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Commodity Prices, Government Policies and Competition
Steve McCorristonUniversity 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
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
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 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
Domestic ag.
comms
World Markets
ProcessingSector
Retailing Sector
Consumers
Competition and Regulation throughout Food Chain
Input sector
Competition issues related to commodity 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
Figure 6: Change in Exporters’ Producer Surplus from Trade Liberalization
0.00
0.02
0.04
0.06
0 0.2 0.4 0.6 0.8 1
Market Power Index
Pro
du
cer
Su
rplu
s C
han
ge
Oligopsony Oligopoly
Oligopsony & Oligopoly Successive Oligopsony with Oligopoly
Successive Oligopoly with Oligopsony
Figure 7: Change in Producer Surplus, Consumer Surplus
and Marketers' Profits from Trade Liberalization for the case
of Successive Oligopoly with Processor Oligopsony
0.00
0.02
0.04
0.06
0.08
0.10
0.12
0 0.2 0.4 0.6 0.8 1
Market Power Index
Pro
du
cer
Su
rplu
s, C
on
sum
er S
urp
lus,
M
arke
ters
' Pro
fits
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?