Commodity Price Stabilization in International Business

Many developing nations exports are concentrated in only one or a few primary products and thus unstable export markets, worsening terms of trade, and limited access to world markets for the products can significantly reduce export revenues and seriously disrupt domestic income and employment level. In addition, many developing nations feel that developed nations tend to insist that developing nations open their markets to industrial products from the developed world, yet refuse to open their markets to agricultural goods from the developing world. For example, United States have used aggressive antidumping and countervailing duties to limit access to their markets.

As noted, the export prices and revenues of developing countries can be quite volatile. In an attempt to stabilize export revenues and prices, International Commodity Agreements (ICA) have been formed by producers and consumers of primary products about matters such as commodity price stabilization, assuring adequate supplies to consumers, and promoting the economic development of producers. The methods used to attain these objectives are exports controls, buffer stocks, and multilateral contracts.

  • Production and Export Controls: If an ICA accounts for a large share of total world output (or exports) of a commodity, its members may agree on export controls to stabilize export revenues. The idea behind such measures is to offset a decrease in the market demand for the primary commodity by assigning cutbacks in the market supply. If successful, the rise in price due to the curtailment in supply with the sufficient for compensate the reduction in demand, so that total export earnings will remains at the original level.
  • Buffer Stocks: Buffer stock, in which a producers association (of international agency) is prepared to buy and sell a commodity in large amounts. The buffer stock consists of supplies of a commodity financed and held by the producers’ association. The buffer stock manager buys from the market when supplies are abundant and prices are falling below acceptable levels, and sells from the buffer stock when supplies are tight and prices are high. A well-run buffer stock can promote economic efficiency because primary producers can plan investment and expansion if they know that prices will not gyrate.
  • Multilateral contracts: Multilateral contracts generally stipulate a minimum price at which exporters will purchase guaranteed quantities from the producing nations and a maximum price at which producing nations will sell guaranteed amounts to the exporters. Such purchases and sales are designed to hold prices within a target range. One possible advantage of the multilateral contract as a price- stabilization device is that, in comparison with buffer stocks or exports controls, it results in less distortion of the market mechanism and the allocation of resources

Examples of International commodity agreements are International Cocoa Organization, International Tin Agreement, International Coffee organization, International Sugar organization and International Wheat Agreement. These agreements are used as a price stabilization device to stabilize export receipts, production, and prices.

However, many of them have broken down over time because production is labor-intensive, output cutbacks are often socially unacceptable to workers. Agreeing on a target price that reflects existing economic conditions is also troublesome. Agricultural products often face high storage costs and are perishable. Stockpiles of commodities in importing nation can be used to offset controls on production and export. Substitute products exist for many commodities.

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