1. Commodity Prices, Government Policies and Competition Steve McCorriston University of Exeter, UK WTO/CUTS Symposium on “Trade in Primary Product Markets and Competition Policy” WTO, Geneva, 22 nd September, 2011

2. Structure of the Presentation Recent events (quickly!) Characteristics of world commodity markets and commodity price behaviour Government policies Overview of sources of competition concerns Why does competition matter? Issues that still need to be addressed

3. Three broad observations Competition issues in commodity and food markets, and how they impact on the behaviour of prices, has received comparatively little (but not no) attention Need to make the distinction between commodity and food markets-this is important in identifying where competition issues may arise Why do departures from competition matter in the context of commodity and food markets?

4. Brief Overview of Recent Events Recent commodity price spikes ….coming against the background of relatively previously low prices ‘Spike’ less significant than the 1972-74 commodity crisis in real terms Widespread commentary on the potential causes of the recent events

5. Figure 1: Monthly Food Price Index, 1990-2010 Source: FAO

6. Figure 2: Real (Yellow) and Nominal (Black) Food Price Index: 1961-2008 Source: IMF

7. What do we know about the behaviour of commodity prices? Long term: Prebisch-Singer hypothesis. Taken over the long-run, there will be a secular tendency for the relative prices of primary commodity prices to decline Differences in income elasticities and market structure Evidence? Mixed with the challenge of allowing for structural breaks.

8. Volatility Prices change (a lot) but the issue here is to do with the amplitude and frequency of price changes that causes problems for producers and consumers Why? Low demand and supply elasticities Commodity prices may be more volatile than other prices but there is no evidence that over the medium to long- run that commodity price volatility has increased.

9. Commodity price ‘spikes’ Related to but distinct from volatility Underlying characteristic of many commodities is that they are storable-there is an inter-temporal aspect to commodity markets. The demand curve is non-linear This changes the way in which we think about the impact of shocks depending where we are on the demand curve i.e. if stocks are high or low

10. Commercial Demand Commercial Demand plus Storage P* P Q ΔQΔQ ΔQΔQ ΔPΔP ΔPΔP

11. Figure 4: Ending Stocks of Calories from Major Grains Source: Wright (2011)

12. Implications of this for understanding commodity price behaviour Possibility of stock outs Commodity prices characterised by: ….asymmetry (long periods of low prices punctuated with short lived high prices) ….changing variance ….positive skewness ….excess kurtosis Evidence: not overwhelming!

13. Government Policies Agriculture is one of the sectors where markets have and are highly distorted by government policies. Wide range of policy interventions (domestic and trade) that have impacted on the progress of trade negotiations Cuts the link between what happens domestically and what happens on world markets

14. But national policies also impose an externality on world markets …low (high) domestic prices raises (lowers) world market prices …as government policies seek domestic security, world markets become more volatile …the export supply/import supply schedules become more inelastic.

15. World commodity and domestic food prices Behaviour can be very different The impact of world commodity market shocks not fully transmitted to changes in domestic market food prices Horizontal and vertical price transmission Domestic food prices can be more stable than world market commodity prices

16. Figure 5: World and Domestic Prices for Selected Developing Countries Source: IMF

17. Figure 6: World and UK Domestic Producer Prices and Retail Food Prices, 1998-2010. Source: Davidson et al. (2011)

18. Competition Issues Largely ignored: concerns about competition in commodity and food markets can arise locally, nationally and internationally Can involve the state or private firms and can impact within or across borders

19. State Manipulation of Market Structure International commodity agreements (?) State sanctioned cartels State trading enterprises…not per se associated with state ownership but direct manipulation of markets both domestic and with respect to trade

20. Competition concerns relating to private firms Cartels, domestic and across borders Downstream markets (i) Export supply chains (Porto et al. (2011) on coffee, cotton and cocoa sectors) (ii) vertically-related and imperfectly-competitive domestic food markets…successive oligopoly (iii) Market power concerns (buyer and selling) within and between stages

21. Domestic ag. comms World Markets Processing Sector Retailing Sector Consume rs Competition and Regulation throughout Food Chain Input sector Competition issues related to commodity markets Competition issues in the upstream input sector

22. Characteristics of Food Markets High levels of concentration at all stages (processing and retailing)…successive oligopoly Tendency towards increasing concentration Consolidation and M&As both domestically and nationally Between (not just within) stage issues also matter But note, other inputs will matter too for the final price of food products at the retail sector

23. Why does it matter? Potential abuse of market power Selling and buyer power may matter Price transmission effects Behaviour of prices for downstream products differs from upstream commodity markets Net welfare and distributional effects associated with price shocks

26. Observations Competition will matter in a variety of contexts Commodities are only one part of the food chain and may represent a small share of the final food product So, other issues matter too. But small deviations in competition can have large effects particularly on the distribution of welfare following shocks

27. Further issues How does competition impact on the volatility of prices? How do departures from the competitive benchmark impact on risk exposure for farmers and consumers? How do departures from competition in domestic markets impact on world markets? How do departures from competition and its impact on volatility impact on investment?