International Commodity Agreements

MAC/WFY

Page-68

0230_553559_11_cha07

194570. Early Attempts: FAO's Pioneering Work

necessarily took on the character of a `speculative deal', justified as a form of
insurance against the risk of undue losses resulting from large and unexpected price
variations. The fact that the conclusion of price-stabilizing commodity agreements
proved so difficult in practice appeared to indicate that neither the exporters nor
importers were prepared to pay a substantial premium for this kind of insurance.
Moreover, for a number of commodities, it was difficult, or impossible, to speak
of a representative world price. And the main concern of exporters was their total
export proceeds (depending on volume as well as price) and the average level of
such proceeds over a number of years, measured in terms of import purchasing
power, not merely short-term fluctuations in money terms. Added to this was
the finding of Singer and Prebisch of the long-term deterioration of the terms of
trade against primary products. Therefore, commodity agreements discussed and
negotiated in the 1950s were not, in themselves, a sufficient instrument, nor did
they take sufficient account of the need for improved co-ordination of national
policies in developed countries.

Types of agreements

By the 1960s, three types of agreements had been negotiated. Their subsequent
histories illustrated the same fundamental difficulties.

Multilateral contract agreements: The main feature of this type of agreement was

that it contained an obligation on importers or exporters to buy and sell certain
guaranteed quantities at stipulated maximum or minimum prices whenever the
free-market price reached or exceeded those limits. Such agreements had to cover
a high proportion of the total trade of the participants and the spread of prices
between floor and ceiling should not be too wide for them to be reasonably
effective. They would then protect the real national income of both importing and
exporting participants from fluctuations in the world price while preserving the
free-market price as a mechanism of adjustment for securing a balance between
world production and consumption.

International buffer stock: This second type of agreement, on which particularly

high hopes had been set in the early post-war years, aimed to stabilize prices by
an obligation to buy whenever the world price fell below a certain minimum level
and to sell when the price rose above a certain maximum, combined perhaps
with a discretionary right to buy or sell between these limits. The well-known
problem of a buffer stock scheme was to provide adequate finance to enable
the scheme's authority to carry out its functions. This was closely related to the
difficulty of successfully forecasting the future relationship between supply and
demand. In addition, was the problem of securing international agreement on a
range of prices at levels consistent with the prospective movement of the long-
term world price securing a balance between supply and demand. Unless the trend
of this long-term world price was stable or rising, a buffer stock was unlikely to be
successful in ironing out the fluctuations from the trend for more than a limited
period of time. With a falling trend, the necessary downward adjustment of the
operating range of prices could not be secured promptly, even if the difference

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Useful links	International Commodity Agreements MAC/WFY Page-68 0230_553559_11_cha07 68 194570. Early Attempts: FAO's Pioneering Work necessarily took on the character of a `speculative deal', justified as a form of insurance against the risk of undue losses resulting from large and unexpected price variations. The fact that the conclusion of price-stabilizing commodity agreements proved so difficult in practice appeared to indicate that neither the exporters nor importers were prepared to pay a substantial premium for this kind of insurance. Moreover, for a number of commodities, it was difficult, or impossible, to speak of a representative world price. And the main concern of exporters was their total export proceeds (depending on volume as well as price) and the average level of such proceeds over a number of years, measured in terms of import purchasing power, not merely short-term fluctuations in money terms. Added to this was the finding of Singer and Prebisch of the long-term deterioration of the terms of trade against primary products. Therefore, commodity agreements discussed and negotiated in the 1950s were not, in themselves, a sufficient instrument, nor did they take sufficient account of the need for improved co-ordination of national policies in developed countries. Types of agreements By the 1960s, three types of agreements had been negotiated. Their subsequent histories illustrated the same fundamental difficulties. Multilateral contract agreements: The main feature of this type of agreement was that it contained an obligation on importers or exporters to buy and sell certain guaranteed quantities at stipulated maximum or minimum prices whenever the free-market price reached or exceeded those limits. Such agreements had to cover a high proportion of the total trade of the participants and the spread of prices between floor and ceiling should not be too wide for them to be reasonably effective. They would then protect the real national income of both importing and exporting participants from fluctuations in the world price while preserving the free-market price as a mechanism of adjustment for securing a balance between world production and consumption. International buffer stock: This second type of agreement, on which particularly high hopes had been set in the early post-war years, aimed to stabilize prices by an obligation to buy whenever the world price fell below a certain minimum level and to sell when the price rose above a certain maximum, combined perhaps with a discretionary right to buy or sell between these limits. The well-known problem of a buffer stock scheme was to provide adequate finance to enable the scheme's authority to carry out its functions. This was closely related to the difficulty of successfully forecasting the future relationship between supply and demand. In addition, was the problem of securing international agreement on a range of prices at levels consistent with the prospective movement of the long- term world price securing a balance between supply and demand. Unless the trend of this long-term world price was stable or rising, a buffer stock was unlikely to be successful in ironing out the fluctuations from the trend for more than a limited period of time. With a falling trend, the necessary downward adjustment of the operating range of prices could not be secured promptly, even if the difference back to top Next page
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