International Commodity Agreements Revisited

1. International Commodity Agreements Revisited Prices, Support & Supply Mgt Chapeco, Brazil January 2005 Muriel Calo Global Development & Environment Institute Tufts University, USA

2. Overview • Rationale, trends • Objectives • Explaining the collapse • A way forward • Temperate-tropical crops • New developments in the political arena

3. Rationale for Commodity Agreements • In agriculture, free market forces do not lead to workable equilibrium • This is underscored by recent developments in tropical export crop markets • world coffee and cocoa markets completely liberalized with collapse of the agreements • prices have fallen to less than 20 percent of former levels

6. Price support Export quotas Require a national stock mechanism Production quotas Price stabilization Buffer stocks Instrument depends on ObjectiveBuffer stock vs. Quota

7. COCOA, COFFEE & TIN : High prices in the 70s  new producers  increased production  chronic surplus in the 80s Stock overflowed Stock lacked flexible mechanism for price & quota adjustment Cocoa Agreement lacked export or production quotas Withdrawal of funds by US and key producers The Collapse of the Agreements

8. The Collapse of the Agreements • RUBBER: Failed to stabilize or support prices • Stock had automatic price adjustment mechanism, preventing bankruptcy • But Agreement lacked export or production quotas • SUGAR: Failed to stabilize or support prices • Protectionist policies in US & EU depressed & destabilized world prices

9. Why the Agreements FailedTechnical Reasons • Lack of funding because major countries declined to cooperate • Led to collapse of buffer stocks • Absence of supply controls • Export quotas & stocks inadequate in the face of structural oversupply • The failure of South-South cooperation • Free riding by producing countries hampered agreement between countries and reinforced conflicts on quota distribution & funding • Domestic farm policies of developed countries • With tropical-temperate crops like sugar, developed countries could also be free riders

10. Why the Agreements FailedUnderlying Constitutional Problem • Restrictive GATT Framework: • De factoveto power by a handful of unwilling developed countries • 5 year terms required near-constant negotiation • Divisive commodity-by-commodity approach failed to balance benefits between countries • Led to: • Inadequate instruments for enforcement of price bands • Obstructed negotiations & withdrawal of funding at will

11. Why the Agreements FailedUnderlying Constitutional Problem • UNCTAD & the 1974 Integrated Program for Commodities: • Provided for coordinated negotiations on 18 commodities & Common Fund • Resolution accepted without dissent, but western countries reneged on their commitments • US and EU used their participation in the Agreements as “damage control”, obstructing and diluting decisions

12. Meeting Technical Constraints: • Match instruments to objectives • Buffer stocks alone will not support prices (Cocoa, rubber…) • Control structural oversupply with production quotas • Flexible price adjustment mechanism (Tin…) • Flexible market share adjustment mechanism • New entrants, new trends in demand (Coffee…) • Enforcement mechanisms • Supportive national policies (Sugar…)

13. Meeting Political Constraints: Financial Independence • Design self-financing arrangements for tropical crops (export tax) • Consider coordinated negotiations on several crops at once • Build a Coalition of southern countries, farmer organizations, NGOs and willing developed country governments • Target traders and processors as negotiating partners • Use the Coalition as a platform to discuss wider trade reforms

14. Meeting Political Constraints:Bargaining Power • Enforce cooperation by developed country gov’ts by leveraging: • Intellectual property • Foreign investment • Anti-terrorism • Environment • Other issues important to developed countries • Enforce compliance by large corporations via: • NGO advocacy, public pressure, consumer boycott campaigns

15. Balancing Efficiency & Equity Stimulating Efficiency: • Establish a system of gradual quota redistribution from high to low-cost countries • Make domestic quotas tradable within countries

16. Balancing Efficiency & Equity Ensuring Equity: • Subdivide domestic quota trade by geographical area or size of landholding • Reserve funds to purchase part of the quotas for freereallocation to farmers • Redistribute quotas to low-cost countries based on agreed formula

17. The Case of Temperate-tropical crops • Restoring international stocks for food crops is justified solely on food security basis(ie. maize) • Supply controls would require: 1. Action in WTO to: • Restrict dumping & direct payments • Restrict market power of large traders & processors 2. Coordination between temperate and tropical countries to limit supply expansion

18. International Momentum Is Building • Oxfam Initiative (2002) • ICO Coffee Quality Improvement Scheme (2002) • WTO Initiative: Kenya, Tanzania & Uganda’s Proposal to the Committee on Trade & Dvlpt (2003) • UNCTAD Initiative: new research on tropical commodities (2004) US Entry into ICO: an opportunity or a constraint?

20. A flexible self-financing scheme • Individual production quotas • tradable in national quota exchanges • Uniform export tax • Transition period • tax revenue is used for buying out stocks, part of current production, and part of the quotas • Post-transition • export tax is reduced • residual tax is used for buying quotas for free redistribution to farmers and low-cost countries (according to pre-agreed formula)

21. Self-financing scheme for doubling producer prices for coffee over a 5-year period

22. SUGAR Operated in very difficult market due to protectionist policies in EU and US: Expansion of EU sugar dumping on world markets US imposition of import quotas and support of domestic producers 4th agreement (1977) failed to stabilize prices under these conditions: EU and US actions undermined the impact of a reduction in export quotas Agreement unable to defend its world price, lapsing in 1984 PROBLEM: Depressed and destabilized world prices due to protectionist policies TIN 6th agreement collapsed in 1985 due to Failure to achieve sufficient participation (US & Bolivia) New low-cost production in Brazil Large stock inherited from 5th agreement Underfinancing caused by US refusal to renew membership Failure to respond to major changes in supply & demand PROBLEM: Lacked flexible price adjustment mechanism Underfinanced Sugar and Tin AgreementsUsed export quotas & stocks

23. ICAs Attempts to control market have swung between cartel arrangements and ICAs since 1962 Successfully moderated price decline until 1989 4th Agreement lapsed in 1989 due to withdrawal of funds by supporting countries, and disagreement on distribution of quotas between producers (Central America vs Brazil) PROBLEM: Withdrawal of funds Expiration of 5 year term Rigid quota system hampered adjustment to new trends in demand Post-1990 Cartel schemes in 1993 and 2000 suffered from: Inadequate scope Weakened gov’t control over stocks and exports Lack of enforcement mechanism Non-cooperation of several producers (ie. Mexico) PROBLEM: desperate need for foreign exchange lack of storage facilities or financing capacity to buy/hold stocks South-South tensions. Coffee AgreementUsed export quotas & stocks

24. Basic Steps to Designing a Scheme • Set reference price • Instruments for enforcing price band (stocks, quotas) • Financial instrument (export tax) • Formula for determining quota shares between and within countries • Flexibility mechanisms for price & quota adjustment • Enforcement mechanism