12 Agricultural commodity chains, dependence
and poverty
| (25385)
6454/04
COM(04) 89
| Commission Communication: "Agricultural commodity chains, dependence and poverty — A proposal for an EU Action Plan"
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| Legal base | — |
| Document originated | 12 February 2004
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| Deposited in Parliament | 24 February 2004
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| Department | International Development
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| Basis of consideration | EM of 26 February 2004
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| Previous Committee Report | None
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| To be discussed in Council | 26-27 April 2004
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| Committee's assessment | Politically important
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| Committee's decision | Cleared, but relevant to the debate recommended on reviving the Doha Development Agenda negotiations
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Background
12.1 According to the Commission, whilst internationally-traded
agricultural commodities are crucial in providing employment and
foreign exchange for developing countries, prices for a wide range
of those commodities tend to be very volatile, and are also following
a declining long-term trend, thus damaging efforts to reduce poverty
in what are known as the commodity-dependent developing countries
(CDDCs). The Commission suggests that, although traditional commodity
sectors, such as sugar, cotton, cocoa and coffee, are still a
key source of export earnings, measures are needed to support
them, if those sectors are not to fail in many countries, and
it has set out in this Communication a Community Action Plan,
aimed at improving producer incomes and reducing income vulnerability.
The current document
12.2 The Communication focuses on agricultural commodities which
are traded and marketed internationally, since the Commission
believes that these have a more direct link with poverty than
mineral commodities, due to the large involvement of smallholders
and labourers. In particular, it highlights policy priorities
in six areas in which the Commission says the CDDCs face major
challenges.
ADDRESSING COMMODITY DEPENDENCE
12.3 The Commission suggests that the abandonment of international
intervention policies at the end of the 1980s, and the market
reforms in the developing countries during the 1990s, left commodity
sectors largely to themselves in their struggle with the market,
and that, despite the importance of these sectors, they have been
left largely outside national development strategies. It therefore
considers that the CDDC countries themselves need to develop such
strategies, identifying the strengths and weaknesses of the different
sectors, and ways of improving competitiveness and returns to
labour (including, where necessary, providing alternatives for
producers who are unlikely to remain competitive). It also suggests
that, whilst this may not necessarily entail large financial investment
by governments, it will require strong institutional capacities.
At the same time, the Commission believes that action needs to
be taken at international level, and, more especially, that this
could be achieved largely through the strengthening of the strategies
followed by international commodity bodies (ICBs), in order to
make them more responsive to producer and consumer needs and to
the pursuit of sustainable development.
12.4 It therefore proposes that the Member States
and the Commission itself should support the CDDCs by analysing
the needs of the commodity sectors, building the capacity needed
to ensure flexible and effective strategies, and supporting multi-stakeholder
participation. It says that the Community should re-evaluate
its membership of the ICBs largely on the basis of their contribution
to its sustainable development objectives, and should consider
withdrawing from those with low relevance, continuous poor performance
or very small size. It also sees merit in merging ICBs covering
related commodities, such as coffee and cocoa.
COPING WITH LONG-TERM PRICE DECLINE
12.5 The Commission says that the long-term declining
price trend for commodities has been driven mainly by significant
productivity gains, but that other factors, such as currency devaluations,
new areas entering into production, and subsidies in certain countries,
have played a part as well, as has the failure of demand for commodities
to keep up with the increase in supply. However, the Commission
also says that structural market imbalances cannot be addressed
through international market intervention, and that CDDCs need
other ways to cope with declining prices.
12.6 The Commission suggests that commodity producers
should seek to reduce costs, pursue quality premiums, capture
speciality market shares, develop relationships with new buyers,
and improve contract conditions. In particular, it says that
this will require investment based on market opportunities, rather
than production capabilities, and that processing capacity needs
to be improved to enhance quality and value added, backed up by
improved information and advisory services, and better-differentiated
research and extension. The Commission adds that public infrastructure
is vital for the competitiveness of commodity sectors, and that
this must be achieved by national governments and co-ordinated
at a regional level, in order to reduce transport costs: reliable
telecommunications systems are also vital for price information
and the expansion of sales networks. The Commission suggests
that effective liberalisation requires governments to both facilitate
and regulate private sector operations, not least in establishing
fair competitive conditions and reducing red tape, but that regional
integration offers "unique" opportunities to CDDCs by
scaling up trading volumes and widening market outlets.
MANAGING COMMODITY RISKS AND ACCESSING FINANCE
12.7 The Commission observes that markets for agricultural
commodities tend to be characterised by high price volatility,
which creates uncertainty for farmers (and others), reduces willingness
to invest, exposes producers to market risks, and increases the
need for them to finance inputs themselves. Likewise, these same
fluctuations can affect government revenues and foreign exchange
reserves. It suggests that, in order to improve access to finance,
more secure collateral is needed for agricultural lending, perhaps
based on the creation of liquid guarantees,[30]
backed by a trustworthy and affordable third party collateral
manager. The Commission also says that market-based risk insurance
can offer producers the possibility of hedging against the effects
of price fluctuations or natural disasters, and that the World
Bank has started (through its Commodity Risk Management initiative)
testing the feasibility of put-options[31]
in CDDCs. However, it adds that such tools need to be implemented
on a scale sufficient to elicit interest from financial providers,
and that there is therefore a critical need to explore means of
delivery and encourage international involvement.
12.8 The Commission suggests that the Community should
support the developing and piloting of a range of new insurance
and finance instruments for the various operators in the commodity
chain, and that the challenge then will be to scale these up to
reach a level of effective demand. It says that the Community
will support the use of market-based insurance tools to cushion
the effect of commodity shocks, and that the international community
should also consider temporary co-financing of premiums, whilst
also exploring alternative international lending arrangements.
The Commission also draws attention to the new instrument (the
Flex), set up under the EU-ACP Cotonou Agreement to compensate
countries for sudden falls in export earnings. It notes that
several countries experiencing important losses in export earnings
have not been eligible for compensation, and that it intends to
propose the necessary amendments to the Agreement.
DIVERSIFYING AROUND TRADITIONAL COMMODITIES
12.9 The Commission notes that the CDDCs mostly export
a small range of commodities without much added value, thus creating
vulnerability. It also says that diversification is commonly
seen as the remedy to this problem, but that developing the necessary
strategy is complex, and that most developing countries face serious
challenges in the pursuit of such a course, whether in relation
to the processing of traditional commodities or to pursuing non-traditional
commodities. Those challenges include lack of know-how and of
access to financial services, absence of the necessary infrastructure,
weak regulatory and legal frameworks, small domestic demand, and
certain trade rules. Despite this, the Commission believes that
such income sources would provide a safety net for many commodity
farmers, and that a diversification strategy would be helpful.
It also points out that government has a crucial role, and that
there is a clear need to increase the capacity of CDDC governments
to evaluate the strengths of their productive sectors and to support
them.
12.10 The Commission says that the Community should
offer technical assistance to help CDDC governments make the necessary
choices, and to involve others directly concerned, including international
investors. It notes that the European Investment Bank plays an
important role in this context, managing the €2.2 billion
investment facility funded by the European Development Fund.
SUCCESSFULLY INTEGRATING WITH THE INTERNATIONAL TRADING
SYSTEM
12.11 The Commission says that international trade
rules, governing such areas as domestic support, export competition
and market access, play an important role in relation to exports
of primary commodities, and that, whilst public support for agriculture
has legitimate objectives, it can lead to over-production, and
so adversely affect CDDCs. Also, whilst it notes that CDDCs usually
benefit from preferential import regimes, tariff barriers still
restrict export opportunities for certain products and countries,
and exporters may also find difficulties in meeting rules of origin
requirements and health measures.
12.12 The Commission comments that a range of trade-related
issues of relevance to CDDCs are at stake in the WTO's Doha Development
Round, and that the Community is committed to achieving a "substantial
and development friendly" outcome, not least to ensure that
the needs of the weakest countries are adequately addressed.
It says that many CDDC governments lack the capacity to participate
actively in this process, and that the Community should provide
the necessary support. It should also pursue internal reforms
which will avoid trade distortion, revise its current Generalised
Scheme of Preferences (GSP) to take into account the specific
needs of CDDCs, address any questions of preference erosion for
some countries arising from wider multilateral liberalisation,
and ensure that preferences are fully utilised by increasing awareness
of them.
ENHANCING SUSTAINABLE CORPORATE PRACTICES AND INVESTMENTS
IN CDDCS
12.13 The Commission notes that international companies
play a central role in the commodity sectors, and exert a level
of power with which local entrepreneurs are often unable to compete.
On the other hand, it comments that the increasing integration
into the commodity chain of processors and retailers has led to
their showing an increasing interest in sustainability, and that
this vertical integration presents opportunities for producers
to secure premiums and enter into more long-term contracts. It
suggests that foreign direct investment should be promoted through
CDDCs establishing a regulatory framework in such areas as competition,
and that the international community should encourage international
operators to invest in long-term relationships with farmers and
local processors and to comply with relevant local and international
laws, with emphasis being placed on the need for an integrated
approach to promote the various pillars of sustainable development.
It also highlights the role which the "Fair Trade" movement
can play.
12.14 The Commission says that, together with the
Member States, it has committed itself to promoting sustainable
codes of conduct within the commodity chain, and that the Community
should take action to increase public awareness of ethical trade
initiatives. In addition, it should support CDDCs in their efforts
to benefit from Corporate Social Responsibility, particularly
in attracting foreign partners to invest in public private partnerships.
The Government's view
12.15 In his Explanatory Memorandum of 26 February
2004, the Secretary of State for International Development (Mr
Hilary Benn) says that the report represents a fundamental shift
in the Commission's focus, away from trade-related aspects of
commodity issues, such as international commodity boards (ICBs),
and towards consideration of wider developmental issues arising
from commodity dependence in developing countries. He adds that
the Government remains committed to addressing the problem of
commodity dependence in developing countries, and is in broad
agreement with the Commission's proposed measures to address this
issue.
12.16 More particularly, he says that:
- the UK supports the renewed
emphasis on addressing agricultural commodity chains and dependence
as a key poverty priority in developing countries, and particularly
welcomes the focus on reforming ICBs, and the need to ensure
that support of these organisations is made conditional on their
positive contribution to Community and Member State development
objectives;
- in order to address the numerous challenges posed
by the decline and volatility of commodity prices, CDDCs will
need to improve significantly their productivity and competitiveness,
and the UK supports the Commission's recommendation to implement
commodity strategies within the appropriate long-term development
instruments;
- the Government acknowledges the negative impact
of commodity price trends on investment, government revenues and
expenditure in CDDCs on essential social services, and believes
that there is an urgent need to ensure improved and wider access
to a range of compensatory financial instruments in the CDDCs:
it particularly endorses the Commission's plans to contribute
to the expansion of the World Bank's work on commodity risk management,
and to reform the Flex mechanism;
- the UK agrees with the need for CDDCs to diversify
into more sustainable non-commodity based forms of economic activity,
and for their governments to strengthen their capacity to evaluate
the potential of existing and future productive sectors: it also
supports the provision of technical assistance to CDDC exporters
as a means of encouraging economic diversification;
- the UK remains supportive of a pro-development
outcome to the Doha Round negotiations, and agrees that the Community
needs to monitor the impact of its policies, and, where necessary,
consider further reforms; and
- the UK also shares the Commission's concerns
about the impact of rules of origin on the utilisation rates of
preference schemes, and hopes that this will be addressed in the
forthcoming review of the GSP (noting that, though preference
erosion should not be an excuse to hold up general progress, developing
countries concerns on this count must be addressed).
Conclusion
12.17 As the Minister suggests, this document
addresses an important subject, in terms of the long-term economic
prosperity of developing countries which are dependent on agricultural
commodities, and the steps which can be taken internationally,
and by the Community in particular, to help tackle this issue.
We therefore think it right to draw it to the attention of the
House.
12.18 We have also considered carefully whether
it would also be right to recommend that the document be debated
in European Standing Committee, and, on balance, we believe that
the questions it raises do warrant further consideration by the
House. However, given the close relationship between these issues
and the negotiations which have taken place on the Doha Development
Agenda (DDA), we suggest that, rather than having a stand-alone
debate on commodity dependence, there would be merit in this document
(and the related document on cotton sector development, dealt
with in paragraph 13 below) being tagged to the debate we have
already recommended on the Commission Communication about reviving
the DDA negotiations.[32]
30 Based, not on fixed assets, but on such items as
warehouse receipts and longer-term contracts. Back
31
Under which the buyer pays a premium to lock in a certain price
for a given date on an international commodity exchange. Back
32
(25127) 15529/03; see HC 42-v (2003-04), para 2 (14 January 2004). Back
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