The recent signs of buoyancy are all the more remarkable because they occur at a time when world economic growth is slow. Given the role of supply-demand balances in determining the level of agricultural commodity prices, the latter are known to be extremely sensitive to the business cycle in the developed countries, rising in periods of boom and falling during the downturn. With the IMF admitting that optimistic projections of a sharp recovery in world economic growth during 2002 are not likely to be realized, there seems to be no stimulus from the business cycle for world prices of agricultural commodities.
 
It is widely accepted that the reason why agricultural commodity prices did not respond favourably to the 'implementation' of the Uruguay Round Agreement, is that domestic support and trade protection for agricultural producers in the US and EU remained high, resulting in high levels of production and large . OECD figures indicate that in 2001, transfers to farmers amounted to more than $300 billion, which was equivalent to 31 per cent of total farm income and 1.3 per cent of GDP. Overall, the volume of support has by no means fallen since the beginning of the implementation of the AoA, athough relative to farm income, support levels fell from 38 per cent in 1986–88 to 31 per cent in 1999–2001.
 
Many factors combined to contribute to this situation. First, with import tariffs and export subsidies having been raised substantially by developed country governments between 1980 and 1986, the reference level of tariffs and subsidies relating to 1986–88 which provided the base for the prescribed reduction in protection and support, was so high that the actual reduction in protection and support did not involve much by way of the freeing of trade. In the run up to the reference years 1986–88, the developed countries massively hiked their support to agriculture in different forms so that their so-called 'reduction commitment' was virtually meaningless. The USA raised its Producer Subsidy Equivalent, which is only part of its total transfers to farmers, from 9 per cent of the value of agricultural production in 1980 to as much as 45 per cent by 1986, namely, a 500 per cent rise in the relative share alone, and a much higher rise in the absolute sums involved. It was this highly inflated transfer that then became the base for reduction, so that after reduction the transfers still remain a multiple of what they were in 1980. Second, the shift away from amber box subsidies to green and blue box subsidies, which were conveniently defined as non-trade distorting and non-violative of WTO norms, resulted in the aggregate support to agriculture in the OECD countries rising over time.
 
The impact of such support and protection is felt in various ways. First, by raising the prices paid by consumers in the OECD countries themselves, through tariffs and subsidies, they hold back consumption of agricultural commodities. Second, by protecting farmers' incomes, they encourage larger production than would have otherwise been the case, resulting in more supply and larger exports that tend to depress international prices.
 
It is not surprising, therefore, that world production of many agricultural commodities did not decline as expected. As Table 1 indicates, in the case of many commodities, world production increased continuously since 1994–95, while in a few production increased initially only to decline during the closing years of the 1990s. What is more, the developed countries, which accounted for 85 cent of world trade in foodgrains when the implementation of the Uruguay Round Agreement began, have remained important producers and suppliers of these commodities to the world market.
 
As against this supply-side scenario, world demand has tended to be depressed because of the adoption of deflationary policies in most countries, and because of the contraction of economic activity in many countries in the wake of the financial crises that afflicted them. Needless to say, this deflationary tendency has worsened in more recent times, when growth in the only countries that had registered some degree of buoyancy during the second half of the 1990s, viz. the US and the UK, has also tended to decline.
 
Persisting high supply combined with depressed demand conditions imply that in the case of agricultural commodities, where demand and supply factors still have a role in influencing market prices (even if not farmers' incomes), prices can be expected to decline. And this is precisely what happened in the years starting around the mid-1990s, resulting in the promise held out by advocates of the UR Agreement—that it would result in a rise in world prices of agricultural commodities, a decline in developed country exports of such commodities and a rise in developing country export volumes—remaining unrealized.