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Dealing with commodity price uncertainty

Author

Listed:
  • Varangis, Panos
  • Larson, Don

Abstract

Liberalization in commodity markets has brought profound changes in the way price risks are allocated and managed in commodity subsectors. Price risks are increasingly allocated to private traders and farmers rather than absorbed by the government. The success of market reform depends on the ability of the emerging private sector to make full use of the available range of modern commodity marketing, price risk management and financing instruments. Because farmers do not generally have access to these instruments, intermediaries must be developed. Larger private traders and banks are in the best position to become these intermediaries. Preconditions needed for accessing modern commodity marketing, price risk management, and financing instruments are: a) creating an appropriate legal, regulatory, and institutional framework; b) reducing government intervention; c) providing training and raising awareness; and d) improving creditworthiness and reducing performance risk. The use of commodity derivative instruments to hedge commodity price risk is not new. The private sectors in many Asian and Latin American countries have been using commodity futures and options for some time. More recently, commodity derivative instruments are being used increasingly in several African countries and many economies in transition. And several developing and transition economies have sought to establish commodity derivative exchanges.

Suggested Citation

  • Varangis, Panos & Larson, Don, 1996. "Dealing with commodity price uncertainty," Policy Research Working Paper Series 1667, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1667
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    References listed on IDEAS

    as
    1. Gemmill, Gordon, 1985. "Optimal hedging on futures markets for commodity-exporting nations," European Economic Review, Elsevier, vol. 27(2), pages 243-261, March.
    2. Akiyama, Takamasa & Larson, Donald F. & DEC, 1994. "The adding-up problem : strategies for primary commodity exports in sub-Saharan Africa," Policy Research Working Paper Series 1245, The World Bank.
    3. Claessens, S., 1993. "Risk Management in Developing Countries," Papers 235, World Bank - Technical Papers.
    4. Deaton, A.S., 1992. "Commodity Prices, Stabilization, and Growth in Africa," Papers 166, Princeton, Woodrow Wilson School - Development Studies.
    5. Larson, Donald F. & Coleman, Jonathan, 1991. "The effects of option hedging on the costs of domestic price stabilization schemes," Policy Research Working Paper Series 653, The World Bank.
    6. Gilbert, Christopher L., 1987. "International commodity agreements: Design and performance," World Development, Elsevier, vol. 15(5), pages 591-616, May.
    Full references (including those not matched with items on IDEAS)

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