Structural Changes in Commodity Markets: New Opportunities and Policy Challenges for Commodity Exporters
the connection between energy and agriculture by linking demand for food crops to energy prices. The energy market is so large relative to the volumes of biofuels that can be produced from food crops that energy prices will drive up food crop prices as long as policies encourage biofuel consumption and the use of food crops for biofuels is unrestricted.6 Efforts to mitigate greenhouse gas emissions may also contribute to the increase in biofuel production. Many countries appear committed to reducing dependence on fossil fuels and increasing reliance on renewable energy sources in the long term. Brazil, Canada, the EU, the United States, and other countries have mandated large increases in biofuel production, and other countries have set nonbinding targets (China, India, Japan, and others).7 Consumption mandates in many countries, but especially in the EU and the United States, will require large increases in biofuels production through at least 2020.8 In the long term, second-generation biofuel technology may limit the upward pressure on prices by allowing agricultural waste to be used to produce biofuels. However, this technology has been slow to develop and may not be economically viable for a decade or more. Even when it becomes profitable, it will take many years to scale up production to significant levels. And until second-generation technology develops, the increased use of food crops for biofuels will divert resources from other food, feed, and fiber uses and raise all agricultural commodity prices (Mitchell forthcoming). If crop prices remain high, agricultural production may increase. Argentina, Brazil, and other parts of Latin America (as well as Eastern Europe and Sub-Saharan Africa) have land that is suitable for crops and would likely come into production. Much of this land is already in pasture and could be used for crops if the necessary infrastructure were made available. Brazil, for example, has about 200 million hectares of pasture, and a portion of this land could be used for crop production without undue environmental stress. This area potentially rivals the 140 million hectares of cropland currently used for production of major field crops in the United States. Sub-Saharan Africa has more than 1 billion hectares of land with potential for rain-fed crop production, with less than one quarter of this land now being cropped, according to the Food and Agriculture Organization (FAO 2008). Marginal and abandoned lands may be even more abundant. The Future of Metal and Minerals The future of metal and mineral prices will depend mostly on demand from China. Currently, China’s per
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capita consumption of metals is following historical trends of other rapidly growing developing countries at similar income levels (figure 20.6). However, China is such a large country, and its economic growth has been so rapid that following historical trends in per capita consumption has led to very large increases in metals consumption and a growing share of global imports. If historical increases in China’s economic growth and exports continue, per capita metals consumption is expected to continue increasing for at least another decade. Indeed, China’s share of global metals consumption is forecast to increase from 40 percent to 50 percent or more for many metals during this period (Mitchell, Tan, and Timmer 2007). Once China moves through its period of rapid economic growth, its demand for metals will fall, and no other countries are expected to replace China’s demand for metals and minerals. As a result, metals prices could be sharply lower in a decade or more. Although supplies of global metals and minerals deposits are abundant (USGS 2008),9 many of these deposits will probably be costly to develop and under the best of conditions will take many years to begin producing. In conclusion, while the boom in commodity prices may be long lasting, it is unlikely to be permanent because commodity demand will slow in rapidly growing developing countries as their economies mature and new resource supplies are developed. However, the period of high prices and strong demand growth may last for at least a decade and provide an opportunity for resource-rich countries to enjoy faster growth than in the past. How they manage such growth will largely determine whether it will be sustainable. Past efforts at managing commodity booms have not been very successful. For example, countries with abundant natural resources have experienced slowed economic growth because of overvalued exchange rates and volatile export earnings. However, countries that manage their policies well can avoid these problems. A Historical Account of the Commodities Literature Recent trends in commodity prices have revived discussion of the differing impact of commodity and manufactures production on economic growth. This debate has been emerging cyclically since the 1950s, starting with Raul Prebisch (1959) and Hans Singer (1950). Prebisch and Singer argued that natural-resource dependency leads to low growth because of the long-term deterioration of commodity prices relative to manufactures and the belief that opportunities for technical progress were limited relative to those in manufactures. Their analyses were further