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Speeches & Transcripts

The Impact of Competition Practices in International Commodity Markets

February 16, 2012

Otaviano Canuto,World Bank Vice President Paris, France

As Prepared for Delivery

It’s an honor to be here today and to have the opportunity to address such an expert audience on a topic that affects everyone. Fair competition matters, and it matters particularly in international commodity markets. This is because when we talk about commodities markets, we are talking about the products that contribute to meeting the basic needs of people around the world.
As I don’t need to tell this crowd, the changing nature of the world economy – in particular the expansion of global value chains and increasing concentration – are giving rise to new issues in terms of ensuring fair competition.
In particular, value chains in the transformation of commodities are characterized by market structures with imperfect competition. Input suppliers and domestic processors often have a certain degree of market power – and a number of them have formed international cartels, as is the case of petrochemical industries that supply farmers with fertilizers.

At the same time, the existence of anti-trust exemptions for private export cartels, export subsidies or state trading through public monopolies may also have an effect on the level of competition in commodity markets.

But to what extent does this matter? There is significant uncertainty and ambiguity about whether these practices affect price levels or generate excessive volatility in commodity prices.

Recent research conducted by the World Bank – including a paper by Bernard Hoekman and Will Martin that is one of the contributions of the book that is being launched today – is exploring this issue of negative cross-border spillovers from imperfect competition in commodities markets and how it may result in price distortions.

From a competition (national welfare) perspective, what matters is whether the exercise of buyer power results in higher consumer retail prices. For instance, if buyers are purchasing less from input suppliers (so as to reduce the input prices paid), the result can be that output available for downstream consumers is reduced, thereby generating higher prices. More generally, any cost savings may not be passed on to consumers – this is the case where there is limited competition or significant barriers to entry.

Traditionally, competition issues are more likely in the case of natural resources than food commodities, because production and exports of such resources often involves a relatively small number of large firms, often with strong links to the state.  Some markets – most notably for oil—are effectively cartelized. Market power and oligopoly have a number of implications, including possible closure of markets for more efficient foreign producers. Political uncertainty and risk also have important welfare impacts, by precluding efficient investment and generating inefficient forms of trade.

The food price hikes of 2006/2007 and 2010/2011 and the situation today with relatively low food stocks, has underscored the importance for low income countries of greater competition along their agribusiness supply chains. The type of bilateral bargaining that occurs between large retailers and large producers of processed foods (multinationals) is unlikely to reduce output – in fact it may increase it by inducing suppliers to compensate for lower prices by producing more.
Nevertheless, in developing countries, excessive concentration and market power within input markets (such as seeds and fertilizers) and output markets (trading, processing, manufacturing and retailing) can work against the interests of small producers.

For example, in many low income countries in  Sub-Saharan Africa, supply of seeds for farmers is informal; formal ‘extension services’ remain weak, private sector participation is minimal due to limited incentives to enter markets, and the reach-out of government supply programs of certified seeds is weak or ineffective. At the same time, allegations of excessive pricing and shortages are typical in highly concentrated markets. Competition concerns related to the marketing of agriculture products arise in relation to monopolies that enjoy exclusive marketing rights or the emergence of a dominant private firm as a result of privatizations. Add to this, strategic, natural and policy-induced barriers to entry that influence the market structure, and farmers can be left with little or no bargaining power at all.

Further distortions in competition in agriculture markets may arise from subsidies or support to state-owned players, absence of competitive neutrality (exclusive rights), non-transparent licensing regimes, and of course the high investments that can be required that create disincentives for private players to enter markets and compete with the state-owned enterprises. Concentration among buyers at the farm gate lowers farm gate prices for farmers. Disproportionate buyer power, arising from excessive concentration of commodity buyers, food processors and retailers also tends to depress prices for food, lowering incomes of farmers and wages of farm workers.

A new World Bank report on agribusiness in Sub-Saharan Africa also highlights further problems. For example, in some countries, the tendering processes for fertilizers, and in some cases, exclusion of foreign companies from importation reduces competition and adds opportunities for collusion and corruption. Countries such as Ethiopia still depend largely on the state to import and distribute fertilizers. Other countries manage subsidy programs in ways that undermine private initiative. In some cases, a legacy of parastatal input distribution is the slow development of input dealer networks to complete the fertilizer supply chain from the port to farm gate. In many cases, the direct participation of governments crowds out private sector investments in input markets. Especially in areas of low population density, the cost to farmers to access fertilizers may add significantly to its price.

Kenya offers a good example of some of the benefits that can accrue to countries that liberalize fertilizer imports. In the early 1990s, Kenya embarked on a program of reform that eliminated parastatal operations, removed price controls, and eliminated subsidies. By 2001, there were 500 wholesalers and 7,000 input dealers. The margin between the price at the port and at the upcountry wholesale point at Nukuru fell steeply thanks to increased competition. From 1997 to 2007, the average distance from the farm to an input dealer declined from 8.4 km to 3.4 km. With lower fertilizer prices and more accessible supplies, the percentage of smallholders using fertilizer increased from 56 percent in 2006 to 70 percent in 2007, to reach an average of 59  kg per ha of product, nearly three times the African average. But the real outcome of all these other numbers in terms of the welfare of farmers and citizens is that yields increased, perhaps by almost 20 percent.

The degree of competition on each market segment of the value chain affects the incentives confronting farmers to invest and improve productivity. In particular, market power in downstream segments of the agricultural value chain may weaken the link between world and local farm gate prices for farmers, especially in developing countries. This in turn can have implications for world markets by reducing global supply and thus putting upward pressure on prices.

Greater competition among processors in even some African countries and export crops would benefit farmers by increasing farm gate prices, while being welfare enhancing for consumers. For example, in Kenya, after significant liberalization leading to increased competition in processing and marketing, milling and marketing margins for maize fell by US$180 per ton from 1994-2008, as did real prices to consumers. In many developing countries producers are smallholders who depend on a small number of buyers that have market power (oligopsony) and are thus able to extract some of the surplus that the export market generates.

Matters are complicated however by the fact that buyers often also provide ancillary services and working capital (e.g., seeds). Pervasive market failures such as lack of access to credit mean that in practice processors may provide inputs to farmers in return for agreement to buy their harvest at a pre-negotiated price. Given weak capacity to enforce contracts through the legal system, the feasibility of such arrangements may depend on the buyers having some market power. These kinds of constraints--institutional weaknesses and market failures – can reduce the benefits of greater competition.

This is well illustrated by remaining parastatals in Sub Saharan Africa, which process cash crops for traditional export markets. African farmers continue to receive low prices for export commodities relative to world prices and relative to prices received by farmers in other regions. At times, the demise of export parastatals cut critical services of extension, credit and risk management needed for producers to take advantage of higher prices through higher productivity. In some cases, such as cocoa from Cote d’Ivoire, it has also undermined overall export quality and market building. Some form of collective action at the industry level is often needed to ensure quality, build external markets, and provide non-price support. Cautious reforms of Cocobod for cocoa in Ghana, the Tea Board and Tea Development Authority in Kenya, and La Société Burkinabè des Fibres Textiles (SOFITEX) for cotton in Burkina Faso have preserved several of these functions with considerable success, although other key functions such as local purchasing have been liberalized.

From a competition policy perspective, the application of a set of market rules that guarantee a level-playing field for all businesses is key to increasing economic welfare in developing countries. Competition policy entails the definition and enforcement of a legal framework which tackles horizontal and cartel agreements, mergers and concentrations, abuse of dominance and vertical restraints; and the promotion of pro-competition sector policies that will eventually eliminate price controls, minimize state aids and other discriminatory treatments, and tear down sector specific barriers to competition (entry, foreign direct investment, trade, exit).

Successful implementation of competition policy results in more efficient markets, increased private sector productivity and the elimination of anti-competitive regulation and unnecessary barriers to entry imposed by government policies.

In the agriculture sector, reducing concentration fosters competition in inputs markets and encourages increased private participation (through public-private partnerships) in the marketing of inputs, which may become a source of productivity improvement.

Furthermore, the review of composition and modus operandi of price setting committees where they exist would address some of the regulatory barriers that influence the market structure. In many cases, the private sector -- including domestic SMEs -- are willing to enter the market but are restricted by the statutory monopoly condition of the board or by the price and quotas mechanisms set in the market. The competition authorities are therefore required to play a major role in closely monitoring the behavior of dominant players and advocating for liberalization and opening key markets to competition.

Active antitrust enforcement sanctioned by home country jurisdictions is equally important to combat international cartels, when incentives to collude exist.

From a global rule-making perspective the question is what international cooperation can do to address the negative spillovers cross-border that are created by the behavior of firms located in a foreign country (or, in the case of multinationals, that are subject to multiple jurisdictions).

As one of the three Singapore issues suggested for negotiation at the 1996 WTO Ministerial Meeting, competition policy was eventually taken off the table at the 2003 Cancun ministerial. Most proposals stressed national enforcement-related disciplines, including as a mechanism through which to deal with the effects of international cartels. International cooperation to address negative spillovers of anticompetitive behavior was to be on a voluntary basis.

A number of major cases in recent years against global cartels connected with the food industry have illustrated the importance of active enforcement and international cooperation between competition authorities.

National enforcement capacity is important and there has been a significant effort over the years to provide assistance to strengthen such capacity in developing countries. But we need to go beyond this and re-visit the case for international cooperation to ensure competitive outcomes.