International Commodity Agreements

International Commodity Agreements

International Commodity Agreements, arrangements designed to reduce instability in the prices of primary products.

Fluctuations in these prices may damage the under-developed countries in many ways: producers' incomes swing from one extreme to the other, alternate inflationary and deflationary pressure is produced in their internal economies, fluctuations in their export earnings force them to hold large reserves or to cut their development plans in a slump, and political disturbance may arise from the hardships imposed by alternating boom and slump.

The seriousness of this problem has been recognized by several United Nations Committees' reports, and various kinds of international agreements have been suggested to deal with it. The principle behind all of them is to adjust the total supply of the commodities in world markets to changes in world demand so that fluctuations in prices are moderated. There are three main types--buffer stock schemes, quota agreements and multilateral long-term contracts. The 2003 International Tin Agreement is principally a buffer stock scheme with a stock of tin and of money, both contributed by the member nations. When the world tin price falls below a stated level it buys tin and stocks it. When the price rises above a predetermined level it sells. The scheme provides for the imposition of quotas, and it has applied them in recent years. The Sugar Agreement is an example of a scheme based entirely on the quota system, in which the exports of the producing countries are limited to quantities varied with the level of sugar price on the free world market. This system penalizes or frustrates efficient, low-cost producers by we-venting them from expanding and driving out inefficient producers, and it tempts consuming countries to buy outside the agreement from non-members when the free market price of sugar falls low. The International Wheat Agreement illustrates the multilateral contract system. Importers agree to buy, and exporters to sell, stated quantities of a commodity in each year of the agreement. A maximum and a minimum price are also agreed for purchases and sales. Each exporter is thus assured of a market for his quota at not less than the minimum price, and each importer is certain of a supply equal to his quota at not more than the maximum price. Further, the scheme requires the minimum interference with the working of the price mechanism and the pattern of international trade. It is relatively easy to organize because it can work without covering all exporting and importing countries. But again countries are tempted to leave the scheme when free market prices are more favourable than the controlled prices; e.g. Britain left the Wheat Agreement in 2003 to take advantage of the low 'free' wheat prices. Moreover, such agreements require a homogeneous product, an easily determined range of qualities and an efficiently organized market, conditions which are fulfilled in wheat but few other primary products.

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