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Commodity risk management and development

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Author Info

  • Larson, Donald F.
  • Varangis, Panos
  • Yabuki, Nanae

Abstract

In 1995, 57 countries depended on three commodities for more than half their exports, reports UNCTAD. And commodities, fuels, grains, and oilseeds are important imports for several countries. The notorious volatility of commodity prices is a major source of instability and uncertainty in commodity-dependent countries, affecting governments, producers (farmers), traders, processors, and financial institutions. Further, commodity price instability has a negative impact on economic growth, income distribution, and poverty alleviation. Early attempts to deal with commodity price volatility relied on buffer stocks, buffer funds, government intervention in commodity markets, and international commodity agreements to stabilize prices. These were largely unsuccessful--sometimes spectacularly so. Buffer funds went bankrupt, commodity agreements were suspended, buffer stocks proved ineffective, and government intervention was both costlyand ineffective. As the poor performance of such stabilization schemes became more evident, academics and policymakers began distinguishing between programs that tried to alter price distribution (domestically or internationally) and programs that used market-based approaches for dealing with market uncertainty. This change in approach coincided with a significant rise in the use of market-based commodity risk management instruments--aided by the liberalization of markets, the lowering of trade and capital control barriers, and the globalization of commodity markets. by the mid-1990s, several governments, state companies, and private sector participants began using commodity derivatives markets to hedge their commodity price risks. Participation in those markets is growing, but important barriers to access remain including counterparty risk, problems small groups (such as farmers) have aggregating risks, basis risks (no correlation of local and international prices), no local reference prices, low liquidity, no derivatives markets for certain products, and low levels of know-how. International institutions, local governments, and the private sector could facilitate developing countries access to derivatives markets and the use of risk management tools to solve public sector problems.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1963.

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Date of creation: 31 Aug 1998
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Handle: RePEc:wbk:wbrwps:1963

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Related research

Keywords: Economic Theory&Research; Payment Systems&Infrastructure; Environmental Economics&Policies; Markets and Market Access; Labor Policies; Health Economics&Finance; Insurance&Risk Mitigation; Environmental Economics&Policies; Access to Markets; Markets and Market Access;

References

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Citations

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Cited by:
  1. Le Pen, Yannick & Sévi, Benoît, 2010. "Revisiting the excess co-movements of commodity prices in a data-rich environment," Economics Papers from University Paris Dauphine 123456789/6800, Paris Dauphine University.
  2. Galtier, F., 2009. "Comment gérer l'instabilité des prix alimentaires dans les pays en développement ?," Working Papers MOISA 200904, UMR MOISA : Marchés, Organisations, Institutions et Stratégies d'Acteurs : CIHEAM-IAMM, CIRAD, INRA, Montpellier SupAgro, IRD - Montpellier, France.
  3. Ehrhart, H. & Guerineau, S., 2013. "Commodity price volatility and tax revenue: Evidence from developing countries," Working papers 423, Banque de France.
  4. Ricardo Caballero & Kevin Cowan, 2006. "Financial Integration Without the Volatility," Working Papers Central Bank of Chile 387, Central Bank of Chile.
  5. Raymond B Swaray, . "Volatility of primary commodity prices: some evidence from agricultural exports in Sub-Saharan Africa," Discussion Papers 02/06, Department of Economics, University of York.
  6. Yannick Le Pen & Benoît Sévi, 2013. "Futures trading and the excess comovement of commodity prices," Working Papers 2013-019, Department of Research, Ipag Business School.
  7. Samuel Guerineau & Hélène Ehrhart, 2012. "The impact of high and volatile commodity prices on public finances: Evidence from developing countries," Working Papers halshs-00659098, HAL.
  8. Samuel Guerineau & Hélène Ehrhart, 2012. "The impact of high and volatile commodity prices on public finances: Evidence from developing countries," Working Papers halshs-00659100, HAL.
  9. Ton S. van den Bremer & Frederick van der Ploeg, 2012. "How to Spend a Windfall: Dealing with volatility and capital scarcity," OxCarre Working Papers 085, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
  10. Sushil Mohan, 2007. "Market-based Price-risk Management for Coffee Producers," Development Policy Review, Overseas Development Institute, vol. 25(3), pages 333-354, 05.
  11. Swaray, Raymond, 2011. "Commodity buffer stock redux: The role of International Cocoa Organization in prices and incomes," Journal of Policy Modeling, Elsevier, vol. 33(3), pages 361-369, May.
  12. Raju, Sudhakar S. & Melo, Alberto, 2003. "Money, real output, and deficit effects of coffee booms in Colombia," Journal of Policy Modeling, Elsevier, vol. 25(9), pages 963-983, December.
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  14. G. Benavides & P. N. Snowden, 2006. "Futures for farmers: Hedging participation and the Mexican corn scheme," Journal of Development Studies, Taylor & Francis Journals, vol. 42(4), pages 698-712.
  15. Kelly, Valerie A., 2000. "Sahelian Input Markets: Recent Progress And Remaining Challenges," Staff Papers 11510, Michigan State University, Department of Agricultural, Food, and Resource Economics.
  16. Rashid, Shahidur & Winter-Nelson, Alex & Garcia, Philip, 2010. "Purpose and potential for commodity exchanges in African economies:," IFPRI discussion papers 1035, International Food Policy Research Institute (IFPRI).

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