price volatility: who bears the costs? what can be done? parvindar singh common fund for commodities
TRANSCRIPT
Price Volatility:
Who Bears the Costs?
What can be done?
Parvindar SinghCommon Fund for Commodities
Variability or Level of Prices
• Short term price changes• Supply demand imbalances• Supply disruptions• Speculation
• Long term price trends• Technological changes• Emergence of substitutes• New suppliers• Decline in demand
Plan of this presentation1. Who are the actors and what is their exposure?• farmers• supply chain intermediaries• exporters• GovernmentsWe need to look at the impact of volatility on the
entire supply chain, not just on producers.2. What can be done?
Underlying assumptions
1. Farming largest private enterprise in the world2. Diminished role of the state3. Rising role of TNCs4. Trade led standards5. Changing consumer concerns – health, safety,
social and environmental concerns6. In future smallest enterprise will be multi-
national
FarmersFarmers always long their crop (expectation that the
asset prices will rise in value).Time horizons1. Short: the crop year. Farmers plan production and
commit inputs before they know yields or prices.2. Long: investment for tree crop commodities.
In both cases, volatility increases return uncertainty.
Farmers• Developing country farmers typically respond by
diversification across crops, relying on the fact that price movements are imperfectly correlated, or across activities, by for example combining farming with factory work.
• By reducing potentially profitable specialization, diversification holds incomes down and inhibits the emergence of modern agribusiness.
• By announcing prices at the start of the crop year, marketing boards and caisses de stabilisation transferred short term risk from farmers to the boards/caisses. Long term stabilization proved impossible.
• Farmers could achieve the same outcomes through hedging but this needs to be done through intermediaries – cooperatives or farmers’ associations.
Supply chain intermediaries• Intermediaries can be cooperatives, transportation
companies, aggregators, traitants, etc. • Typically, they buy spot, process or transport etc.,
and then sell spot. They are exposed to price variation over their (typically short) holding period. Volatility exacerbates this problem.• Risk management consists of minimizing holding
periods and, where possible, diversifying across crops.• The consequence is that intermediaries remain
small and fail to exploit economies of scale.
Exporters• Exporters buy cash, either at the port or up-
country, e.g. From cooperatives. They sell to processors etc in consuming countries. • If they buy before they sell, they bear long price
risk. If they sell prior to purchasing, they have short risk. High volatility exacerbates this risk.• Locally-based exporters minimize this risk by buying
and selling on a back-to-back basis. This reduces trading flexibility.
Exporters• Multilateral exporters, or locals associated with
multilaterals, avoid these problems by taking offsetting futures positions. This allows them to separate physical purchase and sales decisions giving them greater trading flexibility.• Volatility plus limited access to futures markets
unlevel the playing field in favour of the multinationals. The consequence is that, instead of encouraging competition, market liberalization has generally tended to concentrate exporting in the hands of a small number of multilaterals.
Governments• As a consequence of liberalization, many
developing country exporters no longer have significant direct price exposure to the prices of export crops.• Exceptions are where parastatals remain
responsible for exporting and set prices for farmers on a customary or formulaic basis which does not relate clearly to market conditions, e.g. some West African cotton exporters.
Governments• Governments of metal and oil exporting countries
may have substantial exposure – best dealt with by taking revenues into a stabilization fund and withdrawing at a sustainable level. Counter cyclical functioning• Volatility causes serious food security problems for
governments of food importing countries, or countries which are occasional importers. Governments see themselves as unable to leave the prices of major subsistence crops entirely to the market. They hence have potential short exposure to high prices.
Past policy• Reduction of volatility will always be difficult. • Previous international control efforts have at best
enjoyed limited success and in many instances have made matters worse.
• Domestic stabilization by exporting countries has resulted in greater success but ...
... prices have often been held beneath world levels with the result that producers have paid heavily for price stability
....although domestic stabilization can help farmers and, for food crops, consumers, intermediaries and exporters face the same or greater price exposure.
Commodities: Price Stabilisation
1949: Singer and Prebisch• Historically two questions have dominated the discussions on
primary commodity prices in development economics: a) the declining terms of trade in commodity export prices relative to imports of manufactured goods from developed countries (the Prebish-Singer hypothesis), and b) the high price volatility and instability.
• the low price-and income-elasticities of demand for commodities as compared with manufactures; the technological superiority of developed countries over developing countries; the dominance in economic power relationships of the former, which allows transnational corporations to capture excess profits
International Commodity Policies in the early years
The academic and policy discussions on the commodity problem centred on short-term price instability and its effects on export earnings and income of low-income developing countries. Hence, the intergovernmental intervention during those early decades was also centred around measures to reduce excessive instability or to offset its effects on income of producers and producing countries.
Buffer Stock Scheme
• Keynes advocated establishing a buffer stock scheme for the main traded commodities. Active buffer stock management as a means to reduce commodity price fluctuations and to dampen the trade cycle, and hence, as a countercyclical mechanism of a world income-stabilisation scheme. • Richard Kahn, emphasized that the aim of
stabilization policies is to curb irresponsible movements of the price rather than to establish stability within a narrow range of fluctuations.
Supply management,private and public
Private examples:• Aluminium producer prices (until 1984)
• Central Selling Organisation (diamonds: De Beers)
Public examples:• International Tea, Wheat, Tin, Coffee, Cocoa
Agreements
• started in 1933, ended in 1989• Canadian milk, poultry and eggs – up to the
present
International Commodity Agreements
1933: International Tea Agreement (ITA)
Developing countries as commodity exporters
Interest in stable and ‘remunerative’ prices
• ICAs written into ITO and GATT in 1940s
• UNCTAD from 1964
International Commodity Agreements
• The objectives of these ICAs -stabilize excessively high price fluctuations and export earnings by defending floor and ceiling prices within a band through financing centrally held buffer stocks or export controls on a basis of predetermined quota assigned to each producing country. • Bythe end of the 1980s, with the exception of the
International Natural Rubber Agreement (INRA), all the ICAs had broken down, lapsed or have been suspended. The INRA operated through buffer stocks was also finally abandoned in 1999.
Commodity markets are volatileVarious mechanisms are available to cope with
this
e.g.:• Buffer stocks or quotas to improve the balance
of supply and demand• Futures contracts to lock in prices for individual
agents• Guaranteed markets, e.g. ACP sugar and banana
protocols• Compensatory finance, e.g. EU’s Stabex fund• Trade with neighbours, grow ‘non-traded’ crops• And others besides…
New policy directionsWe need to devote attention to coping with volatility rather than supposing that we can reduce it.Access problems will continue to make it difficult for developing country actors to use developed country futures markets. •limited access to foreign exchange,•post 9/11 anti-money laundering regulations.There are two possible routes:1.Use options – puts to protect receipts, calls to limit expenditures.2.Facilitate the development of local futures markets – major success stories in Brazil, China, India and South Africa.•In times of high prices establish viable stabilization funds.
