Tropical Commodities and their Markets

A Guide and Directory

by Peter Robbins
Published by TWIN 1995
ISBN 0 7494 1672 0

PART ONE MARKETS FOR TROPICAL PRODUCTS

Markets for Tropical products

1.1

HISTORY

The history of the world is inextricably linked with trade in tropical products.  Wars have been fought to gain access to precious oils, fabrics and spices from Africa and the Orient.  Empires have been built on the trade in commodities along the Silk Road and the sea routes to South America and islands of the East Indies.

The huge distances over which these products had to be transported by camel train and ship with all the associated dangers of those times and regions meant that the prices of the goods were truly fabulous and most were therefore luxuries affordable to only the richest people.

Over the centuries, the volume of trade in tropical products has increased enormously. Technical, environmental, economic and political changes have had a great impact on their markets.  New, more efficient farming techniques, plantation production and selective plant breeding have greatly increased yields of some commodities. At the same time, populations in industrialized countries have become bigger and wealthier and demand for tropical products has grown.

The industrial revolution brought changes, which meant that production and processing could be mechanized. Transport became cheaper and more reliable. Up until the early part of the twentieth century, international trade in tropical products was almost totally controlled by the companies of the then imperial powers who undertook most of the processing. However since the end of the Second World War, the process of decolonisation has completely altered this structure. Almost all the once colonized countries have now achieved independence and the large trading have relinquished much of their direct role in the process of production.

In many countries, plantations were nationalized and exports put under the control of state run marketing boards, which replaced private trading monopolies. Many firms, once owned by the expatriates of the colonizing state were purchased by members of the indigenous elite. In some countries, there was a movement towards the cooperativisation of farms under the auspices of the state but expels of farmers themselves gaining control over the commercialisation of their products were few and far between.

INFLUENCES ON TRADE IN TROPICAL COMMODITIES IN THE MODERN WORLD.

In modern times, the trade in some tropical products has become truly massive. The markets for these products, whether they are the very important internationally traded commodities like coffee sugar, cocoa or obscure products like candle wax are subject to many forces operating behind the scene such as speculation, the domination of large trading companies and the influence of multilateral development agencies.

Transnational corporations
Most of the old colonial trading companies have evolved over the post- colonial period into vertically integrated trans national corporation operating on a global basis. They have joined by large US and Japanese conglomerates and by trading houses with no real identifiable base but with administrative headquarters in countries lie Switzerland and other business friendly tax havens. Together with some specialist trading companies (mostly based in Europe Japan and North America), these organizations conduct almost all the worlds’ trade in tropical products.

Some these trading companies still retain ownership of production capacity I certain products grown in the tropics. Most however, no longer regard raw material production a s the profitable end of their businesses and are content to purchase raw materials from exporters based in the country of origin. This is largely because multinational corporations are unhappy about accumulating profits in developing countries where the tax rate are often high, expatriation of profits is limited and where viable alternative local investment opportunities are few and far between. They would prefer to conduct the profitable areas of their business in countries with more flexible opportunities to invest and transfer capital. So rather than profiting from production, almost all their in come is now derived from the trading, processing, packaging, financing of the product. For these reasons, such corporations now have a greater interest of keeping the price of raw materials low.

Specialist trading companies, whose existence depends on maintaining the world trade in tropical goods, have an interest in making sure that the competition from synthetic products is kept to a minimum. They encourage tropical producers maintain reliable quality and delivery standards and try to convince them that prices must remain low to maintain the volume of trade. Such advice is generally helpful but doesn’t always assist producers in maximizing their earnings when the opportunity arises.

Transnational corporations have also strengthened their control over intellectual property.  Pharmaceutical companies have developed a multibillion-dollar industry by utilizing natural products.  In order to produce one useful drug it is often necessary to test the properties of the extracts of thousands of natural plants.  The work is so highly technical and costly that only the world’s very largest companies can afford to undertake it.  Once a useful product has been developed, often guided by the knowledge of the people from the district in which the plant is found, the companies go to great expense to ensure their ownership rights to it.

The united Nations Development Programme estimated in 1994 that third world countries might have earned up to US$5 billion a year in royalties from multinationals for their use of plant derivatives and know-how.  But indigenous communities cannot afford to patent their own products, let alone fight a legal battle with large companies over patent rights.  Some third world agriculturalists now find they have to pay a royalty to a multinational corporation, which has patented seed, plant, or process that they have been using freely for generations.

Multilateral development agencies
Multilateral development agencies such as the World Bank and International Monetary Fund (IMF) are among the main conduits of aid and credit to developing countries.  Their attitude to individual countries greatly influences the decisions of private investors.  The agencies in turn are heavily influenced by the governments of the industrialised countries that are the main importers of tropical products.

The World Bank and Imf are responsible for designing the economic policies (structural Adjustment Programmes or SAPs) that must be adopted by countries if they wish to receive loans and aid.  Such policies identify exports as a key to development.  Governments are obliged to encourage exports of these goods, often to the detriment of domestic food production.  These policies might have been effective if adopted by only one or two countries.  Unfortunately many have been pressed to follow the same course and the resulting glut of primary products on the world market has resulted in plummeting prices.  In many cases prices for tropical agricultural products in the early 1990s were, in real terms, at historically low levels.  Although in the last few years it has been recognized that SAPs are not helping to relieve poverty, this has yet to filter through to policy level.

Trade restrictions
Historically, industrialised countries, which are the main importers of tropical commodities, have tended to protect their own processing industries with tariff and non-tariff barriers (quotas, quality restrictions, bureaucratic regulations, etc).  This has perpetuated a situation in which they carry out much of the processing of natural products into added-value goods – often the most profitable link in the commercial chain.

Over the past decade there have been moves towards a reduction of tariff barriers and a liberalization of global trade.  The Uruguay Round of the General Agreement on tariffs and Trade (GATT), completed in 1993, agreed rules aimed towards a long-term reform of trade the world’s tropical products.  Although some tariffs will be progressively reduced over coming years, those with low production costs and large marketing resources are likely to benefit most.  What is more, there are fears that resources are likely to benefit most.  What is more, there are fears marketing resources are likely to benefit most.  What is more is that there are fears that hidden barriers such as environmental criteria and strict food exporters of tropical products. quality standards will become more and more prohibitive to producers and exporters of tropical products.

Commodity agreements
When the world’s trade and much of the production of many of these products was in the hands of the large imperial companies, their prices were controlled by them as producers at levels that guaranteed a return on their investments.  The so-called producer price arrangements were negotiated between companies producing the same product to avoid price competition between companies producing the same product to avoid price competition.  In the 1950s and 1960s this system stared to break down as private companies based in producing countries or state-owned organisations took a greater share of production.

The producer price system was replaced in part by a number of international agreements for commodities such as coffee and cocoa, and minerals such as tin, were meant to keep prices at levels that were satisfactory to both parties.

In the late 1970s and 1980s these agreements came under increasing strain.  This was partly due to a failure by producers to participate in and police the agreements properly, and partly because they lost the support of large consuming countries such as the USA and the UK, which were much, influenced by non-interventionist economic doctrines.  Most of the agreements required the maintenance of buffer stocks and, without the necessary financial resources, which only rich, consuming countries could provide, they started to fall apart.

However, there have been several signs that the era of the collapse of commodity agreements is coming to an end.  Apart from the coming together of the tin producers, the Association of coffee Producing Countries (ACPC) has decided that a well designed stock retention agreement without the participation of coffee-consuming countries is more likely to prove effective.

The history of commodity agreements demonstrates that they can achieve significant benefits for producers while they last that they will only last it they bring together the volume producers of a specific commodity and those who perceive a joint or common interest.  They must be well organised, viz the De Beers diamond cartel or the common agreements the various parties will quickly descend into a hopeless state of bickering over market share and indulge in outright cheating until the agreement finally collapses.

Supply and demand
The buying power of the industrial world continues to have great influences on the markets for tropical commodities.  Demand for these products tends to rise and fall along with the cyclical changes in global industrial activity, whether the product is a food, a fibre or an essential oil.  There are obvious reasons for this: consumers buy more goods of every type when they have jobs and more money in their pockets; speculators and traders tend to keep stocks high when they see prices rising.  The opposite is of course also true and the prices of natural products fall in world economic recessions.

It is important to consider, however, the market dynamic that makes a very small surplus of supply over demand keep prices low.  The marginal rise in demand in the early part of 1995 improved the prices of most raw materials, including tropical crops.  The price of coffee, rubber, cotton and some essential oils showed the first significant rise since the beginning of the decade.  By the time of publication, it was still too early to say whether these improvements would be sustained or whether they were linked to what was beginning to look like a rather ephemeral recovery in world industrial activity.  To maintain prices at reasonable levels, some controls over or coordination of supply in order to avoid over-production, are probably essential.

Natural versus synthetic
In our world of high technology, new and better products are being developed on a daily basis.  Some naturally-occuring organic chemicals can now be synthesised in a test-tube.  Changing tastes and fashions can, in a few years, end trade in a commodity, which had been produced for hundreds of years.

On the other hand, almost paradoxically in an increasingly industrial world, there is a move among consumers in developed countries towards natural products and away from synthetic alternatives.  This can be seen most readily in the area of textiles, especially for clothing.  The cosmetics industry has also seen a notable increase in the demand for natural ingredients.

Ata the same time, the incredible diversity of natural substances is a constant source of interest for those researching new products.  New uses for these products, especially in the pharmaceutical and cosmetic industries are being discovered all the time.  Exotic fruit and vegetables that were once the subject of travellers’ tales are now quite commonplace items in the supermarkets and restaurants of consumer countries.

The combination of a rise in the costs of making synthetic products, a rejection of consumers of synthetic ingredients and a wider interest in non-traditional natural alternatives is bound to assist, albeit to a small extent he markets for many tropical products.

Variety and change
Agricultural products are much affected by seasons and the weather.  Climatic changes, especially in the more arid parts, are causing major changes in production output and in the choice of products to be grown.  The world price of most exported agricultural products changes according to the time of year.  Demand for some goods produced in remote parts of the world outside the main harvest season can be so high that traders can afford to fly such goods halfway round the world.  The trend towards out-of-season fruit and vegetables has reached the point where almost any product can be bought (at a price) at any time of the year in supermarkets in the industrialised, consuming world.

Agricultural products also have their own natural cycles, which are reflected, in their markets.  Taking the example of a nut tree that takes five years to bear its first crop; when farmers (and their governments) see that a high price is being paid for that nut, they will start planting trees.  After five years, they will all bring their nuts to the market at the same time.  This oversupply will cause the market price to fall and no one will want to plant any more nut trees, which will eventually result in lower production levels, higher prices and a repetition of the cycle.

Fair trade
A small but growing influence on the markets for tropical commodities is the fair movement.  Beginning in the 1960s in Europe, the movement has now spread to North America and Japan and is becoming a recognised force among consumers and traders alike.

Standards on what is fair trade have been agreed at international level for some commodities.  In general, they involve paying a fair price to primary producers, so that they receive a decent return on their labour, have access to affordable credit and can invest in their future; working to long-term contracts, reducing some of the insecurity associated with global trade; and ensuring that workers have the right to organise and live and work under safe and healthy conditions.

Fair trade developed through the work of alternative trading organisations and non-governmental organisations involved in development programmes.  Since the early 1990s, however, it has expanded to include some more traditional commercial companies.  An independent monitoring system has been established for certain commodities, so that if a company so implies with specified fair trade criteria, they can display a symbol – a fair trade mark – on their products as a consumer guarantee.  In Holland, where this system bean, coffee traded under these conditions now accounts for some 2.8 per cent of national coffee sales.

Despite including some relatively large and influential companies fair trade is still limited in terms of the umber of produce4s it affects directly.  However, an important element of the movement is its commitment to campaigning on trade issues at national and international level.  Combining this activity with setting an example through actual practice is what gives the movement its strength and the potential to have a wider impact on the market as a whole.

PRODCERS IN THE WORLD MARKET

National agricultural polices
The markets of many products are affected by the economic policies of the countries in which they are grown – whether the country can subsidises or discourages exports, for instance.  Equally, output can be affected by a producing country encouraging or suppressing trade union activity, or neglecting small scale farming, or the production of staple or cash crops.  Some topical and subtropical countries are industrialising at a rapid pace and may not see a future in exporting cheap raw materials.  Others have suffered such appalling economic reverses (for which low commodity prices are often to blame) that political stability has completely broken down and civic disruption prevents proper production.

The SAPs of the multilateral agencies have, in turn, had an effect on national agricultural bodies, particularly the role of state-controlled marketing boards.  The presence of these boards was both positive and negative.  On the one hand, many served a useful purpose in that they gave the country the opportunity of bargaining with buyers (notably the multinationals) on equal terms.  Small-scale farmers are simply not equipped to bargain in such unequal circumstances and are rarely able collectively to confront buyers on equal terms.  In some cases the marketing boards also served to ensure the quality of the exported product.  Ghana for example gained an international reputation as a supplier of excellent cocoa through the strict quality control procedures enforced by the cocoa Marketing Board.

On the other hand, many marketing boards were seen by the governments of the countries concerned, as a simple way of collecting tax revenue.  Being in a powerful position, board officials could and did become corrupt.  As such, the marketing boards became hindrances to export programmes and represented a direct cost borne mainly by the commodity producers

The liberalisation process can offer opportunities to primary producers.  As a board is dismantled, there is a window of opportunity for farmers to gain greater control over the commercialisation of their product.  To do so, however, requires effective organisation or the window will close as individual producers are picked off by private companies seeking maximum profit.

Producers and production
This book covers a wide range of natural products.  Some can be most efficiently produced on huge plantations and others can only be collected in tiny quantities from the wild.  Whosever it is that actually grows and harvest the crop, there is probably no other type of trade in which the actual producers of the traded product have so little influence over the market for their goods, or whose interest are so poorly represented.

Without a producer price system, properly controlled marketing boards, the full support of governments, as well as international commodity agreements, many small-scale tropical agriculturalists are in a weak bargaining position and cannot influence the terms of trade.  When commodity prices are low they must produce even more to obtain the same income, thus putting even more downward pressure on the price.  At the same time, the cost of chemical pesticides and fertilisers rises, so they must work even harder to care for their crop.  But, in order to buy such things as cooking pots, medicines and tools they must keep on producing no matter how low the price falls.  Switching to another crop is often seen as too risky, at least in the short term.

The adoption of modern farming techniques by tropical countries does not necessarily benefit primary producers.  The conversion of agriculture into agro-industry for the mass production of a single cash crop has seldom improved the economic fortunes of small-scale farmers.  Often it has resulted in disaster for the peasant economy as a whole which has seen its traditional ownership systems undermined, land expropriated, production methods and knowledge overtaken and marginalized, and has received no direct benefit from exports of the cash crop.  The movement of subsistence farmers into ever more marginal and ecological fragile land is both a social and environment problem.

Competitive pressures affect plantation production in a different way.  In order to remain competitive, costs must be kept low and very effort must be made to utilise the best available technology to this end.  The development of hybrids and cloned varieties has helped to increase productivity and reduce vulnerability to disease and adverse weather conditions.  The main expenditure for most plantation owners is still the cost of labour, however.  Low prices take their toll in the loss of trade union rights for plantation workers and generally worsening conditions, often resulting in long and bitter struggles.

Plantation production is usually undertaken for profit, whereas smallholders produce to live.  There is a limit to how for plantation owners can cut costs and how long they are prepared to wait for a profit.  This has meant that it has been plantation production, rather than smallholder production of the same commodity, that has tended to succumb to the recent long period of low market prices.  But it has also meant that countries with both low wages and efficient production methods such as those in South East Asia have been able to retain a greater share of the market, generally at the expense of less efficient producers, particularly in Africa.

Price differentials
There is a significant difference between the price received by producers for raw materials or semi-processed products and the price ultimately paid in the consuming country.  This is most obvious for products, which undergo little additional processing prior to being sold to the end consumer.  For instance, for whole peppercorns, the final consumer pays ten times the price paid to the producer and, for coffee, four times more.  Similar differentials exist for fresh fruit and vegetables.

A proportion of these differences are attributed to direct costs such as freight, insurance, finance, cleaning and packaging, advertising and distribution.  The rest is non-material added value such as branding, image and profit.  The decline in prices of many commodities over the past decade has been reflected at retail level.

TOWARDS THE FUTURE: CAN PRODUCERS HELP THEMSELVES?

No matter how large their output, a producer’s influence on the market for its product is tiny compared with that enjoyed by the transnational corporations.  It seems clear that individual producers of producing countries will not be able alone to control the markets of their products.

The obstacles, which stand in the way of producers trying to plan rational levels of production, are formidable.  Small-scale producers usually lack reliable communication systems and so could not get in touch with other producers even if they knew whom they were.  It is often easier to telephone from East to West Africa via Europe than it is to telephone direct.

The United Nations Conference on trade development (UNCTAD), which was the international agency responsible for helping countries to plan world production agreements, has all but ceased this work in the face of opposition from industrialised countries.  The economic argument that more efficient producers should be rewarded by being allowed a larger share of the market by means of direct competition still carries great weight – and this is in spite of the evidence that most efficiency can only be achieved by worsening the plight of already poverty-stricken producers.

It is obvious, however that without an effort by producers to exercise some control over the production of, and markets for, their products, the prices of most primary products will stay low.  There are no grounds for great optimism but there are signs that some efforts are now being made by producers of certain commodities to work together.  Certainly, the catastrophically low prices of the late 1980s and early 1990s have been a harsh lesson to producing countries and may inspire them to seek solutions by cooperating with one other.

It is also possible that pressure from environmental lobbies may eventually stimulate progress towards management of supplies and the full costing of commodities.  The link between conservation, sustainable production and fair price for crops has long been established but a concerted world effort is required to make international policy – and practice – reflect these vital concerns.

The cheapness of all but the very rarest tropical products is, perhaps, the most illustrative feature of the global political and economic forces, which shape their markets.  It would surely surprise most consumers to learn that 12 to 20 million individual clove buds must be picked to earn the grower only about US$600.

The markets for these products not only reflect the relative weakness of tropical agriculturalists in the modern world, they are to a great extent the cause of it.

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