% of current production. - EC budgetary pressure. While government spending on the CAP is not large on a national basis, it is a substantial part of the EC budget. Proposals to move assistance from price to direct income assistance would increase national budget pressures (while reducing consumer transfers). Reducing dairy production would provide significant savings for the EC budget. - Developments in the FSU. This region has been the principle market/aid outlet for EC butter. Price reforms and falling real incomes have seen dairy demand and butter imports fall substantially. - Uruguay Round outcome. It appears likely that one outcome of the GATT Uruguay Round would be to require the EC to reduce subsidized exports. With subsidized internal disposals already high (see below) such an outcome is likely to mean further cuts in production. While these factors are working towards a continuation quota cuts during the 1990s, their extent, timing and impact on actual production will depend on a range of political factors including: - The desire of some member countries to increase production. Currently quotas are not transferable between countries and hence the only mechanism for an increase in production (or a slower rate of decline) is via changes in total quota. - Funding the retirement of quotas, in particular, the level of compensation provided and the proportion provided by the EC. Unless market prices are reduced by lowering support prices and reducing the level of subsidized disposals, future quota cuts are likely to increase quota values, increasing the cost of quota retirement. - Quota performance. Quota production is related to a national rather than farm level. This has meant that farmers were only penalized for over-quota production if the nation as a whole exceeded its quota. Under this regime there is a farm-level incentive for over-quota production and the current scheme has experienced persistent over-quota production. With internal EC prices above intervention levels and sharply lower government stocks, it is far from certain that the 1% quota cut will be implemented in April 1993. Completion of the Uruguay Round is likely to be important to the debate. In the longer term, the balance of probabilities seems to favor modest quota reduction in the mid-1990s. Changes in EC market management. While total EC production is important, we turn now to the world market where the balance between internal and external subsidized disposals has a direct and major impact. The recovery in international prices in the second half of 1991 derived substantially from this source. The EC significantly increased its subsidized internal disposals of butter and skimmed milk powder (SMP) in 1991. This, together with the quota cut, was sufficient to eliminate intervention purchases and allow internal wholesale prices to increase. EC export prices rose correspondingly. With 195 the exception of butter/butter oil, international market prices followed the EC prices.. (These developments are further discussed in the product reviews.) One aspect of EC market management which appears to be changing is the ability of the Commission to more rapidly vary the supply-demand balance. EC production has been significantly reduced from the levels of the mid-1980s. This has meant an even larger decline in the level of structural surpluses (i.e., subsidized disposals). Current levels are such that relatively small changes in production and/or subsidized disposal regimes can alter the market balance between accumulation or decline in intervention stocks. This is likely to change significantly the pattern of international prices. Price fluctuations are likely to be shorter in duration (i.e., the period from significant price decline to recovery is likely to be shorter). The difference between peaks and troughs may also be reduced. Changes to the management of intervention purchases are also likely to affect the pattern of international prices. For both SMP and butter, the Commission introduced a tender system rather than fixed intervention prices. In practice this has meant that with significant sales to intervention, purchase prices are around 90% of the full intervention price. However, sales from intervention are made at the full intervention price plus 10 ECU per ton. Thus a move out of net intervention purchasing triggers a rapid change in internal wholesale prices-from 10% below intervention to slightly above. For SMP, this equates to around a 15% increase in EC export prices and for butter around a 20% increase. UNrrED STATES. SMP and butter are the major US dairy exports. Export volumes have fluctuated widely, largely in response to the level of government purchasing and stockholding. While exports in 1992 are likely to be up on year-before levels (particularly for butter/butter oil), for SMP they are well below the volumes of the 1970s and 1980s. The fall in exportable surplus since the mid-1980s reflects the impact of the 1985 US Farm Bill. This provided for minimum prices to be reduced in response to substantial government purchasing. Over the period 1985 to 1990, the minimum farm gate milk price was reduced by 16%, to $222.67/ton. Over most of this period government purchasing was limited mainly to butter, whose market prices remained at their minimum while non-fat solids were priced well above support levels. As a consequence, although farm prices were constrained by the falling value of milk fat, they remained significantly above the minimum. Policies impose market discipline for milk but butter surplus remains. The 1990 Farm Bill weakened this provision, providing no reduction in the minimum price below its value at that time ($222.67/ton). Despite this and other changes, the legislation appears to have imposed a higher level of market discipline than its predecessors before 1985, as illustrated in late 1990 and early 1991 when the market moved into overall surplus (i.e., for all milk solids). The consequent fall in the milk price to the minimum farm gate price reduced supply sufficiently to eliminate the surplus in total milk solids. The milk fat surplus remained-in the final analysis, an outcome of government intervention, but exacerbated by falling demand (i.e., rising demand for low fat and non-dairy fat products). At mid-1992, government butter stocks reached 280,000 tons. Subsequent aid and subsidized sales to the FSU have reduced these to around 200,000 tons. In response to the continuing surplus of butter, in the first half of 1992 the USDA twice lowered its minimum price for butter, to US$1,681/ton. As the minimum price for milk cannot be reduced, this was offset by increases in the minimum price for SMP (to US$2,145/ton). The US butter price is now only US$330/ton (24%) above the GATT International Dairy Agreement (IDA) minimum 196 price and around US$280/ton (20%) above the current international price. This price represents a price ceiling for international trade. Once international prices reach this level, commercial exports from the United States become possible. US milk production was relatively stable in the late 1980s. However, in early 1990, production increased strongly. This increase pushed the market into surplus (government purchases of intervention products increased) and the subsequent fall in farm gate prices resulted in a production decline to earlier levels. Despite relatively stable milk production, in the late 1980s, surplus butter has been an ongoing problem for US policymakers. While the support price for butter has been cut by 42% over the past four years, butter (milk fat) consumption has not risen sufficiently to eliminate the persistent surplus. Underlying this problem has been a shift in demand away from high milk-fat products. This has been evidenced by falling demand for butter and rising demand for low-fat versions of standard dairy products (e.g., drinking milk and cheese). Disposal of butter into the international market, particularly as aid, has increased. It appears likely that exports for 1992 will reach or exceed 100,000 tons. This is around twice the levels of 1990 and 1991 and five times higher than for the period 1985. With domestic demand trends likely to continue, and limited scope to adjust support pricing under current legislation, exports at this or even higher levels are likely until at least the mid-1990s. In effect, the United States has become a major supplier to the international market at a time of declining international market demand. As discussed in the product review, this has significant implications for prices in the international market. In the second half of 1992, US dairy production began to increase. USDA and other forecasters are predicting that this increase will continue into 1993. The increase follows the recovery in farm gate prices over the last year (in response to the earlier decline in production) and favorable feed prices (see Figure 1). With production increasing and domestic economic conditions not conducive to Figure 1: United States: Milk-to-Feed Price Ratio, 1989-92 1.8 1.7 1.6 1.5- 1.3 1.2 1.1 1.0 0.9 Jwuary Apri Jdy October -*- 1989 1990 -g(- 1991 - 1992 Source: US Department of Agriculture. 197 significant increases in demand, the United States may now be moving towards a total milk solids surplus similar to that of 1990/91. Under current legislation and policy measures, the production surplus and price cycle of the early 1990s is likely to be repeated. US milk exports to Mexico to expand under NAFTA. Mexico is already the United States' largest dairy export market as well as the world's largest importer of milk powders, particularly of SMP. Except for state trading arrangements, most dairy imports are subject to duty. However, duties on imports from the United States will be phased down to zero during the 1990s under the terms of NAFTA. This provides the potential for the United States to significantly expand its exports to Mexico. An increase in US exports to Mexico is likely to result in a net increase in total US exports, rather than diversion from other markets. NEw ZEALAND. The second largest supplier to the international market, New Zealand, is almost unique in its degree of exposure to the international market; around 80% of production is exported. Milk production increased significantly (up 6%) in 1991/92, despite a period of low farm gate prices (see Figure 2). In part, the increase in production reflected very favorable seasonal conditions. However, it also underscored the relative insensitivity of production to short-term price changes. Based on average seasonal conditions, most observers expect production in the 1992/93 season to fall a little. However, investment and development at the farm level appear to be increasing. For at least the first half of the 1990s, production is likely to continue its upward trend, with production increases reflected in rising export availability. The production mix has changed significantly since 1980. The principle change has been to promote whole milk products as an alternative to butter, but despite these efforts butter remains a major product. Figure 2: New Zealand Milk Production, 1980/81-90/91 400.0 350.0 O 0 300.0 250.0 200.0 9 /1 1980/81195 6190 1 Source: New Zealand Dairy Board statistics. 198 New Zealand's continuing need to diversify export destinations. Both domestic sales and quota access to the EC have been falling and hence export availability has been rising. Compared with 1983, New Zealand's export availability for non-EC destinations has risen 40,000 tons (33%) to 185,000 tons. As shown in Table 1 below, the FSU has become a major outlet for New Zealand, accounting for an average of 40,000 tons a year over the period 1987-91. The impact of lower import demand from the FSU, but greater food aid and subsidized exports from other countries, is likely to decrease New Zealand's exports to this destination over the medium term. This should maintain pressure for New Zealand to maximize: - sales to other destinations, hence maintaining pressure on international prices; - production of whole milk products, particularly whole milk powder. As discussed in the product review, this is likely to be one of number of factors shifting price relativities within the milk powder market away from those operative in the 1980s. CENTRAL EUROPE AND THE BALTIcs. Eastern European and FSU production recovery to be slow. The three major dairy producers in the old Eastern European bloc were Poland, Czechoslovakia, and East Germany. In each case, the economic and political changes of the last three years have seen major declines in milk production and consumption. In Poland, milk production has fallen by two million tons (15%) to around 14.3 million tons. Deliveries to dairies have fallen by around three million tons (30%), with more milk being retained for use within the farm sector (by small semi- subsistence units). These declines are indicative of the decline in the relative profitability of dairying since the reforms of 1989 and 1990 and of the structural problems of the sector. Very small herds predominate, limiting milk quality and making new investment difficult. Overall, the standard of the processing sector is poor; large investments are needed to improve quality and productivity. In response to pressures from the farm sector, the Polish government has introduced a range of price support measures. Tariffs have been imposed for many dairy imports and a minimum price regime implemented. These changes may help stabilize the industry but may also hinder development of a fully competitive export sector. The recent increase in international prices for SMP and casein (principal exports for Poland) should assist industry profitability. However, the medium-term outlook is for production to recover only slowly. The upward trend in milk powder exports during the 1980s would appear to have been halted. The volume of exports is likely to be held at levels somewhat below the average for the early 1990s. The Czecho Slovakian dairy industry is very different from that of Poland, with most production coming from large state and cooperative farms. However, the impact of the political and economic changes has been similar. While production was maintained in 1990 (7.1 million tons), it fell by 10% in 1991 and is falling further in 1992. 199 Table 1: FSU Imports of Butter by Origin, 1987-91 Average % Total 1987 1988 1989 1990 1991 1987-91 Exports ('000 tons) EC 307.4 306.3 149.3 28.7 154.6 189.3 45.6 New Zealand 11.4 38.6 25.3 66.8 61.1 40.6 18.9 Australia 0.0 3.0 10.0 1.0 15.5 5.9 11.7 Nordic Countries 6.2 8.6 19.1 53.7 12.9 20.1 40.4 Other 55.6 56.0 54.0 97.1 6.0 53.5 51.0 Total 380.6 412.6 257.8 247.1 250.0 309.6 % World Trade" 37.5 38.9 32.7 33.1 35.3 35.8 a/ Excludes intra-EC trade. Source: Australian Dairy Corporation. Like Poland the dairy processing sector is not adequately equipped by modem standards and considerable investment will be required to improve productivity and quality. While this may occur more quickly than in Poland (because of a better general infrastructure and a stronger/wealthier economy), it is not clear that Czechoslovakia has a comparative advantage in dairying. Restructuring is likely to see a more sophisticated but smaller industry, one catering for the domestic market. With the need for hard currency and with dairy consumption in Russia falling, Baltic countries have a clear incentive to increase exports to the international market. The Baltic states of the FSU have large dairy industries. Prior to independence, they collectively produced and exported (on a milk-fat basis) around the same volume of milk as Australia (currently the third largest supplier to the international market). Butter was the principle export and Russia the principal destination. How rapidly these countries can re-orient their industries to supply non-FSU destinations is not clear but the incentive is strong. In Poland, Czechoslovakia and other countries of the old Eastern European bloc, the immediate impact of economic reform was an increase in exports at heavily discounted prices, with declining domestic consumption and a strong need for hard currency fueling the process. However, these countries already had significant experience in exporting to non-CMEA destinations. This is not the case in the Baltics. Sales of butter for processing into butter oil would be a potential fast-track option and one which could further aggravate the already difficult balance in the butter sector. The capacity of the Baltics to increase milk powder exports is not clear but relative inactivity in the rising market of late 1991 and in the first half 1992 suggests their capacity is limited. 200 AustRALiA. Australia is the third largest supplier to the international market, currently accounting for around 8% of total supply. Production has been rising, despite a reduction in the level of domestic price support. Since 1986, the level of price support for manufactured products has halved and with recent policy decisions support further halve over the 1990s. Still, support for the farm gate price of drinking milk continues at relatively high levels. In key regions the returns from drinking milk sales are averaged with manufacturing milk returns, thereby encouraging production above market-clearing levels. With declining domestic demand for milk fat and increasing imports from New Zealand, export availability is likely to increase slightly. CANADA AND NON-EC WEsTERN EUROPE. In total these countries account for around 10% of supply to the international market. They maintain relatively high rates of protection for their dairy industries and, with the exception of Sweden, also operate supply management programs. Total exportable surplus from these countries is likely to remain relatively static, at least until around the mid-1990s. After that point it is possible that GATT commitments and/or accession into the EC may generate restructuring and lower exports in some of these countries. (ii) KEY IMPORTERS FSU. Commercial imports by FSU plummet. In recent years, the FSU has played a pivotal role in the international butter market, absorbing a large proportion of the export surpluses of the EC, Nordic countries and, to a lesser extent, New Zealand. In the period 1987 to 1991, the FSU accounted for over one third of all international butter trade (see Table 1). For the EC, Finland, and United States, sales to the FSU accounted for over 40% of exports. New Zealand relied on the FSU to absorb around one fifth of its exports. Against this background, the parlous state of the new economies of the FSU is of major concern to butter exporters. Thus far in 1992, commercial imports have been virtually nonexistent. New lines of credit being provided by the EC, United States, and others may improve the situation in the latter half of the year, but commercial transactions seem destined to be well below recent years. Even including aid, total imports are expected to be well down, probably to around 150,000 tons. As Table 2 indicates, no market apart from the FSU accounted for more than 4% of world butter trade during 1987-91. Indeed, in volume terms, the next five markets-Egypt, Algeria, Saudi Arabia, Iran, and Mexico-collectively accounted for less than one half the trade to the FSU. MEXIco. Continuing pressures to reduce Mexican governments intervention in dairy market. As indicated by Table 3, Mexico is by far the largest importer of SMP. Its importance is further heightened by noting that the imports of the third largest importer, Japan, are predominantly of stock feed quality. Mexico's SMP imports are subject to state trading, in part as a means of protection for the domestic industry. In addition, utilization of SMP is subject to considerable government intervention, with around 60% being used in subsidized consumption in social programs. 201 Table 2: Major Butter Markets: Average Imports, 1987-91 Source New Nordic Share Importer EC Zealand Australia Countries Total Imports World Trade (tons) (%) FSU 186,079 40,658 5,905 20,114 309,645 35.8 Egypt 40,526 2,727 0 960 45,619 5.3 Algeria 23,018 5,314 0 1,993 32,847 3.8 Iran 9,473 16,864 2,902 492 31,516 3.6 Saudi Arabia 17,930 4,641 1,149 220 23,945 2.8 Mexico 8,839 5,275 54 270 18,939 2.2 Total Exports 414,109 214,963 50,673 49,850 863,742 100.0 Source: Australian Dairy Corporation. The variability in SMP imports in recent years (Figure 3) was mainly the result of "overpurchasing" by the state trading agency and the consequent accumulation in stocks. Some increase in domestic production and changes to the subsidized consumption programs exacerbated the situation. However, by 1992, the stocks had been cleared and imports recovered. For 1992, imports are likely to be near the average for the previous five years. Future import demand will depend significantly on government policy. Pressure for liberalization of the industry and further reductions in consumption subsidies continue. In the longer term, the effect of higher economic growth, strong population growth, and trade liberalization (especially under NAFTA) is likely to be an increase and broadening of the import demand for dairy products. However, in the short term, local production is likely to expand (with the benefit of significant protection) and subsidized consumption of reconstituted milk products (the principle use of SMP) is likely to be reduced. ALGERIA. Unceitainty in Algerian market. Algeria is a major importer of dairy products. On average, it accounted for 12% of world trade in whole milk powder (WMP) in the period 1987 to 1991 (see Table 4). While Algeria's demand for dairy imports has been strong in recent years, this market faces considerable uncertainty. The economy is not strong and financing of imports remains a significant problem. Whether imports can be maintained will depend substantially on political developments within Algeria and on the decisions of US and EC (principally France) governments to provide lines of credit. JAPAN. Despite high levels of support for its domestic dairy industry, Japan's demand growth has outstripped supply and import demand has trended upwards over the past two decades. Japan is now the largest importer of dairy products, with the principle product being cheese. Japan also imports significant quantities of dairy products in the form of industrial food mixtures. For example, its imports of cocoa preparations (containing a high proportion of milk powders) is valued at over US$150 million. 202 fYgure 3: Exports to Mexico, 1987-92 300000 250000- 200000- 150000- 100000- 50000- 0 1987 1988 1989 1990 1991 1992(f) *Butter includes anhydrous milk fat. Source: Export statistics for exporting countries. This trend of rising import demand is expected to continue, fueled by high and growing incomes, increasing diversity in food preferences, and further liberalization of trade. (iii) TECHNOLOGICAL CHANGE Increasing productivity could intensify. The dairy industry in industrial countries is characterized by a long-run trend of increasing productivity. This can be expected to continue and perhaps to intensify. While slowed by a cautious-to-hostile reaction from various governments, industries, and consumer groups, the introduction of Bovine Somatotropin (BST) offers the likelihood of sharply increased productivity. The US market should provide the key to its widespread introduction. The US Food and Drug Administration has been considering approval of this product for some time. Despite slow progress to date, it is likely that approval will be granted. Notwithstanding consumer concerns, commercial use would probably follow such a decision. Adoption of BST in Europe is less likely, for two reasons. First, the EC currently has a moratorium on its introduction. Second, the effect of the EC quota system is to limit the farm level return from the use of BST. Other major exporters such as New Zealand are unlikely to move to introduce BST until it is accepted in the EC. Overall, therefore, the introduction of BST is likely to be relatively slow during the next five years. Independent of the adoption of BST, productivity growth is anticipated to continue at strong rates. A variety of emerging livestock technologies (e.g., cloning and low-cost embryo transfer) plus continued application of existing technologies are likely to maintain past rates of productivity improvement. 203 Table 3: Major Importers of Skim Milk Powder Averages for 1987-91 Source New US & Total Share Importer EC Zealand Canada Australia Imports World Trade (tons) (%) Mexico 75,731 24,504 53,051 3,132 156,440 17.4 Algeria 53,103 4,669 3,399 0 65,101 7.2 Japan 28,240 11,677 53 17,706 63,658 7.1 Philippines 8,250 16,691 12,157 21,542 58,927 6.6 Malaysia 4,134 20,779 1,370 16,309 46,882 5.2 Thailand 9,891 7,723 2,965 11,549 33,197 3.7 Brazil 9,614 1,576 14,784 0 29,388 3.3 Total Exports 388,422 146,145 184,600 92,190 899,402 100.0 Source: Australian Dairy Corporation. (iv) DIETARY CONCERNS Milk fat substitutes continue to gain ground. In most countries with high rates of dairy consumption, concern regarding the consumption of fats, in particular, animal fats persists. In many countries these concerns have resulted in significantly lower butter consumption and an increasing preference for low-fat dairy products. This trend can be expected to continue with resulting increases in exportable surpluses of butter in key markets such as the EC and the United States. (v) SuBsrrruTEs In both domestic and international markets, the main area for substitution of non-dairy for dairy product is milk fat. This is particularly so in the international market where butteroil has been largely replaced by vegetable oils in milk-recombining markets. Butteroil is a small and relatively high priced segment of the international fats/oils market. Over the forecast period new products are likely to continue to erode the demand for milk fat. These products will include low-fat (high moisture) tablespreads, low-fat dairy products, and replacement of milk fats in some products such as "analogue" cheeses. Protein substitutes are also growing. Soy-based drinks have a small but growing market in many traditional dairy consuming countries. They are a major market segment in many "non-dairy" countries (e.g., in Asia). (vi) MULTILATERAL TRADE REFORM Dunkel drqft suggests little change in world dairy markets. While still to be concluded, it has become increasingly clear that the Uruguay Round will yield only small changes in the international 204 Table 4: Major Importers of Whole Milk Powder* Average 1987-91 Source New US & Total Share Importer EC Zealand Canada Australia Imports World Trade (tons) (%) Algeria 85,754 11,557 3,164 0 100,475 12.0 FSU 42,760 3,329 0 3 64,346 7.7 Venezuela 34,515 28,515 0 0 63,493 7.6 Saudi Arabia 52,409 6.2 Malaysia 6,966 31,251 0 4,551 42,811 5.1 Taiwan, China 15,352 8,611 50 11,623 35,656 4.2 Philippines 14,009 5,698 0 1,328 21,628 2.6 Total Exports 551,647 182,747 19,378 47,746 840,316 100.0 Source: Australian Dairy Corporation. dairy market. The Dunkel Draft of 1991 represents the limit to possible reform of agricultural trade in the current round. If adopted, its formula for reform, choice of base period, and treatment of food aid are likely to result in relatively little discipline over subsidized exports until the latter part of the decade. A possible exception (depending on implementation) is cheese. EC exports of this product have been trending up, hence any commitment to reduce subsidized exports would have an immediate impact on the level of its exports. In the case of butter and SMP, the base period coincides with a period of major government stock reduction by the EC. Its base period exports of these products are therefore abnormally high. (vii) CURRENCY MOVEMENTS Weak US dollar means higher dairy prices. EC export pricing is the major determinant of international prices. However, most dairy trade is denominated in US dollars. Given the importance of EC export pricing and its relative independence from developments in the international market, international prices are strongly affected by the value of the US dollar against ECU currencies. In most circumstances, appreciation(depreciation) of the US dollar against the ECU results in relatively rapid reduction(increase) in international prices (in US$/ton). In some circumstances this impact is counteracted by EC refund management. For example, when prices are at the GAIT IDA minimums, appreciation of the dollar will be offset by reducing EC export subsidies. Still, trends in the value of the dollar do affect the market. In analyzing current prices it is important therefore to allow for the current weakness in the value of the US dollar against the ECU. The dollar is at a post-war low against the DMark. This has been a significant factor in the strengthening of international dairy prices in 1992. 205 Market Outlook (i) BurrER/BuITEROL Competition among supplies has kept prices weak since 1990. Following the short-lived price resurgence from 1987 to 1989, international prices have continued to trade near the GATT IDA miminum price. In the main, the rise in prices from 1987 to 1989 reflected the impact of both declining EC production and its successful stock reduction program (mainly to the FSU). These factors allowed wholesale prices within the EC to rise and export subsidies to be reduced. The decline in international butter prices was initially associated with falling wholesale prices within the EC. This price decline began in the last quarter of 1989 and by January 1990 EC wholesale prices had declined to the effective intervention price (then 93% of the official intervention price). International prices tracked the fall in EC prices. While intervention acted to stabilize prices within the EC, international prices were pushed lower by increases in EC export subsidies (e.g., the butter subsidy was increased US$270/ton in 1990). Importantly, weak pricing has continued despite improvements in the EC market, higher EC export prices, and a fall in total traded volumes. For much of 1992, EC export prices have been well above (e.g., US$200/ton) the international market and there has been little new EC export business. Competition between New Zealand, Australia, United States, and other minor exporters has been sufficient to keep prices low. A key factor in this ongoing weakness in international butter prices is the collapse of the FSU. Renewed intervention buying by the EC in 1990 triggered a change in policy management. Milk quotas were reduced in 1991 and internal subsidized disposals of butter were increased. EC internal prices have risen and notional export pricing by mid-1992 was around US$1,600/ton. International prices remained around US$1,350-1,400/ton. Market demand likely to be well below desired exports in medium term. Most factors suggest that butter prices will remain weak in the medium term. Real incomes in the FSU have plummeted and food prices increased relative to prices of other goods. Dairy consumption is down and experience in Eastern Europe suggests further falls. Production is also falling but because of scarce foreign currency and the fall in consumption, import demand is likely to remain weak for several years and possibly for the rest of this decade. It appears that imports in 1992 are unlikely to exceed 150,000 tons. Much of this will be direct aid and the remainder sold on the basis of extended and subsidized credit. This level of imports is around one half of the level averaged over the previous five years. A number of other importers (e.g., Algeria and Egypt) face lesser but substantial economic and political difficulties. The surplus in US butter supplies appears likely to continue and its export "requirement" should remain high for a number of years. Over the next few years, its exports (including aid) are likely to be well above the average for the past five years, probably adding around 50,000 tons to available annual international supplies. Within the EC, subsidized domestic disposals in 1991 were up by around 50,000 tons on year-before levels and seem likely to increase by a similar amount in 1992. It is unlikely that they could be increased much above this level, however, without resort to substantially greater subsidies. Meanwhile, commercial demand is vulnerable to consumer taste changes (in key countries such as 206 Germany and France, per capita consumption of butter is high by international standards). In recent years commercial demand appears to have been falling at over 30,000 tons per year. Therefore, exports will have to remain at substantial levels (e.g., 300,000 tons per year) unless production is cut further. Excluding quota access to the EC, international trade in butter/butteroil has been around 700,000 tons in recent years (see Figure 4). If FSU imports fall to 150,000 tons and other markets do not increase, this market would fall to 550,000 tons. Excluding quota trade with the EC, New Zealand must export around 180,000 tons and Australia 60,000 tons, while the United States will be looking to export in the order of 100,000 tons and the EC 300,000 tons, so that total desired exports from these countries would be around 640,000 tons. Existing markets are unlikely to take up this level of increase. While butteroil demand in Asia is likely to grow and imports by Mexico appear to be trending up, Algeria could well reduce its demand. One market with potential is India. Domestic consumption, mainly in the form of ghee, is large but to date imports have been virtually prohibited. However, India is moving to liberalize its economy, reducing regulation of international trade. In the dairy market, import licensing is due to be liberalized, but liberalization for dairy products is not likely to be rapid. Over the past two decades, India has greatly expanded its milk production (cow and buffalo)-strong government intervention and guidance have been central to this development and social objectives important. So this program is unlikely to be changed rapidly. Butter prices, therefore, are expected to remain weak for some time with policy adjustments in the EC and the United States being critical factors in future price developments. Prices will also be affected by the degree to which higher prices for non-fat solids can offset the low international returns for butter, which will impact on supply from New Zealand and Australia. In 1992 and 1993, butter prices are likely to remain around US$1,300-1400/ton. Prices in 1994 will depend critically on the level of quota cut in the EC. The 19% cut currently proposed is Fgure 4: Butter Exports for Major Suppliers, 1987-92 12000 1000--LS a n 800- 400- 200- 01_ 1987 1988 1989 1990 1991 1992(*) ONZ exports exclude EC quota trade Source: Australian Dairy Corporation. 207 insufficient to assist prices. Unless the cut is greater or large-scale aid/donations are made to the FSU, downward pressure on the international market should continue, with the likelihood that the IDA minimum would be significantly breached/lowered (i.e., prices below US$1,300/ton). In the second half of the decade, improved prospects in the FSU, import liberalizing (e.g., Japan and India), subsidy restrictions under the Uruguay Round outcome, and market growth in Asia are likely to allow some recovery in prices, but this should be limited because of the declining consumption in industrial economies with a tradition of dairy consumption. Prices are unlikely to be sustained above US$1,600/ton (in current dollar terms). (ii) MILK POWDERS Like butter, the international market price of milk powders increased from 1986 to 1989 before declining in 1990. However, two key differences are that the 1986-89 price rise for milk powders was more sustained and prices rose significantly above earlier peaks, and that prices recovered in 1991 and 1992. Currently, milk powders are trading well above the GAIT IDA minimum prices. Prices for WMP have followed a very similar pattern to that of SMP prices. While important in its own right in the international market, a range of institutional and market relationships ensure that the price of WMP is closely linked to the equivalent value of the milk solids for butter/SMP. Since butter prices were discussed in the previous section, most emphasis is given here to SMP prices. EC domestic market disposals strongly influence international prices. Prices for internationally traded milk powders are strongly influenced by developments in the EC, particularly by the management of domestic market disposal programs of SMP. These programs are far more important than exports in determining the EC's supply and demand balance. Commercial (nonsubsidized) sales of SMP within the EC account for only a minor fraction of total supply. The major outlet for SMP in the EC is for use in formulated calf feed. (Since 1987, this program has been the outlet for virtually all of the subsidized domestic disposal of SMP.) Subsidized domestic sales have been usually around three times as high as exports. The subsidies for SMP sales to the beef sector typically has been conditional on a minimum percentage of SMP in the final compound feed. During 1988 this minimum usage rule was removed. Abandonment of this regulation, the rising price of SMP within the EC, and lower rates of subsidy subsequently caused a substantial decline in the proportion of SMP used in compound calf feeds. In addition, calf rearing has declined since 1988. The net result of these developments was a large fall in disposals to this sector, from around 1.2 million tons in 1987 to 0.75 million tons in 1989. As illustrated in Figure 4, production of SMP began to increase again in 1989. A significant factor favoring higher production was the decline in casein manufacture brought about by the change in regulations controlling the use of casein produced from subsidized skim milk. By the latter part of 1989, higher production and lower domestic disposals pushed the market toward surplus and wholesale prices moved toward intervention levels. Export prices fell accordingly, with a direct impact on the international market. In late 1989, heavily discounted product from Eastern Europe also began to be marketed. Falling casein manufacture and, to a lesser degree, falling production of WMP and condensed milk products pushed SMP production higher again in 1990. (Casein manufacture in 1990 was 40% below the levels of 1988 and 1989.) This released sufficient skim milk to produce 100,000 tons of SMP. With domestic disposals remaining low and export demand dampened by the discounted Eastern European product, intervention purchasing began in March 1990 and increased rapidly (see Figure 5). 208 The EC Commission increased export subsidies by 40% (around US$270/ton) in July 1990, further weakening international prices. These were pushed lower by the progressive reduction in effective intervention prices following the Commission's introduction of intervention tenders. In the second half of 1990 the Commission acted to increase internal disposals. It relaxed regulations controlling the use of subsidized casein and reinstated the minimum incorporation provisions of the subsidy for SMP used in calf feed. In 1991, the disposals of SMP to calf feed increased by 100,000 tons. This and a 15% fall in production (mainly because of lower milk production following the 1991 quota cut and increased production of WMP) were sufficient to move the market back into "balance." Intervention purchases virtually ceased by September 1991 and wholesale prices moved up by around 15%. In 1992, the market for SMP in the EC has tightened. Milk production has fallen (because of adjustment to the 1991 quota cut and drought conditions in key producing regions) and casein manufacture increased by around 40% in the first half of the year. SMP production in 1992 appears likely to be reduced by around 250,000 tons from the 1991 level and to fall to its lowest level for well over a decade. This and strong demand by the calf feed manufacturers (in part to increase commercial inventories) has led to a rapid fall in the level of intervention stocks. By the end of 1992 these are likely to be around 50,000 tons, compared to opening stocks of 414,000 tons. During 1992, international prices denominated in US dollars were also pushed up by the falling value of the dollar against ECU currencies. Compared with September 1991 (when EC prices began to recover), by mid-1992 the US dollar had fallen by 14% in value against the ECU. This increased the US dollar value of EC export prices by around US$200/ton, i.e., around one third of the total rise in international prices over this period. Figure 5: EC SMP Intervention Stocks 1000 750 500 0 250 0 r-84 M-66 MOr-8 ar-90 MW-92 Maw-85 Ma-47 Mar-89 Mor-91 Source: Ara Europe. 209 Demand in the international milk powder market is more robust than it is for butter and less dependent on the state of any one market. There are major import markets in all regions including North Africa, the Latin American markets of Mexico, Venezuela, and Brazil, the Middle East, and Asian markets such as Japan and the Philippines. International demand strong in 1992. While supply and policy management issues tend to be the most important determinants of price, the international milk powder market was stimulated in the first half of 1992 by renewed buying from a number of key import destinations. Mexico, the world's largest SMP market, purchased approximately 150,000 tons of SMP and, as illustrated in Figure 7, its imports in 1992 seem to be back to their average over the preceding five years (following the slump in 1991). Demand from traditional Asian markets has been strong and market intervention agencies in Japan and the Republic of Korea have imported SMP. These commercial developments were complemented by increased food aid deliveries of SMP to Russia and Eastern European countries. In the first half of 1992, the EC provided around 40,000 tons of SMP to Russia, Romania and Albania- volumes which are well in excess of normal commercial deliveries. Also, in the first half of 1992 Venezuela and Algeria, both traditionally large-scale buyers, maintained purchases despite economic and political difficulties. In the medium term, demand prospects for milk powders are mixed. Algeria, Venezuela, and the FSU, key markets for WMP, are facing internal difficulties. Of these countries, the situation is perhaps most assured in Venezuela where export income should be sustained by crude oil earnings. The ability of Algeria to maintain imports at current levels is not as clear. In the case of the FSU, imports are likely to remain a mixture of aid, extended credit, and commercial sales. Despite the economic difficulties, FSU imports may be maintained because, with internal production and distribution in turmoil, good quality WMP provides an alternative to fresh milk. Counteracting the difficulties in these major markets, there is likely to be: (i) continued demand growth in Southeast Asia (in response to higher incomes and population growth); (ii) sustained demand in Mexico (possibly with some shift from SMP to WMP); (iii) good prospects for growth in imports in north Asia (in the case of the Republic of Korea and Japan, from trade liberalization and, in the case of mainland China, from economic growth); and (iv) fluctuating but improving demand in the Americas (e.g., Brazil and Chile). In the medium term, supply and policy management are likely to be far more important to international market prices than demand shifts, although the latter will no doubt generate short-term fluctuations. In this regard, it is notable that the overall trend in milk powder prices since the mid-1980s has been predicated on lower exports from the EC and the United States, not on demand growth. While exports of WMP have been relatively stable (trending slowly up) SMP exports have declined markedly since the mid-1980s. In particular, SMP exports from the United States are reduced by around 250,000 tons from the levels of 1985 and 1986. EC exports have declined following the stock reduction program of 1987-89. Most factors suggest that prices should remain firm for the remainder of 1992. Looking to 1993, the major determinants of prices on the international market are likely to be: 210 - management of EC calf feed and casein programs. It is clear that utilization of skim milk for these programs will be reduced. Thus far it appears that the Commission may manage the cut in a better fashion than in 1988 when its regulatory changes reduced disposals through these programs by too great an amount, contributing to the subsequent market imbalances and price falls; - whether proposed milk quota cuts in the EC eventuate. Low opening stocks and the French election may make the proposed 1% cut in 1993 difficult to achieve; - the degree of expansion of US milk production and consequent accumulation of public stocks; - increased US export activity as a result of increases in subsidized exports or NAFTA- generated sales to Mexico; and - the value of the US dollar against the ECU. Its decline to post-war lows (as of mid-1992) has lifted international powder prices. These are vulnerable to a reversal of this trend (an appreciating dollar). It is likely that powder prices have neared their peak of the current upswing. While timing is difficult to predict, developments in the EC and United States and currency realignments are likely to see lower prices in the 1993 and 1994 period. However, this price decline is likely to be less than in 1989/90, in part because of the better management position of the EC and also because of likely higher GATT IDA minimum prices. Longer-run prospects for the international milk powder market are relatively favorable. While facing some increased challenge from vegetable proteins, positive factors include: - good demand for non-fat solids in traditional (high-income) dairy markets. In contrast to milk fat, health and nutrition attributes of dairy protein (e.g., calcium) and growing diversity and sophistication in its use (e.g., protein and skim milk concentrates and fractions) are likely to see demand grow; - rising demand in rapidly expanding economies in Asia and elsewhere. In addition to the income effect, demand in many of these countries is likely to be encouraged by the nutritional attributes of dairy proteins (e.g., for bone and overall growth in children); - further import liberalization (e.g., in Japan and the Republic of Korea); - A GATT Uruguay Round outcome which may moderate subsidized exports in the latter part of the 1990s; and - lower milk production in the EC, in part in response to a Uruguay Round agreement outcome but more importantly in response to the extent and cost of the current disposal programs, combined with the desire to move at least some way toward targeted income support. Weakness in butter prices and other uncertainties in that market are likely to result in a change in the price relativities between WMP and SMP. During the 1980s WMP maintained a premium; this is not likely to be sustained in the 1990s. Indeed, with strong growth in WMP capacity in New 211 Zealand, impending difficulties in the butter market may be sufficient to cause WMP to trade at a discount to SMP. Our forecast is for milk powder prices to be sustained in the US$1,800 to US$1,900/ton range for most of 1992, with the probability of a price decline in the 1993-94 period. Currency realignment (appreciation of the US dollar against the ECU) and policy management in the EC and United States are key factors. In this period, a price decline of the order of 25% (e.g., to US$1,400/ton) is possible. The duration of such a price decline is likely to be shorter than in the 1970s and 1980s. In the second half of the 1990s, prices are likely to be sustained at higher levels. In current dollar terms, prices should move more in a range of US$1,600 to US$2,000/ton. The price of WMP is expected to average near or below that of SMP; in the latter part of the decade, it is more likely to average below the SMP price. 212 Cotton Summary * Both cotton fiber and cotton product prices declined in 1991/92 as global production exceeded demand and stocks accumulated. Medium staple prices in Europe (Cotlook A Index) were 33.8% lower in March 1992 than in March 1991, while the Cotlook cotton yarn export price index at the end of June 1992 was 14% lower than a year earlier. * Any recovery in prices in 1992/93 will be moderate since the anticipated reduction in cotton area is small and world production is expected to remain higher than consumption. A full recovery to the declining long-run trend is not expected before the mid-1990s. Cotton Prices a/, 1950-2005 Ccents/ kg) coo Constant 1990 $ b/ 500 400 200Current $ --------------- 0 1950 1955 1960 1985 1970 1975 1980 1985 1990 1995 2000 2005 a/ Cotton Outlook "A" Index, cif Europe b/ Def1lated by G-5 MUV Index * Cotton consumption is expected to recover with per capita income growth, with rapid growth likely in high-income non-OECD countries and slowly increasing growth in the LMIC Europe. * Production growth rates to 2005 appear low mainly because the projection base year (1991/92) crop was exceptionally large. The Asia region (China, India, and Pakistan) is expected to continue to be the largest cotton-producing area. LMIC Europe is likely to have a net negative production growth rate. * The ratio of exports to consumption of cotton should continue to decline as major producing countries increase their mill consumption. 213 Projected Cotton Production, by Region Projected Cotton Consumption, by Region 25 25 20 20 155 00 1970 1980 1990 1995 2000 2005 1970 1980 1990 1995 2000 2005 Consumption The level of world demand for cotton normally varies less from one season to the next than does world production. Excess supply resulted in cyclically low prices in 1969, 1975, 198:2, 1986, and 1992. Often, excess supply has been associated with a delayed production response to a period of favorable prices coinciding with a reduction in demand due to poor economic conditions. Typically, low prices have stimulated reductions in cotton production which, in conjunction with a recovery of demand, have brought about an upswing in prices towards a new cyclical high within a period of one to four years. A notable example was the surge in world cotton production in the mid-1980s, which increased global stocks to the equivalent of over eight months of mill requirements in 1986. The response of cotton growers to the lowest prices in many years and to government policy initiatives to deal with the excess supply was decisive; four successive seasons with production below consumption eliminated the surplus (stocks were reduced to the equivalent of four months of consumption) and, by 1990, real cotton prices were 39% higher than the cyclical low in 1986. Dedine since 1990 as prices recover and economies weaken. However, the period of low prices from 1985 increased the competitiveness of cotton relative to substitute fibers. The increased competitiveness and favorable economic conditions in many countries during the 1986-89 period raised world cotton consumption growth well above the trend level of the previous two decades. However, the recovery of cotton prices and less favorable worldwide economic growth, particularly in Eastern Europe and the FSU, resulted in slight declines in world cotton consumption during 1990/91 and 1991/92. 214 CONsumPTiON PROJECTIONs. Projections of apparent consumption of cottoni in the near term reflect continued weakness in the LMIC economies undergoing severe restructuring in Europe and slow income growth in Africa. The economic slowdown in the high-income countries is also expected to restrain cotton consumption through 1992. However, the supply constraint on cotton milling in China was lifted by the very large 1991/92 crop, and improved economic growth there is expected to support a recovery in consumer demand for cotton textiles in the near term. Cotton consumption in Latin American countries that are recovering from the constraints associated with their large external debts should also increase with their improving economic performance in the near and medium term. Large consumption increases in LMICs. In the longer term (the decade beginning in the mid-1990s), world income growth trends are projected to be higher than those experienced in the early 1990s. In LMIC Europe, increasing per capita incomes are expected to result in dramatic increases in per capita use of fiber products, including cotton textiles, due in part to low consumption in the 1991 base year. However, in the world at large, the declining trend in world population growth is expected to moderate slightly the growth rate of cotton consumption compared with the historical rate of 2% p.a. during the 1964-90 period (see Table A2). In the high-income countries, the above-trend growth of cotton consumption which occurred in the last half of the 1980s has abated, and their projected rates are closer to their historical rate of 1.8% p.a. The fastest growth among those countries is expected to be in the smaller non-OECD group. The region with the largest population and the fastest economic growth-the LMICs of Asia and the Pacific-is projected to experience the greatest increase in cotton consumption. This region is expected to increase its share of world consumption to around 38% in 2005 from 35.3% in 1990. A large proportion of this increase should be accounted for by China, although China's growth in cotton use should be at a lower pace than in recent years due to competition from domestically produced synthetic fibers. Synthetic fiber production is being considerably expanded in China.' Cotton consumption in India is expected to continue increasing at near the rate of the past two decades--in spite of increased synthetic fiber substitution-as the liberalization of economic policies contributes to improved income growth. Pakistan's large capacity for cotton and textiles production will provide it an opportunity to continue as a major exporter of raw cotton and cotton textiles while increasing its rate of growth of domestic cotton consumption. Production World cotton production increased from 9.8 million tons in 1961/62 to 19 million tons in 1990/91. The average annual rate of production growth was 1.9% during this period, but an increase in the late 1980s in response to a surge in consumption raised the annual average growth in the 1970-90 period to 2.2%. Annual production growth has varied in response to consumption requirements, the ' Apparent consumption is defined as domestic mill consumption of cotton plus the fiber equivalent of imports of cotton manufactures minus exports of cotton manufactures. I China plans to increase chemical fiber production to 2 million tons per year during its Eighth Five-year Plan (1991-95). 215 relative prices for cotton and competitive crops, and the level of cotton stocks. The growth rate in yields has varied from 2% during the 1960s to 0.4% in the 1970s and to 3.4% during the 1980s. The area under cotton has increased only slowly (0.02% p.a.) during this period but there have been marked year- to-year changes. Although cotton is produced in about 70 countries, the major producers account for a very large share of world output. During the latest five-year period (1987-91), the five largest cotton-growing countries produced almost 75% of the world total.? China has had the greatest increase in cotton production, raising its share of world production from 10.1% in the early 1960s to 24% during the past five seasons. The United States has seen its share of world output decline from 30.5% in the 1960s to 17.6% in the 1987-91 period. High prices since 1989/90 stimulate strong output growth. Production/price cycles commonly occur in the cotton market in response to supply/demand imbalances. Since cotton is produced as an annual crop, producers may adjust their cotton growing area each year according to their perception of the profitability of growing cotton or other crops. Durthig the current cycle, world cotton production declined by more than 1 million tons in 1989/90 due largely to a 6% decline in cotton area in response to an 8% decline in cotton prices during the previous season. With world cotton consumption at a record high in 1989/90, cotton stocks declined by over 1 million tons and cotton prices increased by 24%. The price recovery resulted in increased cotton area in many countries during 1990/91 but the increase in world area was held to 4.5% by continued declines in other countries, particularly in the FSU, Sudan, and Turkey. Record cotton production in 1990/91 provided a partial replenishment of world stocks but the net increase was concentrated in China and Pakistan, both of which were experiencing sizable increases in mill consumption and relatively low exports. Therefore, cotton prices in 1990/91 remained at about the previous season's high level, which stimulated a further increase in cotton area during 1991/92. This crop, enhanced by record yields, produced a world record output of 20.8 million tons. With mill consumption of cotton leveling off during 1991/92 due to slowing global income growth, cotton stocks increased sharply and cotton prices averaged about 24% lower than during the two previous seasons. PRODUCTIoN PROJECTIONs. World production is expected to decline moderately in the 1992/93 crop year in response to the low prices resulting from the addition of about 2.5 million tons to world stocks during 1991/92. Even so, world output is again expected to exceed consumption. Cotton growers' planting intentions indicate that if growing conditions are favorable stocks could increase by a further 1 million tons. In the United States, the 1992/93 cotton area is estimated at 4.5 million ha or about 4% less than the area planted in 1990/91. The US Department of Agriculture estimated in October that, under average conditions, US production could reach 3.5 million tons during 1992/93-about 10% less than last season. Given present prospects for domestic mill use and exports, a crop of that size would result in a moderate increase in US stocks. Trade sources indicate that the cotton area in China will again be large in 1992/93, raising expectations that production will be sufficient to supply its domestic mills and increase its export supply. Cotton plantings have been increased in response to cotton producer prices being set at more attractive levels than the producer prices for other crops. Although the anticipated production would increase cotton stocks, the impact on the volume of Chinese cotton exports may be moderated by financial considerations, 3 Thee countries are China, the FSU, India, Pakistan, and the United States. 216 since the current level of producer prices (converted at prevailing exchange rates) makes exporting at present world prices unprofitable. This may also raise the domestic mills' costs of producing cotton textiles. In India, a recovery in yields should result in an increase in cotton production. Lower production is expected in the FSU, Mexico, and Pakistan due to decreased area planted. Stock budu should depressproducton for afew years. Given the buildup in stocks in 1992/93, the need to liquidate stocks should depress cotton production via lower prices until the mid- 1990s.' Following the stock reduction, an upswing in prices can be expected to stimulate an expansion of production to match the trend in consumption. The Asian and Pacific region, led by China, India, and Pakistan, is expected to continue to be the world's largest cotton-producing area. This region's large investments in cotton manufacturing capacity in recent years will also maintain its position as the foremost cotton textile and clothing producer. Among the high-income countries, Australia and the United States are expected to continue as major cotton producers due to their technological lead in labor efficiency in cotton growing, applied biotechnological techniques in cotton crop protection, and variety development by genetic engineering methods. Two areas where promising research results have been obtained are in fiber quality and yield improvements for Pima cottons and in plant protection from insects. The Sub-Saharan Africa region's cotton production increased by over 4% p.a. during the 1980s and reached nearly 1 million tons in the early 1990s. However, it has lost some of its momentum because of setbacks in East and Southern Africa, due partly to the sustained drought. Projections for the region assume a continued modest increase in cotton growing under reformed agricultural policies, resulting in its concentration in the more efficient regions. In the Middle East and North Africa region, crop diversification, particularly in Egypt, is expected to continue to result in a slow decline in cotton production. Cotton production in Latin America is expected to increase in Argentina, Brazil, and Paraguay. There is also the potential for increased production in other countries, but recent experience in Mexico indicates that in some cases other agricultural crops may be more attractive under reformed policies. In Europe, diverse prospects for cotton growing in the FSU and Turkey tend to offset. Our expectation is that crop diversification in the FSU will have a greater effect on cotton production than the net increase in output from the Southeastern Anatolian irrigation project in Turkey. The completed project is envisaged to encompass 1.7 million ha of land under irrigation from water collected by 22 dams, servicing 19 hydroelectric power plants. Cotton will be only one of the many agricultural commodities grown. The seedcotton production expected implies about 400,000 tons of lint from the project by 2002. These, however, are very uncertain assumptions since there is sufficient scope in each case for major changes in the direction or magnitude of the actions taken to strongly affect the eventual outcomes. Other uncertainties in the production projections arise from the impact on cotton growing of agricultural and trade policy reforms (ongoing or potential). The growth in world cotton production needed to meet the projected demand of 24.2 million tons in 2005 is around 1% p.a. during the 1991-2005 period. The required growth is made to seem low by the record production in the 1991 base year. From a 1990 base, the growth rate is 1.6% p.a. * The high level of production in 1991/92--the base year for the projections-makes the projected growth of production seem even smaller unless account is taken of the need to run down stocks. 217 Trade World cotton export volume had been increasing slower than mill consumption because some major cotton producers have expanded milling capacity faster than production. In Pakistan, for example, cotton production during the past three seasons averaged 24% higher than the previous three- year period, while cotton exports declined by one half due to rapidly increasing domestic mill consumption. During the same period, Pakistan's exports of cotton textiles increased dramatically-70% for cotton yarn and 25% for cotton fabrics. One-off inemase due to FSU restructuring. In 1991/92, the level of world cotton exports was raised by about 1.5 million tons due to the restructuring of the FSU into 15 independent countries. Cotton exported by six former republics within the FSU will now be regarded as world exports rather than domestic transfers. As a result, Uzbekistan became the world's second largest cotton- exporting country and Russia became the largest importer. Uzbekistan's recent cotton production and exports on a calendar year and crop year basis as published in the International Cotton Advisory Committee's Cotton: Review of the World Situation, May-June, 1992 are presented in Table 1. Due mainly to the change in recording of the FSU trade, world cotton exports as a proportion of world consumption are estimated to have increased from 27% in 1990/91 to 35% in 1991/92. Influence of decisions about stock levels. World cotton trade is basically determined by mill demand in cotton-importing countries but mill purchasing for stocks is influenced by expectations about future supply and prices. For example, net importers of cotton added about 8% to their stocks during 1988/89 while prices were relatively low. During 1989/90, those additional stocks were fully utilized as cotton prices increased and, in 1990/91, stocks were reduced further as supplies continued to tighten and prices remained high. Importers' stocks were kept low during 1991/92 as manufacturers were Table 1: Uzbekistan's Cotton Production and Exports, 1987-92 Calendar Years 1987 1988 1989 1990 1991 ('000 tons) Production 1,599 1,572 1,581 1,636 1,532 Total Exports 1,458 1,416 1,427 1,138 1,315 To FSU 890 886 832 790 1,021 To rest of world 567 530 595 348 295 Production minus exports 142 155 154 498 217 Crop Years 1987/88 1988/89 1989/90 1990/91 1991/92 Production 1,478 1,732 1,673 1,634 1,508 Total Exports 1,434 1,423 1,431 1,174 1,168 Production minus exports 44 309 242 460 340 Notes: - Crop year exports estimated from calendar year (CY) data. - 1992 exports estimated to be 1.15 million tons. Source: Production and CY exports, Uzbekistan Government statistics. 218 faced with slackening demand for textiles and the record crop being harvested removed concerns about the adequacy of supplies. This caused a sharp decline in cotton prices but expectations for another large crop in 1992/93 dampened the incentive for importers to immediately accumulate stocks. TRADE PROJECTIONS. Textile lndustry expands In Asia Pacft, Latin Amenca, Middue East, and North Africa. The import demand for cotton is heavily concentrated in Asia where investment in cotton textile capacity has increased rapidly in recent years. The International Textile Manufacturers Federation's survey of textile machinery shipments in 1990 revealed that, of the nearly 5 million cotton- type spindles shipped, two thirds went to Asian countries. The equipment went to both cotton-producing countries and to countries with little or no cotton production. The highly productive textile industries in this region are expected to continue to increase their import demand for cotton throughout the projection period. However, the recent investment growth rates recorded are not likely to be maintained. Asian and Pacific countries at all income levels are projected to increase their share of world cotton imports to more than one-half by early in the 2000s-from 44% in 1991/92. Latin American countries are expected to continue increasing cotton imports to meet requirements for their expanding textile industries. Mexico's cotton requirements now substantially exceed the declining level of domestic production. Brazil is the region's largest cotton producer, but its large textile industry's needs for qualities not produced locally also make it the region's largest importer., Excess locally produced qualities are exported. The expanding textile and clothing exporters in the Middle East and North Africa region will have an increasing need for cotton imports. Multilateral reforms may cause mqIor production aigustments. The long-term decline in cotton imports into the OECD countries has been moderated by large investments in very efficient spinning and fabric-forming machinery. However, the likely easing of constraints on textile and clothing imports from lower-cost producers is expected to continue the downtrend in cotton imports in these countries. The timing and speed of this adjustment depends on the outcome of the multilateral negotiations currently taking place within the Uruguay Round of the GATT. Present discussions anticipate a ten-year phasing-out period for current MFA trade constraints on textile and clothing. Negotiations are also being held to reduce agricultural subsidies in producing countries. Substantial reductions in production subsidies and freer market access would greatly increase the efficiency of resource allocation and economic efficiency in the agricultural and textile industries. The NAFTA will have some impact on the location of production and the patterns of trade as location of production in Mexico becomes more favorable because of access to Canada and the United States. The sources of cotton exports during the projection period are expected to include the current major suppliers. However, the possibility of significant multilateral reform of agricultural policies could result in major adjustments in the cotton-producing countries that have substantially subsidized cotton growing. Such changes would likely be introduced gradually, but the impact on individual countries could be very significant late in the projection period. Based on a continuation of current policies, the two major OECD cotton exporters- Australia and the United States-would supply around 30% of world exports. Australia's export position is enhanced by the good quality of its cotton and its relatively low production cost. US exports are aided by the broad range of cotton qualities produced and its export subsidies. 219 Uncertainties in FSU. Among the LMIC regions, Europe supplies the largest amount of cotton exported. The leading exporters are Azerbaijan, Tadzhikistan, Turkmenia, and Uzbekistan. For the near term, their cotton supply for export outside the FSU republics has been increased by the buildup of stocks since 1990/91 and the decline in mill consumption in the other former republics. However, a recently reached agreement for Uzbekistan to supply cotton to other former republics should ease concerns about the adequacy of raw materials when economic recovery begins. In the medium term, these countries' exports should decline in aggregate due to crop diversification. However, their longer- term export performance will be determined largely by policies yet to be formulated. Exports from Turkey will be enhanced by increased cotton production from the Southeastern Anatolian irrigation project. In the Asian and Pacific region, Pakistan has the most promising export potential, but its realization depends on the relative growth in cotton production and cotton manufacturing. India also has good potential for developing cotton exports. Price Outlook With world cotton stocks having increased by around 2.5 million tons during the 1991/92 season, medium staple cotton prices have declined sharply. The average of our world indicator price during the January-June period in 1992 (Cotlook A index for middling 1-3/32 inch quality, c.i.f. North Europe), at USC130.1/kg, was 29% lower than a year ago. The potential stock buildup is the combined result of record global cotton production and the tendency for world consumption to level off. In some cases mill consumption has declined, particularly in the European LMICs; cotton use in Russia is expected to decline by 12% this season and it may continue to decline sharply there during 1992/93. Supply overhang. Several factors contributed to the decline of cotton prices during 1991/92 and those of particular importance included: (i) the buildup of world cotton stocks; (ii) the large crop in China reducing its need for imports; (iii) the highly competitive pricing of FSU cotton in export markets in order to sell the accumulated stocks from the 1990/91 crop along with the 1991/92 crop; and (iv) the use of marketing certificates in the United States as authorized by the US 1990 Farm Bill (applicable to 1991-95 crops). The supply overhang can be alleviated by appropriate adjustments to production and consumption. Income projections for the near term indicate prospects for world cotton consumption to increase at a faster rate in 1993. The decline in cotton prices will contribute to the demand recovery by increasing cotton's competitiveness relative to substitute manufactured fibers. If the recovery in demand is brisk and cotton production declines decisively in response to two seasons of relatively low prices, as would be expected from past experience, cotton prices would begin recovering in 1993. However, if the cotton production adjustment is delayed by the stimulation of support prices above the level of market prices, (particularly in China, Pakistan, and the United States) and with inadequate limitations on area planted, the necessary adjustment could well require a longer period. Competition and productivity increases mean long-term price decline continues. The importance of relative prices of textile fibers has been clearly demonstrated during the past two decades. During most of the 1970s, cotton prices were at a competitive disadvantage relative to those of its most important synthetic fiber substitute-polyester (see Figure 1). In that period, the non-cellulosic fibers' market share increased from around 20% to over 36%, while cotton's share declined from 56% to 47%. During the 1980s cotton prices gained competitiveness and cotton's market share during the last half of the decade was slightly higher than during the last half of the 1970s. The non-cellulosic fibers increased 220 their market share by over four percentage points, but their gains were at the expense of the cellulosic fibers and wool, which were undergoing a period of high prices. During the projection period the intense price competition between cotton and polyester fibers is expected to continue. Moderate increases expected in the real cost of raw materials for producing synthetic fibers are likely to be largely offset by declining process costs in the new plants to be constructed during the 1990s. Their construction is being concentrated in the Asian countries which have relatively low costs of production. The real cost of producing cotton is expected to be held down by stable real costs of fertilizers and improved varieties requiring less chemical pest control and having improved productivity. In the longer term, cotton prices are strongly influenced by trends in productivity. During the 1960-91 period, the real cotton indicator price declined at an average rate of 2.03% p.a., while the world average cotton yield was increasing at a rate of 2.05% p.a. New plant breeding techniques have improved the potential yields for new varieties of cotton, have improved fiber quality, and have developed better resistance to insect damage. The widespread use of new varieties incorporating these qualities holds promise for the declining trend in real cotton prices to continue. Even so, the influence of weather and agricultural policies are expected to continue to result in price cycles due to temporary imbalances of supply and demand. Cotton and Polyester Staple Prices, 1955-91 400 350 300 V ' -V 250 +J 0D 200 150o 100 50 1955 1960 1965 1970 1975 1980 1985 1990 cotton poly 221 Table Al: Cotton - Production By Main Countries and Economic Regions ActuaL Projected Growth Rates a/ Averages Countries/ ----------------- 1991- Economies 1969-71 1979-81 1990 1991 b/ 1992 1993 1994 1995 2000 2005 1961-90 1970-90 2005 ---- ----------------------------------('000 Tons) ---------------------------------- --------(% p.a.)------ High-Income 2,347 3,249 3,935 4,278 4,115 3,780 3,880 4,025 4,705 5,165 0.5 1.7 1.6 OECD 2,309 3,167 3,884 4,255 4,085 3,750 3,856 3,990 4,660 5,115 0.5 1.7 1.5 United States 2,225 3,004 3,375 3,819 3,675 3,340 3,410 3,590 4,100 4,400 0.1 1.0 1.0 LNICs 9,909 11,320 15,030 16,572 15,985 14,720 15,120 15,475 17,600 18,835 2.4 2.3 0.9 Africa 796 605 961 988 945 870 885 890 1,000 1,140 2.1 1.6 1.0 Americas 1,538 1,632 1,703 1,847 1,610 1,525 1,610 1,665 1,845 1,925 0.2 0.3 0.3 Brazil 614 615 697 831 778 690 697 710 770 850 1.3 1.9 0.2 Asia & Pacific 3,898 4,824 8,222 9,856 9,620 8,820 9,110 9,395 11,235 12,405 4.0 4.5 1.7 China, People's Rep. 2,159 2,620 4,507 5,663 5,475 4,960 5,084 5,110 5,725 6,050 4.7 4.6 0.5 India 1,089 1,371 2,003 1,955 2,200 2,040 2,084 2,034 2,440 2,725 2.5 3.5 2.4 Pakistan 597 735 1,636 2,142 1,850 1,735 1,925 2,080 2,350 2,500 4.7 5.7 1.1 Europe 2,792 3,490 3,498 3,257 3,210 2,945 2,056 2,945 2,925 2,785 2.0 0.7 -1.1 Turkey 441 488 655 565 590 550 575 580 690 765 2.7 1.1 2.2 Middle East & North Africa 885 769 647 624 600 560 565 580 595 580 -0.6 -1.7 -0.5 Egypt 520 504 300 293 280 266 262 270 280 275 -1.0 -2.1 -0.7 Morld 12,257 14,569 18,965 20,850 20,100 18,500 19,000 19,500 22,320 24,000 1.9 2.2 1.0 a/ Least squares trend for historical periods (1961-90); end-point for projected periods (1991-2005). b/ Estimate. Sources: US Department of Agriculture, Foreign Agricultural Services (actual); World Bank, International Economics Department (projected). Table A2: Cotton - Apparent Consumption By Main Countries and Economic Regions Actual Projected Growth Rates a/ Averages Countries/ --- - ----. - 1991- Economies 1969-71 1979-81 1990 1991 b/ 1992 1993 1994 1995 2000 2005 1961-90 1970-90 2005 -****('000 Tons)***- --------(Z p.a.)*------ High-Income 4,297 4,547 6,910 6,880 6.960 7,115 7,280 7,445 8,080 8,720 1.8 2.4 1.7 OECD 4,242 4,392 6,723 6,695 6,770 6,915 7,070 7,225 7,820 8,420 1.7 2.3 1.7 United States 1,906 1,538 2,653 2,665 2,675 2,715 2,755 2,800 2,990 3,180 0.9 1.7 1.3 Japan 625 832 1,129 1,100 1.130 1,165 1.195 1,245 1,370 1,500 3.6 3.0 2.2 Non-OECD 55 155 187 185 190 200 210 220 260 300 4.9 6.3 3.5 LNICs 7,685 9,832 11,763 11,770 11,880 12,145 12,345 12,555 14,050 15,530 2.3 2.2 2.0 Africa 436 478 395 400 410 410 415 415 420 425 0.2 -0.5 0.4 Americas 783 944 1,215 1,250 1,260 1,300 1,330 1,360 1,510 1,680 2.0 2.2 2.1 Brazil 278 435 600 610 615 620 625 635 720 830 3.4 3.9 2.2 Asia & Pacific 3,542 4,913 6,585 6,730 6,810 7,000 7,105 7,225 8,220 9,225 3.1 3.0 2.3 China, People's Rep. 1,686 2,941 3,765 3,800 3,910 4,000 4,095 4,185 4,700 5,250 4.2 4.0 2.3 India 1,039 1,133 1,618 1,620 1,622 1,660 1,705 1,755 1,970 2,200 1.8 2.2 2.2 Pakistan 220 169 238 240 245 246 247 248 256 265 0.3 0.4 0.7 Europe 2,586 2,927 2,821 2,645 2.650 2,670 2,710 2,750 3,000 3,200 0.9 0.4 1.4 Middle East & North Africa 338 570 747 745 750 765 785 805 900 1,000 4.1 4.0 2.1 World 11,982 14,379 18,673 18,650 18,840 19,260 19,625 20,000 22,130 24,250 2.0 2.1 1.9 a/ Least squares trend for historical periods (1964-90); end-point for projected periods (1991-2005). b/ Estimate. Sources: FAO, World AppareL Fiber Consumption Surveys (actual); World Bank, International Economics Department (projected). Table A3: Cotton - Gross Exports By Main Countries and Economic Regions Actual Projected Growth Rates a/ Averages Countries/ ----------------- 1991- Economies 1969-71 1979-81 1990 1991 b/ 1992 1993 1994 1995 2000 2005 1961-90 1970-90 2005 ---- ----------------------------------('000 Tons) ---------------------------------- --------(% p.a.)------ High-Income 784 1,766 2,152 1,982 2,060 2,050 2,070 2,100 2,390 2,580 3.1 3.8 1.9 OECD 763 1,689 2,080 1,942 2,020 2,010 2,030 2,060 2,340 2,530 2.8 3.5 1.9 United States 737 1,576 1,697 1,481 1,540 1,535 1,550 1,575 1.785 1,930 2.0 2.3 1.9 LMICs 3,145 2,792 2,883 4,518 4,500 4,615 4,660 4,720 4,980 5,300 0.6 0.4 1.1 Africa 627 372 699 813 775 790 800 815 900 975 1.3 1.3 1.3 Americas 859 645 669 692 580 610 615 640 760 800 -2.3 -2.0 1.0 Mexico 219 180 37 55 30 40 40 45 60 60 -6.5 -6.4 0.6 Brazil 316 13 156 109 95 100 100 105 120 125 1.0 Asia & Pacific 204 380 729 727 840 895 915 945 1,000 1,175 6.9 11.7 3.5 Pakistan 146 273 304 425 500 525 530 540 590 675 5.4 9.9 3.4 t Europe 892 1,086 644 2,150 2,190 2,200 2,210 2,195 2,185 2,205 1.3 -1.2 0.2 Turkey 279 189 164 50 45 50 75 120 160 200 -2.5 -6.5 10.4 Middle East & North Africa 563 310 142 136 115 120 120 125 135 145 -4.3 -6.6 0.5 Egypt 307 183 33 25 28 28 28 28 28 28 -5.4 -7.5 0.8 World 3,929 4,558 5,035 6,500 6,560 6,665 6,730 6,820 7,370 7,880 1.3 1.5 1.4 a/ Least squares trend for historical periods (1961-90); end-point for projected periods (1991-2005). b/ Estimate. Sources: US Department of Agriculture, Foreign Agricultural Services (actual); World Bank, International Economics Department (projected). Table A4: Cotton - Gross Imports By Main Countries and Economic Regions ------------------------------------------------------------------------------------------------------------------------------- Actual Projected Growth Rates a/ Averages Countries/ ----------------- 1991- Economies 1969-71 1979-81 1990 1991 b/ 1992 1993 1994 1995 2000 2005 1961-90 1970-90 2005 ------------------------------------------------------------------------------------------------------------------------------- --- -----------------------------------('000 Tons)---------------------------------- -------- (%p.a.)------ High-Income 2,388 2,201 2,267 2,196 2,233 2,250 2,255 2,260 2,360 2,480 0.0 0.4 0.9 OECD 2,085 1,742 1,651 1,578 1,600 1,590 1,575 1,560 1,535 1,500 -0.8 -0.4 -0.3 Japan 775 729 634 610 600 599 598 594 585 565 0.0 -0.5 -0.5 Non-OECD 303 459 616 618 633 660 680 700 825 980 4.7 3.6 3.3 Hong Kong 157 189 218 236 239 241 246 251 272 294 2.8 2.5 2.3 Taiwan, China 132 249 358 340 348 364 378 392 467 557 7.1 5.4 3.6 LMICs 1,607 2,442 3,062 4,310 4,327 4,415 4,475 4,560 5,010 5,400 3.2 2.8 1.6 Africa 48 24 146 87 105 106 100 95 105 112 2.2 2.0 1.8 Americas 81 84 235 288 310 315 325 330 410 500 4.3 6.7 4.0 Asia & Pacific 578 1,414 1,847 1,698 1,677 1,768 1,832 1,930 2,305 2,630 5.3 4.0 3.2 Indonesia 85 105 324 363 385 391 406 421 508 611 11.5 9.7 3.8 Korea, Rep. of 113 337 447 414 409 440 457 477 569 682 8.2 7.2 3.6 ThaiLand 42 75 354 370 403 410 417 435 531 650 11.6 9.1 4.1 Europe 880 864 688 2,079 2,067 2,056 2,046 2,030 1,990 1,930 0.8 0.2 -0.5 Middle East & North Africa 21 56 146 158 168 170 172 175 200 228 10.7 10.4 2.7 World 3,995 4,643 5,329 6,506 6,560 6,665 6,730 6,820 7,370 7,880 1.4 1.5 1.4 ------------------------------------------------------------------------------------------------------------------------------- a/ Least squares trend for historical periods (1961-90); end-point for projected periods (1991-2005). b/ Estimate. Sources: US Department of Agriculture, Foreign Agricultural Services (actual); World Bank, International Economics Department (projected). Table AS: Comom- Price, a/ 1950-91 (Aal) and 1992-2005 (Pr~eted) Curre $ 1990 Constant - G-5 MUV b/ G-7 CPI cl 1950 99 608 801 1951 138 731 1,001 1952 94 475 655 1953 82 427 566 1954 85 451 576 1955 80 420 545 1956 73 367 483 1957 72 358 471 1958 69 337 442 1959 63 309 401 1960 65 314 408 1961 67 319 412 1962 66 306 392 1963 64 304 370 1964 64 300 362 1965 63 290 342 1966 61 271 320 1967 65 288 335 1968 67 300 337 1969 61 258 292 1970 63 252 286 1971 74 280 314 1972 79 275 305 1973 136 406 455 1974 142 348 429 1975 116 257 314 1976 169 369 442 1977 155 309 367 1978 157 271 303 1979 169 257 308 1980 205 284 334 1981 185 255 298 1982 160 224 262 1983 185 267 299 1984 179 262 289 1985 132 192 209 1986 106 131 139 1987 165 186 192 1988 140 147 151 1989 167 177 182 1990 182 182 182 1991 168 164 160 Projected 1992 130 122 116 1993 129 117 112 1994 153 136 129 1995 162 140 133 2000 206 150 140 2005 229 145 130 a/ Co~on Ou~lok A Index for Middling 1-3/32*, o.i.f. Nord E~uop. b/ Defated by G-5 Man cturing Unit Valu (MUV) Index. cl Doflatod by G-7 Conmur Price Index (CPI). Source: Cton ok Coook Lited, Liverpool (actual); World Bank, International Economics Department 226 Jute Sunnary * Jute consumption outside the major jute-producing countries continues to decline as new technology in substitute synthetic fiber bag manufacturing intensifies competition in the packaging materials market. In Western Europe, however, the erosion of imports of jute goods has stopped because of a growth in consumption of imported jute yarn in carpet manufacturing. * Jute consumption prospects are most promising in the largest jute-producing countries, but even there the expanding use of synthetic bags is limiting the growth of jute consumption. * Jute goods' trade with Eastern Europe and the FSU should recover as these economies recover, although new currency arrangements may threaten jute's competitive position. * Jute production prospects in the medium and longer term, based on the demand for traditional jute products, indicate a declining trend. But positive results from marketing non-traditional jute products suggest that this trend could be moderated. * Jute prices in real terms are expected to continue the long-term declining trend but at a slower rate than that of the past three decades. Jute Prices a/, 1950-2005 C$/ton) 2,000 Constant 1990 $ b/ 1,500 1,000 500 Current $ ;.. 0 1950 1955 1960 1965 1970 1975 1990 1985 1990 1995 2000 2005 a/ Bangladesh BWD, fob Chittagong/Chalna b/ Deflated by G-5 MUV Index 227 Production Prospects Jute production (including mesta and kenat) is concentrated in South and East Asia. The four largest producers-Bangladesh, China, India, and Thailand-accounted for 94% of world average output of 3.4 million tons during the past three crop years. By comparison, their share of average annual world output of 3.3 million tons during 1973-75 was 85%. The similar cropping patterns and seasonal growing conditions of the major producing countries, due to their geographical proximity, contribute to the high variability of world jute supply. The most competitive crop for jute land in Bangladesh, China, and India is rice paddy and in Thailand it is tapioca. Due to the high variability in the jute-growing area and in yields, the change in world jute production from one season to the next has ranged from + 85% to -42% over the 1973-90 period. World jute production increased reasonably fast during the 1973-80 period (+1.7% p.a.) but declined slowly during the 1980-90 period (-0.2% p.a.). Production trends were mixed in the largest producing countries during the 1980-90 period. Average growth rates were positive in China (+ 1.6% p.a.) and in India (+0.04% p.a.), but negative in Bangladesh (-0.3% p.a.) and in Thailand (-2.5% p.a.). Pduction trends downwar, concentration continues to increase. In the medium and longer term, the three largest jute producers will likely account for an increasing share of world output. China and India are expected to continue producing jute mainly for domestic use in packaging materials for their large supply of agricultural inputs and products. Jute production in India could also benefit from its lead in the development and marketing of nontraditional jute products, especially for home furnishings and travel and shopping bags. Although the sales volume of these products is currently low, the potential returns to manufacturers make their efforts for further development appear worthwhile. However, China and India have expanded petrochemical industries and their jute production is becoming more vulnerable to competition from synthetic products. Jute production in Bangladesh has become increasingly dependent on the incremental changes in world import demand for raw jute and jute products as a result of its increasing share of those markets. Therefore, the continuing decline in world import demand, particularly for raw jute, will impact more directly on production in Bangladesh. In Thailand, jute/kenaf production has declined since the mid-1980s due to losses of growing area to tapioca. With the jute spinners being integrated to produce both jute and synthetic twine and sacking products, jute/kenaf production is expected to decline during the projection period. Jute production in the rest of the world has also declined since the mid-1980s and now accounts for about 6% of world output. Those countries are not expected to significantly increase jute production during the projection period. Consunption Prospects From 1973 to 1990, traditional jute products lost market share to bulk handling in the transport and storage of commodities and materials and to synthetic materials substituting for jute sacks and fabrics. World jute production and apparent consumption increased at an annual rate of only 0.5%. The growth in consumption occurred mainly in the jute-producing countries. World trade in jute fiber declined by over 3% p.a. during this period. Trade in manufactured products declined by an average of 1.5% p.a. Competition severe in packaging and wrapping; quality advantage in carpet manufacturing. The major jute products, hessian and sacking, are used as packaging and wrapping 228 materials. The next two most important jute products are carpet-backing cloth and jute yarn. The demand for these products is derived from their service in packaging, transport, and storage of commodities and materials, or their use as an intermediate good in the manufacture of other consumer products. These same services can be performed by other materials, and often the product choice has been determined by relative costs. Periodic wide swings in jute carpet-backing prices provided the incentive for synthetic carpet-backing manufacturers to expand their capacities, which ultimately enabled them to dominate the North American carpet-backing market. A recent development has been for large carpet manufacturers to acquire synthetic carpet-backing production capacity to support their carpet production. This further integration will limit jute's prospects for recovering a larger share of this use. Nevertheless, technical considerations and quality requirements are also important considerations when determining the choice of alternative intermediate goods for manufacturing consumer products. A successful example of this for jute has been the response since the 1970s of jute yarn spinners to the opening European market for weft and stuffer jute yarns used in the manufacture of woven carpets. Technically, jute yarns contribute more to the carpet's quality than synthetic yarns, but those jute yarns must be made from jute of desirable color and be free of slubs and unevenness in order to be processed successfully on high-speed looms. By meeting these requirements, jute yarn spinners have held this market niche against competition from lower-priced, but technically less desirable, synthetic yams. These quality advantages, and the decline of jute spinning industries in Western Europe, resulted in exports of jute yarn from the major producers increasing from around 58,000 tons during the 1981/82 season to about 142,000 tons during 1990/91. Consumption in producing countries slows. The share of world apparent consumption of the three leading producing countries increased from 38% during 1973-75 to 56% during 1988-90. Jute consumption in Bangladesh and in India increased at a slower rate during the 1980-90 period than during the 1973-80 period. The annual average growth rate in India was 7.5% during 1973-80 and 2.5% during 1980-90. Bangladesh's consumption growth rate was 3.3% p.a. during the 1973-80 period and 0.4% p.a. during the 1980-90 period. China's consumption growth was slower than in the other two countries, at -1.8% p.a. during 1973-80 period and 0.5% p.a. during the 1980-90 period. Apparent consumption of jute in the rest-of-the-world group declined at an average rate of 1.9% p.a. during the 1973-80 period and by 2.8% p.a. during the 1980-90 period. Future trends in jute demand are most promising in the major jute-producing countries, though even in these cases the outlook is pessimistic. Their large agricultural sectors provide food commodities and industrial raw materials to domestic consumers which were typically packaged in jute sacks or wrapped in jute fabrics for distribution. However, the slowdown in growth in domestic demand for jute during the 1980s in China and India resulted, in part, from the substitution of domestically produced synthetic products for jute cloth and sacks. Future demand growth will also likely be slowed as transport and storage facilities adopt bulk-handling practices. In India, the jute industry has undertaken an energetic program to develop new products to diversify the uses of jute. Many products have been developed and are undergoing market testing. For jute consumption in India to continue increasing, the demand growth for nontraditional products would have to more than offset the losses from synthetic substitution and bulk handling. In China, installed capacity for production of synthetic sacking fabrics is now sufficient to meet domestic demand for synthetic bags and provide a large supply of these bags for export. The planned expansion of synthetic fiber capacity in China indicates that synthetic substitution for jute will continue. In Bangladesh, the modest increase in jute consumption will likely continue. 229 Largest importer also expects lower consumption. In the nonproducing countries, jute consumption is expected to continue its declining trend. In Pakistan, the jute-manufacturing industry-the world's largest importer of raw jute-is facing intense competition from the domestic synthetic bag industry. Despite domestically produced synthetic bags being only one third of the price of domestically produced jute bags, the profit margins derived from their sale are said to be attractive. These developments indicate that future growth in jute consumption in Pakistan will likely be at a substantially lower rate than the 3% p.a. experienced during the 1980-90 period and it may well be negative. The demand for raw jute imports is also expected to decline further in other importing countries that are opting for imported jute products to replace local manufactured ones or installing capacities for production of substitute synthetic products. Jute goods consumption outlook poor too. Jute consumption outside the jute-producing countries is increasingly dependent on imports of manufactured jute goods. However, the volume of trade in jute goods is expected to decline due to the overall reduction in jute use in the importing countries. Apparent consumption prospects imply only a small increase in jute goods imports in the low- and middle-income countries in Asia, modest declines in Europe, and more substantial declines in the other regions. The four largest jute-producing countries-Bangladesh, China, India, and Thailand-are also the dominant jute goods exporters (together, they supplied 85% of world's jute goods exports during the past three seasons) and should continue to be. The high-income countries in Western Europe, after experiencing a sharply declining trend in jute use during the 1970s (6.85% p.a.), had only a modest decline during the 1980s (-0.2% p.a.). Jute yarns used by woven carpet manufacturers appear to have a positive outlook because of their technical superiority over their synthetic substitute, but the import of jute hessian for making bags is facing intense competition from imported synthetic bags. Net imports of polypropylene and polyethylene bags into Western Europe more than doubled between 1985 and 1990. In the near term, imports of jute goods by the newly-independent European countries will be constrained by a shortage of convertible currency and the reorganization of trading structures. In the longer term, jute products will be competing with synthetic products and the development of bulk handling in these countries. Price Prospects The world jute market is subject to severe supply/price cycles. During the current cycle, the indicator price (Bangladesh white, D grade, f.o.b. Bangladesh)' increased from its low average of $270/ton in 1986-due to a sharp increase of stocks from the extremely large 1985/86 crop-to $408/ton in 1990 as the excess stocks were gradually liquidated. Jute prices declined during the second half of 1991 due to the interruption of import demand by disruptions in Eastern Europe and the Persian Gulf and averaged $378/ton during the year. Short-term price recovery expected in 1992/93. Jute prices continued to decline during the first nine months of 1992 as demand for jute remained weak, in spite of prospects that production in SJute prices vary by type and grade. Generally, tossa jute is more valuable than the same grade of white jute due to tossa's longer and finer fiber, strength, and greater flexibility. 230 Bangladesh and India would be substantially less than in 1991. A critical factor for determining jute prices in the near term is whether the supply adjustment taking place will anticipate correctly the timing of an increase in demand that should materialize with the recovery of the economies in LMIC Europe. A supply shortfall at that time could result in prices moving up to levels detrimental to jute's longer-term interest. In the medium and longer term, real jute prices are expected to continue the declining trend experienced since the 1960s. However, the decline may not be as severe as in the past because the largest exporter, Bangladesh, is reforming trade policies and extending privatization in the manufacturing industry, and thus reducing government support for the industry. 231 Table At: lute - Prices, al 1950-91 (ActUal), 1992-2005 (Projected) (3 /to n) Currt $ - 1990 Constant - 0-5 MUV b/ G-7 CPI c/ Actual 1950 204 1,249 1,645 1951 262 1,392 1,907 1952 113 573 789 1953 155 808 1,073 1954 181 965 1,234 1955 171 896 1,163 1956 219 1,107 1,457 1957 187 927 1,219 1958 155 752 988 1959 201 989 1,283 1960 333 1,609 2,091 1961 225 1,068 1,380 1962 185 860 1,101 1963 179 850 1,035 1964 223 1,041 1,256 1965 254 1,176 1,386 1966 306 1,369 1,616 1967 290 1,283 1,493 1968 271 1,210 1,357 1969 286 1,212 1,372 1970 274 1,093 1,239 1971 286 1,082 1,212 1972 299 1,038 1,148 1973 289 866 971 1974 353 868 1,071 1975 371 821 1,002 1976 296 645 773 1977 321 637 759 1978 398 688 769 1979 387 590 706 1980 308 428 502 1981 276 382 446 1982 286 402 468 1983 302 435 487 1984 531 780 858 1985 583 850 924 1986 270 334 355 1987 323 363 375 1988 370 388 400 1989 373 394 405 1990 408 408 408 1991 378 370 359 Proiected 1992 320 300 287 1993 340 308 294 1994 350 311 296 1995 356 308 292 2000 441 321 301 2005 493 313 281 al Bangladesh BWD, f.o.b. Chiuagong/Chalna. b/ Deflated by G-5 Manufacturing Unit Value (MUV) Index. c/ Deflated by G-7 Consumer Price Index (CPI). Source: World Bank, International Economics Department. 232 Rubber Swnary * In the projection period 1992-2005, market prospects for rubber will be heavily influenced by rates of economic growth, technical changes that will affect both demand and supply, environmental reforms in Eastern and Central European countries and the FSU, and the impact of the tire industry's globalization on trade patterns. * Over the longer term, income growth of the LMICs where current per capita rubber consumption is low provides fundamental support for market expansion. But projecting the pace of market expansion over the next 15 years is heavily clouded by medium-term demand uncertainties, particularly for Eastern Europe and the FSU. * Unlike in the post-World War II period when stability in the synthetic rubber industry offset the instability of the natural rubber industry, in the coming period the reverse may be the case with the synthetic rubber industry becoming a destabilizing factor. Economic reforms in Eastern Europe and the FSU are likely to shift consumption away from synthetic rubber and this change in input-mix is likely to cause increased market instability. However, such instability should be mitigated somewhat by supply side developments, such as new budgrafting and tapping techniques that will lower production costs and lead to shorter supply response times. * The supply outlook is for gradual expansion in the first half of the 1990s, accelerating thereafter. World production should increase at 2.8% p.a. over the forecast period. The expansion in world trade is expected to be 2.5% p.a. with gross exports rising from 4.1 million tons in 1991 to 6.1 million tons in 2005. During the projection period, prices in constant 1990 dollars are expected to average around $1,020/ton. Rubber Prices, al 1950-2005 ccents/kg) 800 Constant 1990 $ b/ 400 200 Current $ 0 1950 1955 1960 1985 1970 1975 1980 1985 1990 1995 2000 2005 a/ RSS No. 1, In bales, spot. New York b/ Deflated by G-5 MLN Index 233 Supply Despite recent expansions in the smaller producing countries of Africa, Latin America and elsewhere in Asia, production should remain concentrated in the three Southeast Asian countries of Indonesia, Malaysia, and Thailand. The continued competitiveness of these Southeast Asian producers derives from land availability, predominance of smallholders with a long tradition in rubber cultivation, and the development and diffusion of new technologies that enhance efficiency in labor and land utilization. Technical developments increase productivity and supply elasticity. In the coming decade a new labor-saving tapping technique, development of which was prompted by increasing labor costs in Malaysia, should become widespread in Malaysia and be adopted elsewhere thereafter. Instead of the traditional two to three times per week tapping that entails bark removal, the new Hypodermic Latex Extraction (HLE) tapping technique requires only a single puncture once a week and without bark removal. The combined use of this puncture technique with continuous chemical stimulation causes gradual, continuous dripping of latex for about 40 hours. The latex is collected on the third day. The known advantages of this puncture tapping technique are: (i) the sharp reduction in the time and labor skill requirements at both tapping and collection stages; (ii) the elimination of crop loss during the rainy season due to the air-tight design of the collection bags; and (iii) flexibility in the timing of the tapping and latex collection tasks instead of the fixed dawn and midday timing, respectively, of traditional tapping tasks. The new puncture tapping technique is expected to result in a 50% increase in weekly yields. The benefits of higher yield and lower labor input associated with this puncture tapping will be partially offset by lower planting density for efficient puncture tapping as well as the higher initial cost of the tapping equipment. The net effect is an estimated lowering of production cost by 15-20%. However, the longer-term effect of the technique on tree life remains to be verified. The technique is likely to be applied to older trees in the initial period. Another technological change that will lower the cost of rubber production is the development of young budgrafting. By budgrafting the seedlings at three to four months, instead of the usual eight months, the seedlings can be transplanted into the field in eight months. Assuming proper maintenance throughout the immaturity period, the gestation period can be reduced from seven to five years. The demonstration effect of these techniques in Malaysia as well as competitive market forces should induce their adoption elsewhere, including the relatively labor-abundant countries. These technical changes will impact positively on the rubber market over the longer term, not only through reduced labor costs and the elimination of latex contamination, but also because the shorter gestation period will lead to a shorter-term supply response to price changes, thus raising the supply elasticity and, ceteris paribus, reducing market instability. Furthermore, the gains from higher yields through use of chemical stimulants over the productive life span of the trees, and from the rising commercial value of rubber wood, provide the economic rationale for a potential shortening of the rubber tree's life-cycle to about 20-22 years from 25-28 years. Both the shorter gestation period and life-cycle and higher scrap value for the tree will enhance the attractiveness of rubber investment and reduce market instability originating from the supply side. 234 SUPPLY PROJECTIONs. Higher gvh raes for many pdacers. The supply outlook for the 1992-2005 period presented here differs from that presented in the 1990 edition of this Report for two reasons. Firstly, the new production technologies together with the prospect of faster demand growth in the ex-COMECON countries make accelerated replanting and new plantings more attractive than previously. This perception of increased demand in the ex-COMECON countries underlies, for example, the recent pronouncements by Malaysian producers to expedite replanting on Peninsula Malaysia and extend rubber cultivation to new areas in East Malaysia to overcome the land constraint in Peninsula Malaysia. Secondly, economic (particularly fiscal and trade) reforms in India and Viet Nam are likely to cause higher growth rates in the rubber output of these countries. In India, faster output growth should derive from the accelerated replanting and new plantings program underway. In Viet Nam, supply should increase faster than previously projected for two reasons. Firstly, data now available reveal that extensive replanting and new plantings were undertaken during the early 1980s to enhance Viet Nam's role as the key rubber supplier to the COMECON market. Production now coming onstream from these planting efforts should increase sharply from the mid-1990s when the trees reach maturity and their yield profile peaks. Furthermore, the diversion of Viet Nam's rubber exports to Malaysia in recent years has paved the way for a joint venture between Malaysia's MARDEC and Viet Nam's UTANIMEX (both state- owned enterprises) for the transfer of new planting and processing technologies from Malaysia to Viet Nam. World output is expected to grow at 2.7% p.a. from 5.2 million tons in 1992 to 7.64 million tons in 2005. Of the three major producers, Indonesia is projected to become the lead producer with output growth of 3.5% p.a. from 1.1 million tons in 1992 to 1.9 million tons in 2005. Higher investment by Malaysian producers than was previously projected should lead to 2.4% p.a. growth from 1.2 million tons in 1992 to 1.8 million tons in 2005. Because of its land constraint, Thailand is likely to increase supply at the lower rate of 1.3% p.a. to 1.62 million tons by 2005. Faster output growth in India and Viet Nam is forecast to lead to production of 600,000 tons and 250,000 tons, respectively, in 2005. Output in China is projected to increase at 4.3% p.a. to 500,000 tons in 2005. For Sri Lanka, where export duties were reduced by 50% in 1991, output is projected to rise by 2.4% p.a. to 160,000 tons. Within the Asia Pacific region, production is expected to grow at 2.7% p.a. from 4.8 million tons in 1992 to 7.1 million tons in 2005. The projected share of world output from the three major producing countries increases by 1 percentage point to 93% by 2005. The balance of world supply will come primarily from Africa where production is projected to rise marginally in countries such as Cameroon, Cote d'Ivoire, and Nigeria. Liberian production is projected to recover slowly and to reestablish its 1988 production level only by 2005. Investment in African rubber production is basically constrained by political and economic instability. Production in Latin America is likely to expand slowly because of the production hazard posed by the leaf blight disease and the lack of smallholder cultivation. However, given the growing environmental concerns and the higher economic value of rubber wood, Hevea Brasiliensis may become an increasingly attractive choice in afforestation efforts for environmental and preservation purposes within the tropical belt. Demand Continuing adialization of tires increases naturl rubber denand. About 65% of natural rubber is consumed by the tire industry, with the balance used in a wide range of consumer and producer goods ranging from medical insulation products, carpet-backing and shoes to automotive parts, 235 industrial belts and hoses. One technical change that will continue to affect demand for some years yet is the innovation made in the mid-1960s of radial tires that require higher natural rubber content than cross-ply tires. A priori, the replacement of cross-ply tires by radial tires leads to higher rubber consumption. However, because radial tires give higher mileage, the net increase in natural rubber consumption over the lifetime of a vehicle is less than suggested by the higher natural rubber content per tire. The experience of radialization in the high-income countries has been gradual and progressing in sequence from passenger cars to commercial vehicles. In these countries, radialization in the passenger car sector was completed by the early 1990s and is now taking place in the commercial vehicle sector. In the LMICs, radialization has begun in the passenger car sector. Over the longer term, radialization across all sectors in the LMICs may be anticipated. However, because of the diversity in road conditions across these countries, radialization may not yield the tire mileages obtained in the high-income countries. Besides radialization, more recent technological changes that have affected demand are (i) automation of tire production processes and (ii) the development of high-performance tires. These precipitated demand for quality-consistent rubbers that, in turn, led to rubber differentiation by supply origin. In the non-tire industries, the need for specialized properties or better handling characteristics of the final product is manifested in the demand for speciality rubbers such as thermoplastic elastomers, epoxidized natural rubber and deproteinized natural rubber. DEMAND PROJECTIONs. The major determinants of natural rubber demand will be income growth rates, growth rate of the transport sector, the rates at which the LMICs adopt tire radial ization, and the rates at which the FSU and Eastern European countries substitute natural for synthetic rubbers in their rubber goods industries. A difficulty in projecting demand growth in the coming decades stems from the growing concern with the environmental problem posed by scrap tires. Efforts to resolve this problem are two- pronged, aimed at (i) finding alternative uses for scrap tires, and (ii) reducing the speed of scrapping tires. The former has led to increasing use of scrap tires in fuel generation, and the second to improving tire retreading and increasing mileage yields. Potential for substantial per capita consumption increases. Notwithstanding the uncertainties that make projections particularly hazardous, the potential for increased demand over the longer term is clear from the gaps in per capita consumption between the high-income countries and the LMICs. In Japan and the United States, where consumption is perceived to be at or near saturation, per capita consumption is about 5 kg. This contrasts with per capita consumption of 1.5 kg in Eastern Europe, 0.6 kg for China, and 0.4 kg for India. The margins for error in demand projections are therefore substantially smaller for the high-income countries than for the LMICs. Because of the importance of road transportation for tire-and hence rubber-consumption, a comparison of road transportation statistics for a range of countries provides useful insights. The differentials in commercial transportation across countries can be seen from Table 1 showing key road statistics for the G-5 countries. For example, there is a ten-fold gap between Japan and the United Kingdom. The impact of income-generating policy reforms on rubber consumption growth is illustrated by the 50% increase in China's natural rubber consumption from 450,000 tons to 660,000 tons during the 1986-88 period, and by the 30% increase in India's consumption from 278,000 tons to 358,000 tons over the 1987-90 period. Moreover, consumption in these two populous countries had already nearly 236 Table 1: Key Statistics on Road Transport in Higher Income Countries, 1989 Country Persons/Car Motorway Commercial Freight Ton a/ (km) Vehicles (million) Road Rail Japan 3.7 4407 22 United States 1.6 83964 44 Germany (West) 2.0 8721 3.1 163 62 France 2.4 6950 4.7 144 52 United Kingdom 2.6 2993 1.9 130 18 a/ Freight ton in billion kilometers. Source: Rubber Developments, Vol. 45 (1:4), 1992, published by the Malaysian Rubber Research and Development Board. doubled in the 1980s from 0.35 kg to 0.61 kg in China, and from 0.25 kg to 0.4 kg in India. Conversely, the adverse impact of policy reversals and political upheavals on demand is exemplified by the situations in China and the former East Germany during the 1989-91 period. In China, annual consumption declined from 675,000 to 600,000 tons after the June 1989 upheaval while the fall of the Berlin Wall precipitated a two-thirds decline in East German annual demand from 41,000 tons to only 14,500 tons. It should be emphasized that the higher growth rates presented here compared with those presented in 1990 are partly the result of a lower base-year value-there was a 100,000 tons decline in world consumption in 1991 to 5.2 million tons. World consumption is projected to grow at 2.6% p.a. from 1992 to 7.6 million tons in 2005. Among the major tire-producing OECD countries, the highest demand growth rate is 1.7% p.a. for Japan and Italy. In Japan, demand is expected to reach 895,000 tons by 2005 while demand in Italy should reach 155,000 tons. The United States will remain the largest single consumer with consumption of 986,000 tons by 2005. Some tire "transplanting" to Mexico is expected, thereby resulting in a high growth rate of 5.8% p.a. for Mexico. Mexico's consumption is expected to reach 130,000 tons in 2005. Demand growth in Germany should remain slow until 1995 because of the ongoing reform and restructuring in the eastern part of the country. Thereafter, demand is projected to accelerate,, Likewise, per capita consumption is expected to remain at about 2 kg p.a. until the mid-1990s and to recover to the former West German per capita consumption level of 3.6 kg p.a. only towards the end of the projection period. Total German consumption is therefore projected to grow at 1.1% p.a. to 258,000 tons in 2005. Growth of consumption in the other leading EC countries should be gradual. Demand in France is projected to grow at 1.3% p.a. and reach 202,000 tons in 2005. A lower growth rate of 1% p.a. for the United Kingdom translates into demand of 140,000 tons by 2005. Major LMIC markets grow at 2-4% p.a. The fastest demand growth area is in the LMICs of the Asia Pacific region where projected growth of 3.5% p.a. during the 1991-2005 period will raise consumption from 1.9 million tons to 3.1 million tons. Driven largely by growth in tire production, 237 rubber consumption in the Republic of Korea should increase at 2.3% p.a.-from 254,000 tons in 1991 to 355,000 tons in 2005. In the three major rubber-producing countries, demand growth is supported by the spread of globalization in the tire industry to these countries. The lowest demand growth rate of 2.1% p.a. projected for Malaysia stems from the prior establishment of latex-based dipped goods industries that significantly increased domestic consumption in 1989/90. In the projection period, demand growth in Malaysia should be driven by investments in tire manufacturing. Similarly, the establishment of both tire and dipped goods manufacturing in Thailand is reflected in the projected 3.9% p.a. demand growth to 200,000 tons in the year 2005. Unlike Malaysia and Thailand, growth in rubber consumption in Indonesia will derive from demand for solid rubber for tires, shoes and other industrial rubber goods that have less stringent quality requirements. Indonesia's consumption is projected to grow at 3.6% p.a. to 195,000 tons by 2005. Trade Changes caused by technical change and tire industry globalization. Since the mid- 1970s rubber trading has undergone several changes. The factors behind these are technological changes in demand and supply, adoption of variable exchange rates in the world economy, growth of financial engineering and associated instruments, emergence of newly industrializing economies (NIEs), development of modern telecommunications, and globalization of the tire industry. The main impacts of these developments have been the increased share of rubber imports by the NIEs, the differentiation of rubber by supply origin, and the growth in direct and closed trading between consumers and producers of the differentiated rubber. The impact of technical change on trade has been through increased automation in tire manufacturing. This has led to more stringent demands for quality consistency and material processability so as to reduce machine down-time and material wastage caused by contamination in the rubber. The demand for rubber quality has been reinforced by heavier demands on tire performance and safety and by just-in-time material deliveries to minimize inventories. Increased product differentiation, as part of the competition strategy among tire manufacturers, has resulted in increased emphasis on raw material specifications and their supply origins. The upshot of these developments has been more direct trading and confidentiality about product specifications and price premia. The growth of closed and direct trading has implications for the interpretation of published prices that are discussed later. Another development that has affected the pattern of trade is the globalization of the tire industry. Motivated by competition for market share amidst growing protectionism, globalization began in the mid-1980s with tire "transplants" from Japan to the United States. Subsequent adoption of globalization strategies by all the tire majors accelerated the dispersion of tire manufacturing facilities worldwide in competition for regional markets. Amongst other things, such dispersion lowers transport costs and enhances the growing trend towards output differentiation by category (cars, trucks, commercial vehicles, etc.) and design (conventional and high-performance radials for various climatic and road conditions) to suit the respective regional markets. The result has been rapid growth of rubber consumption in several LMICs such as China, Indonesia, Malaysia, Mexico, Thailand, and Turkey that: either (i) have large domestic markets; (ii) are strategically located within a regional market of growing potential; or (iii) have both domestic and regional market potential. The significance of globalization is accelerated demand for natural rubber in the major producing countries. The AIDS-induced growth in demand for latex-based medical insulation products 238 in the late 1980s had already caused the relocation of such industries to the z:ior lat-e-producing countries to minimize freight cost of latex (which has a 35-40% water content), pzoduction cost (because of labor-intensity in dipped goods' production), and to take advantage of fiscal incentives that vere designed to attract direct foreign investments to the producing countries. World export growth likely to be 2.6% p.a. During the 1992-2005 peiiod, world gross exports are projected to grow at 2.6% p.a.-from 4.1 million tons to 6.1 million tons. Because of their rising domestic consumption, the share of total exports from the three major producing countries should decline from 84% to 82%. Exports as a share of production are projected to decline from 96% in 1989 to 90% by 2005 for Malaysia, from 92% to 90% for Indonesia, and from 93% to 91% for Thailand. Between 1991 and 2005 gross exports from Indonesia are expected to grow at 3.8% p.a. (from 1.09 million tons to 1.89 million tons). Growth of exports from Malaysia is projected to be 1.9% p.a. (from 1.17 million tons to 1.55 million tons); while Thailand's export growth is expected to be 1.6% p.a. (from 1.18 million tons to 1.49 million tons). A caveat to these projections is that were the economic reforms in Eastern Europe and the FSU to yield results earlier than reflected in the demand growth projected here, exports from Indonesia and Malaysia would benefit most because of their production potential. The fastest export growth should be experienced by Viet Nam where exports are pro;jected to grow at 7.9% p.a.-from 70,000 tons in 1991 to 220,000 tons in 2005. African exports are expected to grow at only 1.7% p.a. with Cameroon, C6te d'Ivoire, Liberia, and Nigeria remaining the major exporters. LMICs' strong growth rate. Over the projection period, the relatively faster increase in imports by the LMICs should result in the expansion of their share of world imports from 41% in 1992 to 49% in 2005. Among the high-income countries, the United States should remain the single largest importing country, followed by Japan. The low EC import growth rate of 1.1% p.a. is largely explained by the slow growth of 0.9% p.a. projected for Germany during the first half of the 1990s. This slow growth is one manifestation of the cost of German unification. Total German imports fell from 262,500 tons in 1989 to 202,000 tons in 1991. In the 1991-95 period, Germany's imports are projected to grow very slowly to 212,000 tons in 1995, and only to recover to their 1989 level of 262,500 tons by 2005. Import growth in the other major EC tire producing countries will be restrained by slower economic growth and some transplanting of tire manufacturing facilities to Asia and the Americas. Among the LMICs, the Asia Pacific region should have the highest import growth of 3.8% p.a. with its share of LMIC imports reaching 43% by 2005. Within this region, the largest importers are China and the Republic of Korea. China's imports are projected to grow at 4% p.a. to reach 652,000 tons in 2005. Korean imports are projected to grow at 2% p.a. to 344,000 tons by 2005. In India, the benefits from economic reforms, combined with the low import base in 1991, underlie the high growth of 8.2% p.a. The importing European LMICs are differentiated by the degree of uncertainty attached to their import projections. Projections for Greece, Portugal, and Turkey have a higher degree of certainty. Of these three, Turkey is the largest importer. This stems from its strategic location within the Near and Middle East, and its incorporation as an "export platform" by the tire majors in their globalization plans. Imports by Turkey are projected to grow at 4.2% p.a. to 85,000 tons in 2005. The less predictable importers are the FSU and East European countries. Import projections for these are highly uncertain because of the uncertainty of their economic reforms and of the rate at which they will reduce their dependence on domestically produced synthetic rubbers. 239 Price Outlook It was mentioned earlier that the projected growth rates for demand presented here are not directly comparable with those presented in 1990 because of the much reduced levels of consumption in 1991 which affect the growth rate calculations. Likewise, the price outlook in the medium-term is significantly influenced by some of the events of the early 1990s. Slow recovery from 1991 price fall. Reportedly, 1991 was the worst year in the history of the US tire industry as demand for original equipment tires declined by 5 million units and the world's top three tire manufacturers (Bridgestone, Goodyear and Michelin) took a combined $6 billion loss. Political upheavals in the East European countries and the FSU added further price pressure as rubber originally traded under the COMECON arrangement, or intended for that market, was diverted to other markets. This involved mainly sheet and crumb rubber from Viet Nam and latex crepe from Sri Lanka. The sharp fall in demand in the FSU must account in part for the reduced efficacy of International Natural Rubber Agreement buffer stock purchases in 1991. The change in the market structure also contributed to the negligible, and occasionally negative, price premium of RSS1 over lower-grade rubbers. The depressed market led to a price decline from $1,020/ton in 1990 to $1,008/ton in 1991. Despite the early 1992 upswing in the US automobile sector, prices have not broken out of the $1,020-1,030/ton trading range. Indications at the time of writing (June, 1992) suggest limited potential for price increases in the near term. Moreover, given the ample supply situation, natural rubber prices are expected to remain sluggish until 1994. Real prices to peak around 2000, then decline. Under the assumptions for world economic growth in the 1992-2005 period, some upturn in real prices could be expected by 1994. With the projected demand growth in the second half of the 1990s, led by the high-income countries (such as the United States, Japan, and Taiwan, China) and some of the LMICs in the Asia Pacific region (such as China, India, and the Republic of Korea) and Latin America (such as Mexico), real prices (in 1990 dollars) are projected to follow a rising trend to a peak of $1,300/ton towards 2000. A later and/or slower rate of economic recovery than projected for the East European countries and the FSU provides the main downside risk for this price outlook. Thereafter, real prices are projected to decline (to $1,250/ton by 2005) because the adoption of the new budgrafting and tapping techniques should result in lower production costs. Higher price trends may be observed if consumption in major developing countries such as China, India, and Mexico were to grow faster than projected, or if the former centrally planned economies were to adopt the input mixes of the tire majors within this time frame. International Natural Rubber Agreement (INRA2) and Futures Rading INRA and dosed trading inhibit market price signals. Since early 1992 a gulf has developed between the positions of the consuming and producing countries over the scheduling of negotiations for a successor agreement to INRA2 that expires in 1993. Underlying this is a difference in opinion about the efficacy of INRA2. While both producing and consuming member countries agree that INRA2 has stabilized prices, producing countries argue that this has been at the cost of less-than- remunerative price levels. Producing countries have also become concerned about the growth of closed trading and its impact on the price formation process. This has revived interest in futures trading. In May 1992 a Commodity Exchange was established in Singapore to trade RSS1, RSS3, and TSR20 rubber 240 futures. This was followed by International Natural Rubber Organization (INRO) approval for the buffer stock manager to trade futures on this exchange, and to take delivery of physicals. Because of technological and financial market developments since the 1970s, futures trading had faded in all markets except in Japan. The survival of futures trading on the Tokyo and Kobe markets stems not only from regulatory aspects of the Japanese financial system that lead to use of rubber futures as a currency hedge but also from Japan's huge domestic base of RSS3. Elsewhere, futures trading started declining in the 1970s for a variety of reasons including the introduction of new financial trading instruments that competed for speculative funds. This was exacerbated when INRAl implemented its buffer stock operations in 1981 and when demand for origin-specific rubber increased closed trading. By the late 1980s, openly traded rubber was estimated at about one third of total trade. Since the initial impact of this reduction was on the traders and dealers, concern over the diminishing trade opportunities was first voiced by this group. Over time, concern has become more widespread because of the declining transparency of the price formation process and the market signalling efficacy of official price quotations. Further concern over the efficiency of the marketing system has been fueled by the price depression since 1990, and interest in futures trading has persisted despite the unsuccessful 1990 futures contract on the London FOX. Another market development behind the establishment of the futures contract in Singapore is the growth in demand within the producing countries, consequent to the choice of Indonesia, Malaysia and Thailand as tire "export platforms" by the multinational corporations. Singapore is located near to countries with 85% of world output and 55% of world consumption. These recent developments provide motivation for the mushrooming of Japanese rubber trading operations in Singapore since the late 1980s. The unsuccessful attempt by the London FOX to revive futures trading in rubber in 1990 raises questions about whether globalization of the tire industry has led to merging of primary and terminal markets into a new marketing center away from London, whether rubber differentiation by supply origin has taken sufficient hold, and whether the eventual maturization of rubber into a highly differentiated industrial material will render futures trading unattractive. But in trying to provide answers to these questions, it is important to note that successful futures trading is contingent on free movement in prices. The operation of INRA, in attempting to stabilize prices within a range, is inhibiting the process of price discovery. 241 Table Al: Naural Rubb - Pries, a/ 1950.91(