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Commodity Prices_ Government Policies and Competition - cuts ccier

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									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, 22nd September, 2011
     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
           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?
       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
Figure 1: Monthly Food Price Index, 1990-2010




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




Source: IMF
  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.
                        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.
              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
 P


          Commercial
          Demand
ΔP

                 Commercial Demand plus Storage
P*

ΔP



                                                  Q
     ΔQ                ΔQ
Figure 4: Ending Stocks of Calories from Major Grains




Source: Wright (2011)
    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!
               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
• 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.
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
Figure 5: World and Domestic Prices for Selected Developing Countries




          Source: IMF
Figure 6: World and UK Domestic Producer Prices and Retail Food Prices, 1998-2010.




Source: Davidson et al. (2011)
              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
   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
   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
   Competition issues related to commodity markets


                        Competition and Regulation throughout Food Chain


         Domestic
            ag.
          comms


Input                     Processing              Retailing            Consumers
sector                      Sector                 Sector


           World
           Markets




Competition issues in the upstream input sector
       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
           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
Producer Surplus Change          Figure 6: Change in Exporters’ Producer Surplus from Trade
                                                            Liberalization



                          0.06




                          0.04




                          0.02




                          0.00
                                 0              0.2              0.4            0.6              0.8                1
                                                                 Market Power Index

                                     Oligopsony                                  Oligopoly
                                     Oligopsony & Oligopoly                      Successive Oligopsony with Oligopoly
                                     Successive Oligopoly with Oligopsony
 Producer Surplus, Consumer Surplus,




                                          Figure 7: Change in Producer Surplus, Consumer Surplus
Marketers' Profits




                                         and Marketers' Profits from Trade Liberalization for the case
                                             of Successive Oligopoly with Processor Oligopsony



                                       0.12

                                       0.10

                                       0.08

                                       0.06

                                       0.04

                                       0.02

                                       0.00
                                              0            0.2               0.4            0.6           0.8           1
                                                                             Market Power Index
                                                          Producer surplus      Consumer surplus   Marketers' profits
                      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
                 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?

								
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