This is a Boom of Mineral, Not Agricultural Prices

The recent surge in food prices has generated significant concern all over the world. It has had a significant effect on poverty in developing countries. In the case of Latin America, the United Nations Economic Commission for Latin America and the Caribbean (UN-ECLAC) estimated that extreme poverty would increase by 10 million people in 2008, despite rapid economic growth. In poorer parts the world, the situation is, of course, significantly worse. Measures to counter the effects of rising food prices on extreme poverty are thus an essential response at the current conjuncture, and must include both domestic policies in developing countries as well as active international cooperation in bringing adequate amounts of food aid to poor countries.

The boom has also given rise to the hypothesis that we have entered a new phase in the history of commodity markets, similar to the one experienced in the nineteenth century, where there were ample growth opportunities for commodity-dependent economies. In the present story, China would play the role that Britain and other countries in Western Europe played in the nineteenth century as a source of demand for commodities that led to dynamic growth in the newly settled areas of America and Oceania, as well as in some developing countries, many of them Latin American.

However, the story is a bit more complicated. Many analysts do not take clearly into account the collapse of commodity prices that took place in the 1980s or, for that matter, long-term trends in commodity prices. There is, of course, copious literature on the subject, including the now classic paper by World Bank economists Grilli and Yang (1988), which showed that the Prebisch-Singer hypothesis on long-term deterioration of the commodity terms of trade (relative to manufactures) was empirically correct in the twentieth century. The literature that followed indicated, however, that such dynamics were dominated by a few major shocks. In a paper published a few years ago (Ocampo and Parra, 2003), we showed, with an updated version of the Grilli-Yang index, that the long-term fall in real non-oil commodity prices throughout the twentieth century could be explained by two major downward shocks: the first took place during the post-World War I crisis (1920-1921), the second during the 1980s. We also concluded that tropical agriculture faired the worst in terms of adverse long-term price trends.

We updated the index for recent years and for March 2008 and came to the very interesting conclusions that are evident in the enclosed graph. Comparisons are made with the average of 1945-1980 (to which we will refer below as “the post-war average”). This is a good base period, as our 2003 paper indicated that commodity prices had actually been trend-less during the three and a half decades following the Second World War (the period, of course, in which the Prebisch-Singer hypothesis was formulated and, according to critics, proved wrong). We could have used the 1970s as an alternative –which, as shown in the graph, is in fact not very different from the post-war average. As is usual in these exercises, the Manufacturing Unit Value of the United Nations/World Bank is used as a deflator. (This deflator gives in fact a better impression of the evolution of real commodity prices than the alternatives, such as the US CPI).


The results are quite interesting. Metal prices are very high. They are double the post-war average in 2007 and more than double that average in March 2008. There are only a few years in our whole series where real metal prices were as high – indeed only one, 1916, in the midst of the First World War. If we were to add oil to the graph, it would show with an index of over 500 in 2007 and 700 in March 2008. So, we are really in the midst of a boom in mineral prices.

On the contrary, agricultural prices have just recovered from the very depressed levels reached after the collapse of the 1980s and the smaller additional reduction that took place during the Asian crisis. The major reason for the collapse of the 1980s was the “fallacy of composition” effect in the attempt by many developing countries to increase commodity exports to manage their debt crises. The most surprising result is that in March 2008 (which, according to some analysts, such as Otaviano Canuto, may have marked the end of the recent boom—see his piece in this Monitor on April 21, 2008), real agricultural prices just went back to levels similar to the post-war average and the 1970s. Indeed, tropical commodity prices were still somewhat below those averages. As supplies increase and demand weakens during the ongoing world slowdown, they are likely to fall again in the immediate future.

There are many factors that influence recent prices, including the demand for biofuels, subsidies and protection measures, droughts (particularly in Australia) and a few export restrictions (particularly in rice) or taxes (such as in Argentina). Some of these effects are quite high. In particular, US corn ethanol has introduced significant distortions and is, according to most analyses, both economically and environmentally inefficient: as its production is too energy intensive, it would not survive in free markets and it generates net environmental costs. There has been no better time since the 1980s to correct the massive distortions in world agricultural markets generated by the subsidies and protectionism in the industrial world.

So, this is more a boom of mineral than agricultural prices, which have just recovered from very depressed levels. This conclusion is also borne out by an analysis of terms of trade improvements experienced by Latin American countries in recent years. Using the most recent report of UN-ECLAC (the December 2007 Preliminary Overview of the Economies of Latin America and the Caribbean), the 2007 terms of trade stood 90 to 100% above 2003 levels for Chile and Venezuela, 40 to 60% for Bolivia and Peru, and over 25% for Colombia and Ecuador (contrary to common views, Colombia is today mainly a mineral exporter, as these goods make up more than two-fifths of its export basket).

In contrast, main agricultural exporters, such as Argentina and Brazil, saw terms of trade improvements of 10% or less; oil importers (such as Uruguay) have actually had terms of trade deterioration. Interestingly, all the winners are actual or former members of the Andean Group/Community.

Finally, it is important to note that there have been very large changes in relative prices over time. So, the enclosed table classifies a subset of individual commodities into three categories: booming, under average, and still depressed. The only food staple in the first group is wheat; corn and rice come in the second. Tropical beverages, as well as cotton and sugar are still depressed. Major sources of bio-fuels come in the three groups. If corrected by productivity trends, the story would be equally heterogeneous.


We may thus have entered an era of significant opportunities for mineral exporters. The data do not show a similarly bright future for agricultural exporters – despite the spillover from high energy prices generated through bio-fuels.

ReferencesGrilli, E.R. and M.C. Yang, “Primary Commodity Prices, Manufactured Goods Prices and the Terms of Trade of Developing Countries: What the Long Run Shows”, The World Bank Economic Review, Vol. 2, No. 1, 1988.Ocampo, J.A. and M.A. Parra, “The Terms of Trade for Commodities in the Twentieth Century”, ECLAC Review, No. 79, April 2003 (which can be accessed online from

9 Responses to "This is a Boom of Mineral, Not Agricultural Prices"

  1. Vitoria Saddi   May 6, 2008 at 1:20 pm

    Do you think that the fact that "gricultural prices have just recovered from the very depressed levels" did not foster Latin countries economic growth? Are you saying that because agricultural prices have only recovered previous levels that commodity prices may increase even further?ThanksVitoria

  2. Juan de la O   May 7, 2008 at 1:48 am

    How might adjustment be made for the post-2003 increased financialization of commodity prices relative to manufacturing unit value, i.e. as return seeking long only funds preceeded to increasingly reallocate into never-to-be-realized claims to commodities, disrupting preexisting relative balance between bona fide commercial hedgers and CTAs + hedge funds? Or would this be irrelevant.

  3. Tom Trebat   May 7, 2008 at 11:47 am

    Would the conclusions on agriculture be any different if the focus were only on wheat, soy and rice which seem to be generating the most concern? It would be interesting to see oil prices included in the graphs. At the end of the day, the latest results seem to suggest that Prebisch-Singer may not have been a useful way to think about development problems of emerging markets.

  4. Carlos Federico   May 9, 2008 at 2:43 am

    Very enlightening article. Thank you. But some questions:1. You provide no evidence why ag prices should not continue to rise and why minerals should continue on same boomline. You seem to assume ag has reached a top.2. Some demand pull and supply constraints information in both categories would be necessary to support your conclusion that ag exporters do not face as bright a future as mineral exporters (leaving oil aside).3. You do not mention soya. Is it not significantly in the ag boom category?

  5. Ashok   May 9, 2008 at 6:02 am

    I would like to know to what extent ongoing restructuring of major metal industries like steel, aluminium through merger and acquistions and consquent reduction in supply buffeted by incresed monopoly has been responsible for surge in metal prices. What is the role of hedge funds in this situation?

  6. Otaviano Canuto   May 11, 2008 at 7:52 pm

    A provocative and thoughtful note, Jose Antonio and Maria Angela. Fellow-blogger Eugenio Diaz-Bonilla had already referred here in the blog (last year) to the fact that agricultural prices have not returned to some kind of price nirvana lost sometime ago. One short remark on your reference to my latest blog. What I tried to say then was that, if on the one hand financial drivers of high commodity prices might desaccelerate accompanying deleveraging, on the other hand real-side effects (demand and climbing marginal costs of production) would still pressure commodity prices upward, not downward. Sorry if I wasn’t clear enough.

  7. Aly-Khan Satchu   May 19, 2008 at 3:34 am

    A very interesting article and I commend you for it. I am grateful that you have seen fit to show Commodity prices over a longer term time frame. Too many articles are ‘crying wolf’ about Commodity prices but entirely failing to give us a starting point longer than the last 12 months. However, I do feel you are entirely wrong about your Agricultural hypothesis. ‘As supplies increase and demand weakens during the ongoing world slowdown, they are likely to fall again in the immediate future.’The slowdown is very US centric. The increase in aggregate demand is greater than the slowdown in US and associated net demand. I believe we are in a perfect storm for Agri prices; There are very many more of us, the net calorific intake per human has spiked considerably, we have cannibalised Agri land, throw in Biofuels and weather patterns and look at the long term data [as you have so kindly provided] and it strikes me that Investors would be sensible to read the lay of the land.’There has been no better time since the 1980s to correct the massive distortions in world agricultural markets generated by the subsidies and protectionism in the industrial world.’And I quote above. You seem to betting on an outcome which is entirely unlikely. More likely is that Countries become more defensive and erect more barriers.We have been paying a pittance for Agriculture. There is no reversion to an artificial mean. This run has only just begun.Aly-Khan

  8. Murilo Parada   June 11, 2008 at 6:55 am

    I am curious to know how you accounted for technological progress and it´s effect on the production costs of the ag commodities. Don´t you think that the ag´s would have a much cheaper cost (due to higher yield) than compared with minerals? In that case the current price would alçready represent a much higher level than in the past (atr leats in terms of returns to producers…)

  9. D Saelinger Lawsuit   March 26, 2013 at 6:02 am

    Every thing is linked with Dollar values and gold prices and whole economy is controlled by IMF and the gold is controlled by Federal reserves bank and Pre-Masons own these setups, Agricultural prices hike is subjected to US policies they dispose millions of tons wheat to feed their oceans and African are dying due to starvation.
    The solution for all the Crises is that the universal currency should not be gold backed, It should be real commodity backed for example Product backed economy i-e OIL, food technology etc.