Commodities and Africa: A resource curse

There are four main reasons why many African countries have not benefited to the full extent from their natural resources. These are broadly an over reliance on commodities, a distortion of incentives (hollowing out of the manufacturing sector, corruption, conflict etc.), volatility resulting in fiscal policy constraints and low levels of value add.

First, too much reliance on commodities. In three-quarters of African economies, the share of primary commodities in total exports is 50% or more. In one-third of the continent’s economies, that share rises to at least 90%. Concentration doesn’t just exist by sector, but by commodity too. In eight African countries, one single commodity accounts for more than 70% of exports. Many, though, rely on a combination of agriculture, mining and energy.

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History suggests that soybean price rally is not built on stable foundations

Since the start of March soybean prices have rallied by 25% on poor weather in Argentina, putting more than 3 million tonnes of soybeans at risk. Heavy rainfall have damaged the crop while also making it more difficult to harvest. Argentina is the third largest producer of soybeans after China and the US.

However, history suggests that even with a disruption to supply the prospect for further gains are limited.

A cursory look at the relationship between the three main global agricultural crops (wheat, corn and soybeans) suggests that the price of wheat, and to a lesser extent corn is the main driver of substitution affects between crops.

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The commodity rebound is cyclical, not structural

This website has published a number of articles looking at how oil, copper and commodity prices in general have performed at different stages of the market cycle. The risk after the rebound in commodity prices that we’ve seen since the start of the year is that the expectations of producers, manufacturers and we as consumers changes too soon, and we adjust our behaviour to something that may only be a transitory phenemenon – a so called ‘dead cat bounce’.

This is important. It could mean that the producers put off the day of reckoning for another day, not wanting to provide a free pass to others but also aware that something has to give. Equally, the rebound in many commodity markets may encourage new investments in production in downstream activities to be made on the basis that prices are likely to continue to rise from current levels. It also has implications for someone investing in miners and oil producers for the long term, perhaps as a part of a pension.

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