Meaning of Commodity Agreements
Commodity agreements refer to the formal arrangements between producing and consuming countries to stabilize markets and raise average prices. Such agreements are common in many markets, including the market for tea, coffee and sugar. International commodity agreements are inter-governmental arrangements concerning the production of and trade in, certain primary products to stabilise their prices.
Commodity agreements are international agreements that aim to stabilise commodity prices for the benefit of both producers and consumers. One way to enhance market prices is by incorporating mechanisms that allow for the modification of export quotas and production levels when market prices reach certain trigger price levels. To effectively manage market fluctuations companies sometimes employ buffer stocks which release stocks of commodities onto the market when prices rise to a certain level and build them up when they fall.
For example, the International Cocoa Agreement.
What are Commodity Agreements?
International commodity agreements are inter-governmental arrangements concerned with the production and trade of certain primary products. An international commodity agreement, usually reflected in a legal instrument, relating to trade in a particular commodity. It is based on terms negotiated and accepted by most of the countries engaged in the commercial export and import of said commodity.
Some commodity agreements such as those for coffee, cocoa, natural rubber and sugar have centred on economic provisions intended to stabilise the market price within a negotiated price range for the commodity through the use of export quotas or buffer stocks or both. Other commodity agreements (such as existing agreements for jute and jute products, olive oil and wheat) seek to promote cooperation among producers and consumers through improved consultations, exchange of information, research and development, and export promotion.
Many developing countries which embark upon ambitious development programmes need large foreign exchange resources to finance some of their developmental requirements like the import of capital goods. But they face problems like fluctuations in export prices of primary goods, i.e., agricultural products and minerals, which form a major part of their total exports. Apart from making export earnings unstable, it also causes deterioration in their terms of trade. Hence, there has been a growing demand for adopting stabilisation measures to protect the interests of developing countries. Many experts hold the belief that international commodity agreements have the potential to stabilize the prices of the respective commodities.
- nature of business meaning
- nature of international business
- scope of international marketing
- determinants of economic development
- nature of capital budgeting
- nature of international marketing
Forms of Commodity Agreements
The forms of commodity agreement are as follows:
1) Quota Agreements
International Quota Agreements seek to prevent fluctuations in commodity prices by regulating their supply. Under the quota agreement, export quotas are determined and allocated to participating countries according to some mutually agreeable formula wherein they undertake to restrict the export or production by a certain percentage of the basic quota as decided by the central committee or council. For example, the Coffee Agreement, among the major producers of Latin America and Africa limited the amount that could be exported by each country.
Quota agreements have already been tried in the case of coffee and sugar, and commodities like tea and bananas have been suggested as prospective candidates for new agreements. It has been pointed out that quotas are bad theoretically because they imply misallocation of resources. They protect inefficient producers, freeze markets, and probably keep supply below the optimum. Quotas have the advantage, however, of being manageable. They avoid the accumulation of stocks, require no financing and do not call for continuous operating decisions.
2) Buffer Stock Agreements
International Buffer Stock Agreements seek to stabilise commodity prices by maintaining the demand-supply balance. Buffer stock agreement stabilises price, increasing the market supply by selling the commodity when the price tends to rise and by absorbing the excess supply to prevent a fall in the price. The buffer stock plan, thus, requires an international agency to set a range of prices and to buy the commodity at the minimum and sell at the maximum.
The buffer pool method has already been tried in the case of tin, cocos, and sugar, and commodities like rubber, tea, and copper have been suggested as prospective candidates for new agreements.
The buffer stock arrangement, however, has certain limitations. It can be affected only in the case of those products which can be stored at a relatively low cost without the danger of deterioration. Further, large financial resources and stock of the commodity are required to launch the programme successfully. It has also been pointed out that “In the absence of production and export quotas to protect the buffer pool, there is always the prospect that some countries might use it to create ‘easy’ foreign exchange for themselves. Export subsidies and special exchange rates might provide the means to that end. Finally, the present division of the world into different currency areas would hamper the functioning of buffer pools”.
3) Bilateral and Multilateral Contracts
Bilateral contracts to purchase and sell certain quantities of a commodity at the agreed-upon prices may be entered into by the major importers and exporters of the commodity. In such an agreement an upper price and a lower price are specified. If the market price throughout the agreement remains within these specified limits, the agreement becomes inoperative. But, if the market price rises above the upper limit specified, the exporting country is obliged to sell the importing country a certain specified quantity of the commodity at the upper price fixed by the agreement. On the other hand, if the market price falls below the lower limit specified, the importer is obliged to purchase the contracted quantity at the specified lower price.
Such international sale and purchase contracts may also be entered into by two or more exporters and importers. Bilateral or multilateral agreements are usually concluded between the major supplier(s) and the major importer(s) of the commodities. The best-known example of this type of commodity agreement is the International Wheat Agreement which fixed the maximum price at which the exporting countries guaranteed to supply the stipulated amount of wheat to the importing countries and the minimum price at which the importing countries agreed to purchase fixed amounts of wheat from the exporters.
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