Question

Stabilizing commodity prices has been a major objective of many primary product nations. What are the main methods used to achieve price stabilization of primary commodities? What are some examples of international commodity agreements and why do many of these tend to break down over time?

Answer 1

Many primary markets are subject to extreme fluctuations in price. There are several methods of intervention available to governments and agencies.

1. Buffer stock: Buffer stocks are stocks of produce which have not yet been taken to market. They can help stabilise prices by taking surplus output and putting it into a ‘store’, or, with a bad harvest, stock is released from storage.

2. Ceilings and flooring: The buffer stock managers are likely to establish a price ceiling, above which intervention selling will occur, and a price floor, below which intervention buying will take place.

3. Guaranteed prices:

Guaranteeing a price to producers (at P1 in the diagram below), irrespective of the output they produce, is another way of stabilising prices and incomes.

A government or agency can establish a target price, and then guarantee to pay farmers and growers this price, whatever output is produced. If the market price rises above this guarantee, the market price will prevail. But if the market price falls below the guarantee, then the guaranteed price will prevail.

4. Export subsidies: An export subsidy involves producers being paid a subsidy to export their surpluses at artificially low prices. However, other countries may retaliate, and protect their own producers from cheap imports, because it can be argued that export subsidies are a form of unfair competition.

5. Quotas: Over-production can be controlled by allocating production quotas to producers. Quotas are agreed quantities that individual producers must produce, and a quota system can help prevent over or under production in response to economic shocks.

Example - The International Cocoa Agreement

In 2003, an agreement was made between the seven main cocoa exporting countries, Cameroon, Ivory Coast, Gabon, Ghana, Malaysia, Nigeria and Togo, and the main importing countries including the EU members, Russia, and Switzerland.