Commodity price volatility remains a top concern for many developing countries, heavily dependent on commodity exports for their economic development. This dependence has decreased significantly in Asia. But, commodities still account for the bulk of export earnings in much of Latin America and the Caribbean, and for more than three quarters of Africa´s export earnings.
At an expert group meeting convened by UNCTAD this week (4 to 6 May), Secretary-General Rubens Ricupero advocated the use of modern financial instruments to improve the trading conditions for commodities. The meeting, focussed on the two - often interrelated - issues of commodity price risk management and collateralized finance (see document TD/B/COM.1/EM.5/2). It brought together some 60 experts, and was chaired by Mr. Pierre Damien Hamidou Wibgha (Burkina Faso); the Vice-Chairman-cum-Rapporteur was Mr. Philippe Sechaud (France).
In his opening statement, Mr. Ricupero said that while it had proven very difficult to influence the absolute level of commodity prices through international action, there were good possibilities to improve the way that developing country governments and enterprises manage their exposure to the volatile commodity trading environment.
Worldwide, commodity prices are no more volatile today than they were in the past. However, commodity price volatility is arguably a larger problem now than ever before. Until the early years of this decade, hundreds of millions of farmers were protected from the direct effects of price volatility by their governments, admittedly at a high cost to national budgets. Now, with the ongoing liberalization of trade and the withdrawal of governments from setting commodity prices, a growing number of producers were directly exposed to volatile prices.
Traditional defences to price volatility are costly, Mr. Ricupero said, adding that capital set aside by governments and companies could be better used for productive purposes than for extra reserves. Most international commodity agreements with economic safeguard clauses have failed.
Apart from exposure to volatile prices, those active in the commodity sector have difficulty in getting access to credit. Use of commodities as collateral, that is, making the commodity rather than the counterparty the guarantor of the deal, could help remedy this problem.
On Wednesday, the experts adopted a set of recommendations (TD/B/COM.1/EM.5/L.1) based on their judgement that there is a clear link between exposure to price risks on the one hand, and lower investment and growth and more income inequality, on the other. They also noted that savings on interest costs when using commodities as collateral can be considerable. They therefore agreed that the enhanced use of new tools for commodity risk management and finance can make a large contribution to countries´ development goals, including the alleviation of poverty.
The experts stated that producers and others exposed to price risk (including governments) which do not manage this price risk are, in effect, speculating. In too many cases this was because key decision-makers were not aware of the existence, and use, of price risk management instruments. As for commodity finance, they saw a large gap between the availability of financial instruments which could be of great use to developing country producers, processors, traders, financial institutions and investors, and their actual use.
According to the experts, this can be explained in large part by weaknesses in the national legal, regulatory and institutional framework: lack of awareness and training; lack of clear title (e.g., registration, transferability of title documents, etc.), fiscal and tax inconsistencies, problems in enforcing the law, or weaknesses in local banking infrastructures.
They therefore urged national governments to put in place a conducive policy framework; the importance of having sound legal, regulatory and institutional policies was underlined. Governments were also urged to ensure that price and trade policies are consistent with the use of market-based risk management and finance instruments.
Intermediaries, in particular local banks and farmers´ organizations, can play an important role. It was thus recommended that the upgrading of the skills of these bodies in the areas of commodity risk management and finance be undertaken.
UNCTAD and the World Bank - the principal international agencies active in this area - could play both indirect and direct roles. The former covers information dissemination, knowledge sharing, strategy advice and technical assistance. Direct roles involve acting as an "honest broker" between commodity-dependent countries and providers of risk management instruments; credit enhancement through guarantees; the provision of commodity-linked lending instruments; facilitating the provision of commodity risk management tools through local banks; and intermediation, to transfer risks from developing countries to markets.
International donor agencies were urged to support country-level efforts to improve legal and regulatory frameworks for commodity trade, risk management and finance, and to support the activities undertaken by the World Bank and UNCTAD, as well as other organizations involved in this area.
Partnerships involving governments and the private sector, including non-governmental organizations, farmers´ organizations and all local stakeholders, were seen as an effective way to advance work. The meeting thus welcomed the fact that the use of modern financial instruments for commodity trade would feature at the Partners for Development Summit, in Lyon (France) from 9 to 12 November 1998.