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III.b. E-Commerce and Primary Commodity Markets: E-COMMERCE AND SMALL ENTREPRENEURS

Guest post by: OECD Development Centre

Article Overview: Most low-income developing countries continue to be primary commodity exporters (including oil, gas and other minerals, and agricultural products). Thus, short of wholesale diversification into manufactures and services, their immediate interest is in how e-commerce may affect competitiveness in their traditional export markets.

III.b. E-Commerce and Primary Commodity Markets: E-COMMERCE AND SMALL ENTREPRENEURS

Most low-income developing countries continue to be primary commodity exporters
(including oil, gas and other minerals, and agricultural products). Thus, short of wholesale
diversification into manufactures and services, their immediate interest is in how
e-commerce may affect competitiveness in their traditional export markets. Global
commodity chains for tropical goods generally differ in market structure from those for
manufactured goods. Historically, they have been characterised, in individual producer
nations, by a high degree of market power exercised by government procurement agencies
and by international price-stabilising agreements among producer nations. On the other
side of the market, exporters have been faced by large multinationals wielding significant
market on account of the control of brand names and distribution channels18. In principle,
a monopoly seller on the exporter side was intended to counter the bargaining power of a
monopsonist/oligopsonist on the buyer side. In general, however, even where this worked,
the losers have been small-scale producers, who have not often shared in the higher
revenues. Government commodity marketing boards have been winding down in many
countries, and international price stabilisation bodies have been doing likewise, reflecting
their lack of effectiveness.
Enter ICT, which is an important impetus to changes in the organisation and functioning
of world markets for agricultural products. How are these changes likely to affect the
financial prospects of developing country producers? As far as market governance is
concerned, ICTs have made it possible to hold auctions at source as well as online. In the
case of bulk tea, for instance, such auctions now take place in both Africa and Asia,
leading to the closure of the London Terminal Auction in 1998. These trends can be found
in other markets. The Cochin Oil Merchants Association of India has formed an alliance
with the clearing arm of the International Pepper Exchange to offer future contracts in
coconut oil and copra19. Trade will be screen-based rather than open outcry, with the ultimate objective of moving over to Internet trading and creating a B2C portal. In the case
of rubber — where three Asian producers (Indonesia, Malaysia, and Thailand) control
about 80 per cent of global output — the six largest tyre groups plan to launch an Internet
exchange by the end of 2000 in order to break the market power of this quasi-cartel20.
In some markets, there is a tendency for wealthy consumers to demand higher-quality
brands and organic methods. In December 1999, the first online coffee auction was held
for 10 high-quality Brazilian coffees (pre-selected by tasters) coming from ten farms21. A
single exporter represented the suppliers, while 23 bidders qualified. While Brazilian coffees
are normally sold at prices below the New York benchmark price, the auctioned coffees
commanded an average price 73 per cent higher than that benchmark. Shortly before the
auction the farmers sold the coffee to the nominated exporter and a formula was agreed
for splitting the premium. Among the lessons learned is that, Internet notwithstanding,
suppliers continue to depend critically on a sound physical distribution system. Farmers
and roasters are seldom equipped to handle intermediary export functions like transportation
to port, letters of credit, payments, documentation, and shipping. Another is that size of
shipment is crucial to making a profit, and that guaranteeing a minimum economic size
(essentially filling a cargo container) can be difficult with speciality coffees.
In the case of gourmet tea, conventional whole-leaf is preferred to crush, tear, curl
varieties, although the capacity for smallholder tea growers to meet the required quality
standards is still weak. There is also a segment of the market (still small) that pays a
premium for “fairly traded” produce. In the case of coffee, Equal Exchange is a specialised
“fair trade” importer from growers’ co-operatives in developing countries22. In Costa Rica,
a small company, Café Britt, completes the entire cycle of growing, processing, exporting,
importing, and selling via its website23. A number of websites have sprung up to provide
market and technical information, agronomic advice and risk-management tools to coffee
and tea farmers in developing countries24. On the one hand, the Internet may permit readier
direct access of small producers and their co-operatives to overseas customers; on the
other, the demand for coffee produced by organic methods or meeting other customerdictated
standards may favour a few large producers whose production methods can be
easily monitored and verified.

OECD DEVELOPMENT CENTRE
Working Paper No. 164
E-COMMERCE FOR DEVELOPMENT: PROSPECTS AND POLICY ISSUES
by
Andrea Goldstein and David O’Connor

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Article Tags: agricultural products, bargaining power, commodity chains, commodity exporters, commodity marketing, developing country, diversification, export markets, financial prospects, global commodity, government procurement, market structure, merchants association, multinationals, pepper exchange, price stabilisation, procurement agencies, producer nations, scale producers, world markets



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