World agricultural prices are the most commonly used indicators in evaluating the buoyancy of different agricultural markets and defining their policies, both on a national and international level. However, as WOAgri has demonstrated since December 2005, it is dangerous to base international agricultural policy decisions on the theory of “world prices”. These are in fact extremely volatile and totally disconnected from production costs and supply and demand structures.
This is what Hélène Delorme, Anna Lipchitz, Annie Bonnet and Julie Villain demonstrate in their article entitled “Dynamique des prix agricoles internationaux (Dynamics of international agricultural prices)1 ”, an excerpt of which is published below.
Before presenting existing work on international prices it is important to examine the methods used to calculate international agricultural prices: what is their scope and how are the indices used to measure them constructed?
The international agricultural prices used by economists do not include all agricultural prices but only prices for “commodities” which are defined as raw materials whose prices are “subject to the law of one price” (Géronimi, 2005). This means that these prices are representative of markets that are not segmented by protectionist measures or transport costs and sufficiently uniform (no segmentations according to quality) so that the prices formed can function as common references for most, if not all, transactions. Each raw material thus defined is associated with a reference market and its price is considered as an indicator for all the markets under consideration. Therefore, in the case of cotton, the Liverpool or “index A” price serves as a reference.
The main agricultural products which comply approximately with the “law of one price” are: for foods, wheat, corn, rice, palm oil, beef, lamb and sugar; for drinks, Robusta and other types of coffee, cocoa beans, tea; for non-food raw materials, timber, cotton, wool, rubber, tobacco and animal hides. These are then factored into the global indices thanks to a weighting system. The global indices for raw materials except for energy selected by Cashin, Liang and Mc Dermott (1999) (see also Grilli and Yang, 1988) include prices for agricultural products up to 72% for base year 1990 and 69.15% for base year 1995 in order to calculate the terms of trade for all countries .2 […]
The details of the above methodologies enable us to understand the limited validity of international agricultural prices. While they provide a snapshot of supply and demand, these prices are only remotely related to production costs and therefore cannot serve as a reference to measure comparative advantages of different national agricultures for three reasons:
> The first reason is technical: the methods used to convert current prices to real prices3 , as well as to construct indices, introduce biases. For example, the quality of manufactured goods evolves more rapidly than that of agricultural products which makes it difficult to compare two series of prices over the long term. In the same way, including drinks with food products raises the index because drink prices drop less dramatically than those for foods and non-food agricultural products. Moreover, the weighting system selected to construct the indices influences their meaning. Industrial products have a higher weighting within exports by industrialized countries than within those of developing countries whereas for the latter the share of industrial products varies more dramatically and rapidly (Géronimi, op. cit.). These few examples illustrate why these indices are highly sensitive to the deflators and weightings used.
> The second reason is the result of the imperfections of international agricultural markets which are much less competitive than we might believe. First, markets such as Chicago, which is the reference for grain, for example, are inevitably polluted by the impact of direct and indirect agricultural subsidies included in agricultural policies. Also, “speculation” on these markets is highly affected by the strategies of oligopolies that structure agriculture both upstream and downstream as well as the financial sectors whose firms are becoming active players on commodities futures markets.
> Finally and above all, international agricultural prices are highly unstable. Whether we consider their absolute level or calculate the average indices, they are in every case shifting references that are unpredictable and can only provide signals that are difficult to interpret. In particular, even if they can be used as reliable indicators to monitor past trends, they are highly questionable tools when it comes to forecasting the future.
1 Notes et études économiques – n°27, April 2007. This article draws on presentations and debates from three research seminars organized in 2005 by the GREMA (research and exchange group for agricultural markets), a consortium of research institutions and non-governmental organizations.
2 Thus, the definition of international agricultural prices is performed according to technical conventions that do not reflect the reality of production costs (note by WOAgri).
3 The current prices are the prices indicated for a given period. They are expressed in terms of nominal value. Real prices are prices adjusted in function of price increases compared to base or reference data. We use in the same way the terms constant euros or francs and current euros or francs (note by WOAgri).
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