The world is in crisis with respect to its soft commodities. “Soft commodities” is a term used in futures markets to apply to products that are grown rather than mined (see note at end of story). Weather plays a large role in determining the supply of such goods. However, a number of other factors have also recently come to the fore in establishing how much is available.

There is a growing shortage of food supplies (mainly staples) due to: (1) the huge increase in the middle class in some developing nations (mainly China and India), with resultant greater demand for a wider variety of food products; (2) increasing volumes of product are being sidetracked into biofuel production; and (3) there are ongoing drought, flooding and/or pest problems in some key producing regions.

Wheat and rice are basic food staples for about half of the world’s population. They have doubled in price over the past year. Rising fuel and fertilizer costs have contributed to the price increases as well. World stockpiles of both wheat and rice are at 25-year lows. The result is that some exporting nations (particularly of rice) are hording supplies while importing and consuming nations are being forced to ration whatever they have available.

The Philippines is the world’s biggest importer of rice. Protests and riots have broken out in that nation over the lack of supply. Consumers in many other parts of the world are also suffering from heightened anxiety about access to basic food sustenance. Thailand and Vietnam are the world’s two largest exporters of rice and they have imposed restrictions on foreign sales and shipments.

Governments often tend to take active roles in soft commodity markets, through regulations and subsidies. That is what is happening now. Some successful growing nations are imposing taxes and/or quotas on agricultural exports. This can lead to serious distortions in the marketplace. Furthermore, those distortions are not always well anticipated.

Argentina is a case in point. Argentina is big in soybean, wheat and beef production. The government has imposed an export tax on some products. As a result, in that country, it is the farmers that are in revolt rather than consumers.

The reason for an export tax is the hope is that it will guarantee supplies at home and keep domestic prices down. However, it distorts markets and makes for bad economics. It removes the financial reward from the most successful farm operators and causes some land to be taken out of production. It also takes away a prime incentive for farmers to remain on the land – the expectation that there will be high payback years to compensate for earlier hard times, as part of the cycle of growing crops and tending livestock.

An export tax encourages switching from a successful crop to one of lower financial yield. Also, it can damage good relations with international customers that may have taken years to build up. Finally, it can become an ingrained method for governments to acquire revenue. As such, it may be difficult to ever disassemble.

Footnote: sometimes, “soft commodities” is the term applied to a limited sub-category comprised of coffee, cocoa and sugar. However, here it’s more general use is employed, referring to all commodities that are grown rather than mined.

Alex Carrick

Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News.

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