Commodity Price Insurance:A Keynesian Idea Revisited
Keynes proposed that a ‘Commod Control’ agency be created after the Second World War to stabilise spot prices of key internationally traded commodities by systematically buying and selling physical buffer stocks. In this paper, the creation of a new Global Commodity Insurer (GCI) is discussed that would operate an international Commodity Price Insurance (CPI) scheme with the objective of protecting national government revenues, spending and investment against the adverse impact of short- term deviations in commodity prices, and especially oil prices, from their long-run equilibrium level. Crude oil is the core commodity in this scheme because energy represents 50% of world commodity exports, and oil price shocks have historically had a significant macroeconomic impact. In effect the GCI would develop a new international market, which is currently missing, designed to protect governments against the risk of declines in their fiscal revenue, and increases in the level of claims on that income especially from social programmes, brought about by short-term commodity price shocks. GCI would take advantage of the rapid growth of trading in derivative securities in the global capital market since the 1980s by selling CPI insurance contracts tailored to the specific commodity price exposure faced by national government, and offsetting the resulting price risk with a portfolio of derivative contracts of five-year or longer maturities, supplied by banks, insurers, reinsurers, investment institutions, and commodity trading companies, with investment grade credit ratings. The difference between the CPI and a buffer stock or export/import control scheme is that it would mitigate the macro-economic shocks posed by commodity price volatility, but not attempt to control commodity prices. The cost of the CPI scheme is estimated by simulating 5-year commodity price paths using a standard log price mean reverting model parameterised from an econometric analysis of commodity price time series.
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