Covering Globalization: A Handbook for Reporters

COMMODITIES ARE a vital sector for many developing countries. Revenues from commodity exports often provide a large share of foreign-exchange revenues, as well as government income. In countries where the commodities being produced are agricultural, most of the labor force—in some cases, as much as two-thirds—is employed in the sector. This means covering commodities goes beyond merely reporting about events that influence prices on world markets. It also involves writing about economic development and the lives of the millions of people working in agriculture, mining, and elsewhere.

Anything from social unrest to bad weather can affect commodities. Good coverage of the sector includes social, labor, political, and macroeconomic topics. One critical issue on this list is the impact of commodities prices on government finances. A fall in the price of a commodity often leads to fiscal imbalances as governments find it difficult to match their forecast expenses with dwindling revenues. In such circumstances, governments tend to resort to borrowing—an action that sometimes leads to excessive levels of indebtedness and, at the extreme, debt crises.

The deterioration of economic conditions in the 1980s has been partly blamed on the fall in the prices of primary commodities. Throughout Latin America and Africa, countries relied heavily on earnings from the international sales of domestically produced commodities. When prices of these commodities collapsed on the international market, government revenues fell as well. The governments found it difficult to meet basic needs at home. In theory, governments should have adjusted immediately by reducing expenditures, but this proved difficult politically. Instead, the initial response was to increase borrowing while keeping spending unchanged. Eventually, the fiscal pressure became too onerous and access to even more borrowing proved impossible. Governments throughout the developing world defaulted on their debt obligations in droves

The concept of comparative advantage has often been used to justify the fact that developing countries produce commodities while other countries produce high-margin products such as computer chips. The idea is that countries should specialize in the production of commodities where they have a cost advantage relative to that of other countries. Developing countries, the theory goes, are endowed with the unskilled labor and land required for the production of commodities at comparatively low costs.

But developing countries worry that if they focus on commodities, they will be stuck in a low-growth trap. And comparative advantages can change over time as countries acquire the skills to produce manufactured products at lower cost; this has been the experience of East Asia. Some economists believe that learning to produce manufactured goods can only come by actually producing the goods. Limiting themselves to commodity production condemns developing countries to low-margin, less-lucrative activities. That makes it difficult for commodity producers to improve their lot, as their earnings remain low year after year.

Many developing countries start on the road to value-added activities by producing goods related to the commodities they produce, such as food processing for agricultural nations or petrochemicals for oil producers. But some countries, such as Ghana and the Ivory Coast, remain unable to process all or a significant proportion of their cocoa beans into butter, which they could export at higher prices than those they receive for cocoa beans. Nigeria and other oil producers export crude oil but not refined products.

From the perspective of some, the reliance of developing countries on commodities is reminiscent of the days of colonial rule. Then, developing countries often served as sources of raw materials that fed industries located in the developed countries. But by looking at a basic list of commodities—coffee, copper, cocoa, diamond, gold, and palm oil—it is easy to see the practice continues today. Each of these is predominantly produced by developing countries, among which are the poorest nations of the world. According to one source, Africa produces 95 percent of the world’s diamonds, 55 percent of its gold, two-thirds of its cocoa, and about three-fifths of its palm oil. Yet the African continent has the largest concentration of poverty anywhere in the world.

This paradox—the coexistence of concentrated resource wealth and abject poverty—deserves the attention of commodities reporters. One reason for this phenomenon is the relatively low profit margins on raw materials and the heavy competition generated by many countries producing the same commodity. A buyer of coffee can buy it from Yemen, Vietnam, or Colombia, meaning it is largely a buyers’ market. With the exception of the OPEC cartel, which governs the production of oil among member nations, commodity cartels like the rubber producers’ association have not been very successful at restricting output and bolstering prices.

Commodity homogeneity also makes prices much more sensitive to supply considerations. When the World Bank urged developing countries to grow commodities as part of their development strategies of the last few decades, it did not think about what would happen if everyone else did so at the same time: supply rose, and, with little competition, producers had to accept ever lower prices for their commodities. A single country, Vietnam, brought down the price of coffee markedly when it increased its production of low-priced robusta coffee in the late 1990s.

The structure of the international commodity market has also rendered it vulnerable to large price swings. Periods of high prices elicit large increases in supply, which ultimately lead to a price collapse. This boom/bust cycle of commodities’ prices can be very disruptive since it requires economies to continuously adjust. Many African countries have suffered from this phenomenon. During the oil price shocks of 1973–74 and 1978–79, and the boom for cocoa- and coffee-exporting countries in 1976–77, commodity price increases resulted in economic growth spurts to which governments reacted with dramatically higher expenditures. The eventual price collapse often came as a surprise, and the economic adjustment tended to be painful.

Commodity price cycles also have an impact on currencies. During boom periods, export-related hard-currency flows multiply and put upward pressures on local currencies. As currencies appreciate (that is, strengthen), they eventually become overvalued. As a result of the overvaluation, nontraditional exports become noncompetitive, and their producers gradually go under. At the same time, imports rise and external imbalances materialize. This phenomenon, the so-called Dutch disease, catches countries completely unprepared when commodity prices collapse—as they often do. The Dutch disease contributed significantly to the recurring balance-of-payments problems experienced by many developing countries in the 1970s and 1980s.

In light of these experiences and the long-term decline of commodities prices, many countries are recognizing the need to diversify their economies. Many Asian countries have been successful in this by diversifying their export bases, despite the comparative advantage they had in some commodities. Reporters should follow governments’ programs or initiatives aimed at achieving this.

Unfortunately, not all of the government revenue from the sale of commodities goes to public services or economic development. Some is funneled to the officials in the state-owned enterprises or to those in the government itself.

Nigeria has earned billions of dollars from exports of crude oil. According to the World Bank, over a period of twenty-five years since the 1970s, Nigeria earned more than $200 billion from the exploitation of oil resources. But poverty is widespread, with about 70 percent of the population now living below a poverty line defined as income of less than $1 a day. Much of the money earned from oil and gas has gone to government officials, including military officers who have ruled the country for most of the period since independence. In many ways, the country today is poorer than it was a quarter century ago.

Covering commodities entails finding out about the sources and magnitude of corruption and determining what, if anything, the government is doing about it. By nature corruption is hard to detect. One way is to examine the accounts of the national treasury and uncover discrepancies between actual commodity revenues and the theoretical ones (that is, those that should have been obtained had the goods been sold at international prices). Sometimes, the problem lies with multinational companies who attempt to cheat. For instance, Alaska noted that the amounts oil companies were claiming as their “net receipts” from the disposition of Alaskan oil were less than they should be. It required hard detective work—a few pennies a barrel can add up to billions of dollars—but Alaska succeeded in forcing the oil companies to repay a substantial sum, in excess of a billion dollars.

There are other tell-tale signs of potential corruption: Was there, for instance, an open process of bidding in the auction of a contract? How many bids were submitted? Recently, there has been a major initiative to induce foreign companies to “publish what they pay,” or to disclose the checks they are sending to the government. If the government does not encourage such initiatives or if there is active resistance to doing so, there are grounds for suspicion. In countries where permission from the government is needed in order to export commodities or import inputs, people may pay bribes in order to get the required permits.

In covering commodities, it is important to focus on three key elements: government policies, the underlying forces of demand and supply, and market structure.

Most African countries are exporters of commodities, which in most cases form the bulk of government revenues. As a result, governments have imposed policies to regulate the commodities markets. Even with the advent of deregulation and market reforms, there is still an ongoing debate in many African countries about to the extent to which they should liberalize their commodities markets. In virtually every country in Asia, the government is involved in the local rice market, either directly or indirectly. In Vietnam the government sets a minimum price to be paid to the farmers for their crop and requires exports to go through government-run food companies. In Japan and Korea the governments subsidize local farmers and impose tariffs to keep out foreign rice. For many years in Ghana, the government-run cocoa-marketing board controlled the industry by specifying the marketing channels for cocoa beans and prescribing acceptable farming practices. But in the late 1990s—partly at the prodding of the World Bank—the government began to liberalize the cocoa industry through the licensing of privately owned buying companies, which introduced some competition in the marketing of cocoa in Ghana. In Nigeria, meanwhile, the government has partnered with multinational oil companies in the exploration and production of crude oil. Under this arrangement, the government holds an average of 57 percent in the joint venture projects and the partners contribute to the projects in proportion to their shareholding. These joint ventures account for about 98 percent of Nigeria’s crude oil production, with the remaining being produced by local entrepreneurs.

Depending on the commodity produced in the country, there can be a wide range of official policies on these products. Among the key questions are the following: Why do these policies exist? Are the policies effective? Who benefits from them? Are they creating distortions in the market? Are their any pressures on the government to effect changes? What are the sources of these pressures, and what motivates them? How have such reforms worked elsewhere?

Commodities markets react to various supply and demand conditions found at a particular point in time. In addition to viewing how supply and demand play out immediately—something called the spot market—the markets also react to the conditions expected to prevail in the markets in the future. It is therefore important for reporters to know the current situation of a given market and what it will likely be in, say, three months’ time. In each market, there are specific factors affecting demand and supply and specific sources from whom reporters can learn how the market views the current situation, as well as the future.

In covering commodities with known cycles or seasons, it is a good idea for journalists to interview farmers, agricultural ministry officials, employees of government-run market boards, port officials, and potential buyers to find out what they expect production and sales to be. Reporters should also try to find out about possible delays in shipping exports because of weather, late harvests, and so on. Also when a farmer is trying a new crop, it can take years before it becomes ready to harvest and export. Rubber, for example, needs seven years before the trees can be tapped.

In mining for commodities such as gold, the time horizon is markedly different from that of agricultural commodities like cocoa or corn. Gold mining is quite capital intensive, and every stage in securing this capital can have an impact on supply. The process starts with the award of prospecting licenses at a concession or block. During the prospecting stage, the mining company assesses, through a chemical process called assay, the quality of the ore on its concession. Through this process, it determines whether or not the amount of gold is sufficient to warrant committing workers and materials to the actual mining process, or, in other words, whether it can make money from the quantity of gold available.

Even at this stage, the reporter should pay attention to the supply story. What is the prospect of the company finding enough gold ore in the concession? What does the assay result say, although the authenticity of this result must be taken with caution since the company may be worrying about the impact of any public statement on its share value.

Mining contracts are also important commodity stories. The reporter should find out whether the mining company will undertake the actual mining by itself or if it will contract it out to another party, and if so to whom. Reporters should also pay attention to the mobilization of equipment to a mine site, since this may be affected by a number of factors, including the depth of sand to be scraped before getting to the acceptable ore quality.

Because a mine is a long-term investment, those undertaking its development must form expectations about future prices. It is important to know what those expectations are, how they change over time, and how sensitive profits are to those expectations. Will a drop of 20 percent in the price lead to the abandonment of the mine? Is the concession being bought as, in effect, an option, only to be developed if the price increases enough? Is there a contract provision that inhibits such speculative behavior, such as the forfeiture of a large deposit? At the same time, it is important to know how the mining company handles its price risk and the strength of its financial position. Is there a serious risk of bankruptcy that would interrupt the development of the mine?

Market conditions reflect the actions, and sometimes the inaction, of the chain of players that runs from the producers through the middlemen and brokers or buyers to the final consumers. These actors play different roles in markets or industries, depending on the fundamental structure of the market concerned.

A market structure can give leverage to some companies over others. In the extreme case of a monopoly, the firm has power over the level of output and the price at which it sells its product. At the other extreme of perfect competition, no one firm has market power; there are a myriad of relatively small firms. Between these two extremes lies the real world where firms operate—there is usually some competition, but it is far from perfect. The reporter should be able to understand the market structure, how it is changing, and how proposed policy reforms would affect the different participants in the market, as well as the source of market power. What factors confer market power on some firms, or countries, as the case may be? How can a firm sustain its dominant power over a period of time in the industry?

Commodities have become the economic tools of wars in several countries. From Angola to the Democratic Republic of Congo to Sierra Leone to Liberia, diamonds and other precious metals have played significant roles in funding wars.

While these commodities are usually not the reasons for the wars, warlords and their supporters have found them to be a convenient way of earning resources to continue wars, sometimes against world opinion and opposition. To circumvent international financial and weapons sanctions, such military leaders target mineral-rich regions for occupation. This enables them to mine these resources illegally and subsequently export them, in spite of procedures designed to prevent profiting from these illegal activities.

This has given rise to the concept of “conflict” diamonds or “dirty” diamonds. Revenues earned from their export are used to acquire arms and ammunition that are in turn used in further prosecution of wars, many of which have been extremely costly in terms of human lives. These conflicts may not have lasted as long as they did or still do if the parties involved had not had access to such minerals.