World Prices for the Detailed and Small FAP Commodity Lists

NOT FOR QUOTATION WITHOUT PERMISSION OF THE AUTHOR

WOKLD PFUCES

FDR THE

DETAZLED AND

THE

SMALL

F A P

COMMODm IJSrS

U. Sichra

December 1984 WP-84-95

Working Rzpers a r e interim reports on work of t h e International Institute for Applied Systems Analysis and have received only limited review. Views or opinions expressed herein do not necessarily represent those of t h e Institute or of its National Member Organizations.

INTERNATlONAL INSTITUTE FOR APPLIED SYSTEMS ANALYSIS 2.76 1 Laxen burg, Austria

Understanding t h e n a t u r e and dimensions of the world food problem and t h e policies available to alleviate it has been t h e focal point of t h e IIASA Food a n d Agriculture Program (FAP) since i t began in 1977.

National food systems a r e highly interdependent, and yet t h e major policy options exist a t t h e national level. Therefore. to explore t h e s e options, it is necessary both t o develop policy models for national economies a n d to link them together by trade a n d capital transfers. Over the years FAP has, with t h e help of a network of collaborating institutions, developed a n d linked national policy models of twenty countries, which together account for nearly 80 p e r c e n t of important agricultural a t t r i b u t e s such a s area, production, population, exports. imports and so on. The remaining countries a r e r e p r e s e n t e d by 14 somewhat simpler models of groups of countries.

To link various national policy models in international trade. consistency of units: prices a n d valuation has to be maintained. World market prices for agricultural products depend on a variety of factors, s u c h a s quality, n a t u r e of t h e contract, time of t h e year, etc. A notion of world market prices suitable for o u r analysis and level of aggregation had to be defined. World market prices were computed for the historical period based on this notion.

In this paper, Ulrike Sichra documents the notion of computational pro- cedures a n d t h e world market prices for agricultural commodities s o computed for various levels of aggregation.

Kirit S. Parikh Program Leader Food and Agriculture Program.

This paper r e s u l t s from a long s e r i e s of discussions involving n e a r l y all of t h e staff who have been c o n n e c t e d with t h e Food a n d Agriculture Program over t h e years. From this large list special t h a n k s a r e due t o Kirit S. Parikh, Leader of t h e Food a n d Agriculture Program, who made major i n p u t s to t h e outline of t h i s paper, a n d Giinther F i s c h e r , who developed t h e methodology.

Without t h e d a t a provided by t h e Food and Agriculture Organization (FAO) a n d t h e World Bank no figures could have been c a l c u l a t e d

The paper was completed t h a n k s t o t h e typing efforts of Lilo Roggenland a n d Bonnie Riley.

CONTENTS

1. NOTION 2. METHODS 3. RESULTS

3.1. Nominal World P r i c e s 3.2. Relative World P r i c e s 3.3. Exponential E x t r a p o l a t i o n 3.4. Linear E x t r a p o l a t i o n 4. TABLES OF WORLD PRICES

REFERENCES

Tables

Table 1: Combination of Original a n d Aggregated P r i c e s Table 2: Small a n d Detailed FAP Commodity List

Table 3: Nominal World P r i c e s , Small FAP Commodity List Table 4: Relative World P r i c e s . Small FAP Commodity List Table 5: Nominal World P r i c e s , Detailed FAP Commodity List Table 6: Relative World P r i c e s , Detailed FAP Commodity List Appendices

Appendix A l : Tabulation a n d P l o t s of World P r i c e s Appendix A2: Sample Control File f o r NEWPLOT

Appendix B 1: Smallest P r i c e s , Original Commodities, 1961-76 Appendix B2: Smallest Prices;Original Commodities, 1966-80 Appendix B3: Smallest P r i c e s , Aggregate Commodities, 1961-76 Appendix B4: Smallest P r i c e s , Aggregate Commodities. 1966-80 Appendix C1: Country P a t t e r n , Original Commodities, 1961-76 Appendix C2: Country P a t t e r n . Original Commodities, 1966-80 Appendix C3: C o u n t r y P a t t e r n , Aggregate Commodities, 1961-76 Appendix C4: C o u n t r y P a t t e r n , Aggregate Commodities, 1966-80 Appendix D: Commodity Codes a n d Text

Appendix E: FAP C o u n t r i e s

World Prices

for the Detailed and the Small F A . Commodity Lists

1. NOTION

Within t h e FAP modeling work there is a need for prices a t different levels of aggregation (27 commodities and 16 commodities), so t h a t processing mar- gins, trading margins, etc.. can be derived from them and also to ascertain whether trade in c e r t a i n products is being subsidized in certain countries. The world prices should satisfy t h e following conditions in order to be included in t h e FAP country models:

have as basis t h e national exports prices (in each country, for e a c h com- modity, t h e quotient of export value by export quantity);

allow for positive processing a n d trading margins when compared to the national export, import and producer prices, even a t t h e most aggregate level.

The methods applied to calculate t h e prices differed slightly, depending on t h e level of aggregation for which i t was done (original FA0 commodities, main FA0 commodities, commodities of t h e detailed a n d small FAP commodity list).

A t t h e two lowest levels of aggregation. i.e. original FA0 commodities (600) a n d main FA0 commodities (260) t h e following method to calculate t h e world prices was applied:

t a k e for each commodity t h e national ratio of export value by export quan- tity, b u t only for those c o u n t r i e s which contribute a t l e a s t

XZ

(x=3 was chosen) t o t h e " w o r l d t o t a l exports. and from these ratios select t h e smal- lest price not equal t o z e r o (sum of all countries included in t h e calcula- tion).

In mathematical notation:

N

pwe(j)

=

min pek(j) k= 1

subject to:

N pek(j)

=

a n d qek(j) ²

&

^qel(j)

sek(j> 1=1

where:

pwe(j)

=

world export price for commodity j pek(j) = export value of c o u n t r y k, commodity j vek(j)

=

export value of c o u n t r y k, commodity j qek(j) = export quantity of country

k.

commodity j

N

=

number of c o u n t r i e s t h a t compete for the minimum

By t h i s method one arrives a t 2 groups of prices, depending on t h e aggrega- tion level:

orpwe(j), j E

N~

N ~

=

O 600 original

FA0

commodities

which are prices that do not include processing costs a t the original product level (e.g. wheat, rice paddy, potatoes, etc.,), b u t for each derived product t h e corresponding processing is included (e.g. in flour of wheat. rice milled. tomato juice. etc.). and

agpwe(j). j E

N~~

a n d NZBO

c

N600 N~~~

=

260 main FA0 commodities

which a r e only prices a t t h e original product level, b u t which include process- ing costs for all derived products. The processing costs a r e included h e r e due t o t h e aggregation p a t t e r n used (Fischer and Sichra, 1983).

In Appendix B1 to B4 lists are presented which indicate, for each commo- dity, the country whose price is the smallest price, a n d t h e corresponding price for each y e a r of t h e time series. In Appendix B1 t h e non aggregated commodi- ties between 1961 and 1976 a r e shown, i n Appendix B2 t h e same commodities between 1966 a n d 1981 (or 1980 in most cases) a r e given. Appendices B3 and B4 show the corresponding figures after t h e first aggregation step, i.e t h e process- ing costs are included. Appendices B1 a n d B4 a r e only meant as a reference and will be too detailed for most applications.

If one lists only t h e countries which have t h e smallest price, leaving out t h e price itself, t h e p a t t e r n s of market influence of countries for t h e various commodities can be recognized. Appendices C1 t o C4 show these patterns.

Aqpendix C1 has t h e pattern for original commodities without processing between 1961 a n d 1976, Appendix C2 between 1966 a n d 1981. This last y e a r will be disregarded in t h e calculations and plots t h a t follow, as this year is not covered by all countries and all commodities. Appendices C3 and C4 give the corresponding p a t t e r n a t t h e first aggregation level, i.e. with processing costs included.

The codes shown in t h e above appendices can be deciphered in Appendix D (commodity'codes and text), and Appendix E (country codes and text).

These price calculations have been made for all commodities in t h e same consistent way, except for r i c e paddy (0027). The main t r a d e of r i c e products is

not in rice paddy, b u t in r i c e milled, or sometimes rice husked. Rice paddy has a higher export price t h a n rice milled (probably because only high-quality varieties are traded, t o be used for seed purposes). Therefore. in order to arrive a t a "reasonable" rice price for the nonaggregated stage of t h e product (original 600 FA0 commodities). t h e price of rice milled h a s b e e n used whenever the price of rice paddy was needed.

The world prices for t h e commodities of t h e detailed FAP commodity list (27 commodities) a n d small commodity list (16 commodities) have been calculated in a similar way a s t h e national producer prices for t h e s e commodities (Sichra.

1984).. i.e.

where:

~ w e ( i )

=

world export price for commodity i

qwe(1)

=

total " w o r l d export quantity of commodity 1 pue(1)

=

world export price for commodity 1

4 1 )

=

aggregation weight for commodity 1

N i =

number of commodities 1 t h a t aggregate t o commodity i

Depending on t h e aggregation level of qwe(1) (original 600 F A 0 commodities or main 260 F.40 commodities) and the choice of pwe(1) (orpwe(1) or agpwe(1) as described above) t h e resulting prices pwe(i) a r e different. Two of t h e four possi- ble combinations a r e of interest:

take qwe(1) a f t e r t h e first aggregation s t e p (260 main F A 0 commodities) and s e t pwe(1)

=

agpwe(1); this r e s u l t s in prices t h a t include processing costs;

or

take qwe(1) from t h e 600 F A 0 commodities (but aggregate only over t h e main commodities), and s e t pwe(1)

=

orpwe(1); this gives prices t h a t only contain t h e raw material value a n d no processing.

The first s e t i s called "prices with processing", agpwe(i), t h e second s e t

"prices without processing", orpwe(i).

A t t h i s s t a g e i t is necessary t o analyze both s e t s of prices (agpwe(i) and orpwe(i)) f o r t h e detailed FAP commodity list. The relative difference of both prices (for e a c h commodity and e a c h year) can be interpreted a s processing margin of e a c h commodity:

It is e x p e c t e d t h a t prm(i) r 0 for all i and all years. This is not always t h e case. Some commodities still have a negative processing margin which c a n have many sources:

The c o u n t r i e s which contribute t o t h e minimum price of a commodity n e e d n o t be t h e same at t h e 600 a n d 260 commodity 'level; some products have large price fluctuations. which a r e sometimes noticeable only a y e a r l a t e r due t o t h e non-homogeneous statistics on trade across t h e countries (e.g.

sugar.) ;

for some products t h e trade of t h e processed good is more significant t h a n t h e o n e for t h e non-processed one (e.g. cassava);

t h e r e might be countries who try t o gain a market a n d "dump" t h e product a t a very low price; etc.

Therefore, after carefully studying the ratios a n d the possible reasons for t h e i r deviation from "normal", i.e. t h e price without processing is lower than t h e price with processing, the world prices for t h e detailed FAP commodity List were selected. In Table 1 below one c a n s e e t h e commodities for which a n exception has been made (not t o take t h e price without processing) and for what reasons.

World prices for t h e small FAP commodity list a r e computed in a straight- fornard way from the detailed FAP commodity list by aggregating t h e commodi- ties as shown in Table 2. using export quantities as weights. The u n i t of meas- u r e m e n t of each commodity in t h e small a n d detailed list is also shown in Table 2.

The price for non-agriculture ( t h e 10th commodity) is calculated from export Q u r e s . I t is t h e difference of c u r r e n t total exports and agricultural exports, divided by the diflerence of c u r r e n t exports and agricultural exports a t c o n s t a n t 1970 values. i-e.

where

pwet(lO)

=

world price for t h e non agriculture, in year t

mj,t

=

total exports, c o u n t r y j. a t c u r r e n t value, year t

Table 1. Combination of Original and Aggregated Prices commodity

large FAP list

n o Yes proc

reason

wheat rice

coarse grain vegetable oil protein feed sugar

bov+ov meat pork

poul+ egg s dairy prod

fruits+nu ts fishery prod coffee . cocoa+tea bev.of alcoh dbers

indust.crops bov+ov fat pig fat poultry fat 6 s h oil meat meal llsh meal wool.+ hides pig hides

but p

=

q27*p31*0.6?/ q27'0.67

is a processed product

t h e r e is little trade in fresh meat. and the processing price also includes trade in offals most trade is done in butter, milk

powder and cheese

the raw material price is often higher than t h e price for t h e processed good

t h e trade in fresh products is not representative

t h e r e i s no trade in seed cotton, only linter, which has too low a price i t is not traded as such. but a s " l a r d (derived commodity)

it is not traded as such but as "rendered"

the processed good is mainly traded t h e smaller price was chosen

EXT70jnt

=

total exports. country j, a t constant 70 value, in year t exchjBt

=

exchange r a t e , country j. year t i n nc/US$

e x ~ h ~ , ~ ~

=

exchange r a t e , country j. year 1970 i n nc/US$

q B t ( i )

=

agriculture exports volume. country j, commodity i , year t

Table 2. Small a n d Detailed FA.P Commodity List.

d e t a i l e d models

3001

-

³⁰²⁷ simplifled models

3501

-

³⁵¹⁶

commodity " good dim" commodity dimension

30.. 35..

1 wheat ( z > m t

2 r i c e (2)mtm

3 c o a r s e g r a i n (2)mt 4 vegetable oil (2)mt 5 protein f e e d (2)mt p r 6 s u g a r ( z > m t 7 bov+ov m e a t (2)mt

8 Pork ( z > m t

9 poultry+eggs (2)mt p r

10 dairy prod (2)mt

11 v e g e t + r o o t s (1) 1000$

12 f r u i t s + n u t s (1) 1000$

13 fishery prod (2)mt p r 14 coffee ( z > m t 1 5 cocoa+ t e a (1)1000$

16 bev.of alcoh (1)1000$

1 7 fibres (1) 1000$

1 8 industr.crops (1) 10006 19 non a g r i c u l t (1) 10006

r e d u c t i o n

1 wheat ( z > m t

2 r i c e (2)mt milled

3 c o a r s e g r a i n (2)mt 8 o t h e r food (1) 1000$70 7 protein feed (2)mt p r o t 8 o t h e r food (1) 1000$70 4 b o v + o v m e a t (2)mt

6 o t h e r meat (2)mt p r o t e i n 6 o t h e r meat (2)mt p r o t e i n

5 dairy prod (2)mt milk

8 o t h e r food (1)1000$70 8 o t h e r food (1)1000$70 6 o t h e r meat (2)mt p r o t e i n 8 o t h e r food (1) 1000$70 8 o t h e r food (1) 1000$70 8 o t h e r food (1)1000$70

9 industr.crops(1)1000$70

9 i n d u s t r - c o r p s (1) 1000$70 1 0 n o n agric (1)1000$70

r e d u c t i o n 4 bov+ov fat

4 pig fat 4 poultry f a t 4 fish oil 5 m e a t meal 5 f h h meal 17 woo1,hides 1 7 pig hides

-

8 bov+ov f a t 8 o t h e r fat 8 o t h e r fat 8 o t h e r fat 7 m e a t meal 7 fish meal 9 wool.hides 9 pig hides

(1) 1000$70 (1) 1000$70 (1) 1000$70 (1) 1000$70 (2)mt p r o t e i n (2)mt p r o t e i n (1) 1000$70 (1) 1000$70

pwe,(i)

=

world price for commodity i. y e a r t

~ ~ ~ 7 0 ( ~ )

=

world price for commodity i, y e a r 1970

=

n u m b e r of c o u n t r i e s which a g g r e g a t e t o " w o r l d (FAP c o u n t r i e s ) Ni

=

n u m b e r of a g r i c u l t u r e commodities.

'3.

RESULTS

The calculated world prices can be presented in numerous groupings and ways. Here t h e following combinations have been chosen and plotted separately.

1. Nominal World Prices, i.e. prices as they are calculated, in "historical"

time series, i.e. between 1961 and 1980.

2. Relative world prices, t h a t is the world price of each commodity, divided by the non-agriculture price, giving an inflation-free view of the prices. Only historical numbers a r e presented (i.e. 1961-1980).

3. Exponential extrapolation of the nominal world prices until t h e year 2000, by fitting the 20 years between 1961 and 1980 with an exponen- tial regression.

4. Linear extrapolation for the relative world prices series, by m a k n g a linear regression on the historical time series.

Each of t h e above four groups is arranged in the order of the small FAP commodity list. A subdivision into those commodities which constitute the detailed FAP list can be calculated as well. Also shown are Four tables of time series. These a r e a combination of historical time series and extrapolated values, and should senre as reference For the plots mentioned above. The order of the commodities here Follows the divisions into the small and detailed FAP commodity lists. The nominal prices are all given in c u r r e n t US$ per unit. The units are diderent depending on the commodity they refer to. In Table 2 above the various units can be seen.

3.1. Nominal World Pricea

The historical world prices, a s calculated with t h e methodology discussed above. all range between 40 and 4000 US$ per unit, except for "poultry and eggs" (and therefore "other meat") which go up to 10,000 US$ as the unit of measurement is rnt protein.

The following plots show the development of these prices between 1961 and 1980. The x-axes s t a r t in 1960 for reasons of convenience, t h e actual curves only s t a r t in 1961. The &st plot shows a l l 10 commodities in one chart. For t h i s purpose t h e world price of "other meat" h a s been scaled down with 0.1 in order to make i t comparable with t h e o t h e r prices. The next t h r e e graphs show, in somewhat larger scale. each of t h e 10 demand commodities of t h e small FAP commodity list. The unit for each price has t o be taken from Table 2 as it is n o t always t h e same for t h e various curves on one chart.

Nominal World Prices for t h e 10 Demand Commodities of the Small FAP Commo- dity List.

3.2. Relative World Prices

In t h e c a s e of relative world p r i c e s t h e r a n g e of values lies between 0.04 a n d 0.8, except for "poultry a n d eggs" ( a n d t h u s "other meat") which g o e s u p t o 5. These values a r e t h e r a t i o between world price in

US$

p e r u n i t of e a c h com- modity a n d t h e price in

US$

p e r 1000 $ 70 of t h e non-agriculture commodity (frequently called t h e 10th commodity). These figures t h u s exclude inflation a n d give a b e t t e r picture of t h e world p r i c e development of e a c h product.

The graphs for t h e relative world prices, except for t h e 10th commodity, which always would be 1. p e r definition, a r e shown next. The first plot gives an overview over all 9 commodities. with t h e 6 t h commodity ("other meat") s c a l e d down w i t h 0.1 in order t o be able t o show more details of t h e development of t h e o t h e r prices. The next plots a r e g r o u p e d in t h e same way a s t h e nominal world prices.

Relative World Prices for 9 Demand Commodities of the Small FAP List.

3.3. Exponential Extrapolation

In t h e next series of graphs t h e previously shown nominal prices a r e plot- t e d again, in conjunction with values from the exponential regression

wp(t)

=

a exp (b*t), t=1961 t o 1980

for each commodity a n d extrapolated to t h e year 2000. The a r r a n g e m e n t of t h e commodities follows t h e previously discussed mode.

As would be expected, t h e trend is highly exponential and i n numerous cases t h e price for t h e year 2000 does not even fit on t h e c h a r t . The plots are mainly meant as reference t o compare results from simulation r u n s o r forecasts from other sources.

I t can be seen immediately that the fit is generally poor, which i s also reflected in t h e control values of t h e regression calculations. The large fluctuations and changes in direction between 1967 a n d 1975 a r e h a r d t o fit.

Exponential regression a n d Extrapolation of t h e Nominal World Prices (61-80).

,-

-

^P

,,1-85E G 3 F l i N S ,.C?L~ = ? I C E :N s / r T zsa

-

R I C E

a ]

196a 1979 : $ 9 8 zaas

...

continued

...

OTH. n E R T

LIGRLD P R I C E I N S / F T - ? R O T

! asa 300

a I

;96a 1 9 7 9 :sea : j g a zaaa

3.4. h e a r Extrapolation

For t h e relative world prices t h e linear regressions

were calculated and with t h e coefllcients a and b all years until 2000 were extra- polated. A linear function. instead of t h e previous exponential one was taken, as it seems to reflect better t h e trend, although t h e flt i s still r a t h e r poor.

Also here t h e non-agriculture sector has been left out as i t would only show flat 1's. For reasons of clarity t h e y-scale is varying in order to show better the fluctuations over time of t h e "historical" relative world prices.

It c a n be seen t h a t t h e prices between 1961 and 1970 fluctuate very much.

This certainly has an influence on t h e projected linear trend. If one leaves out t h e first 10 years in the linear regression, and only takes values between 1971 and 1980, a change in t r e n d direction can be noticed for some commodities;

wheat and non-food become positive;

rice becomes strongly positive;

bovine and ovine meat changes From positive to negative trend.

dairy, other meat, protein feed and other food do not change direction.

These plots are shown below. The observed years between 1961 and 1969 ^. a r e also drawn although they a r e not included in the regressions. The changed t r e n d behavior is even more noticeable in the plots of t h e detailed commodity list. not shown here.

Linear Regression a n d Extrapolation of t h e Relative World Prices (61-80).

R I C E

? I 1 I / ? I NON-QG I

9 . 2 1 r

I

...

continued ...

OTH. V E A T

I P( I ] / P I N O N - P I G I s.aa

I

P R T . F E E D (

! a

^I

Linear Regression and Extrapolation of the Relative WorId Prices (71-80).

R I C E P ( I I / P ( N O N - S G 1

...

continued

...

'a. 1

i96B 1370 1988 i998 2000

'a. !'a 'a. 2a

I

4. TABLES

OF'

WORLD PRICES

For reference purposes actual tables of world prices, nominal and relative, a r e also included, On each table t h e historical series, between 1961 and 1980 is shown f i s t , and below t h e dashed line extrapolations until the year 2000 are given. In the case of nominal world prices t h e extrapolation follows an exponen- tial trend. for relative world prices t h e t r e n d is linear. The last line on each page gives t h e average price between 1961 and 1980.

In Table 3 nominal world prices for t h e 10 demand commodities of the small FAP commodity list are tabulated. On Table 4 the relative world prices are s h o r n .

All details for t h e aggregated commodities like "other meat", "other f o o d ,

"non f o o d can be found in Table 5, for t h e nominal world prices, and in Table 6 for the relative world prices. Some commodities like whgat. rice, coarse grains.

dairy and bovine and ovine meat a r e repeated in these tables.

It should be noted t h a t the aggregate prices result from weighting the disaggregated prices with the corresponding quantities t h a t contribute to the aggregate. a n d with US$ or protein conversion weights when needed. Therefore recalculations by h a n d should be done with extreme care.

s h o r t l i s t nominal wp

y e a r wheat r i o e o t h . o e r . bov.meat d a i r y o th.oreat p r t . f e e d o t h . f o o d non-food non-ag

TMLE 3: Nominal world prices, a dF~ commodity h t .

short l i s t

r e l a t i v e world p r i o s :

y e a r w h e a t r i c e o th. oer. bov.meat d a i r y oth.meat prt.feed oth.food non-food non-ag

a - f m a - a m f w a a a a m N w - r r X W m m v 8 t o q 7 q

. . .

. . . a . . .

m w a . P N m w F a c 0 w w a P a P m a w N P m a m a w w w w w w w w w w w w a - - - % - - ~

lona l i n t

nominal world p r i o o :

year p i g f a t p l t r . f a t f i s h o i l m . meal f . meal w + w + h p i g h i d .

aver . 6 1 - 8 0

l'AI3l.E 5: Nominal world price.. delnilad FW co-dily kt. (continued)