Global Trade Mailing List Archive

["Tom Lines" <<address removed>>]

Dear Duncan,

Thank you for your detailed summary last Friday, and in particular for giving 
such full play to the discussion on commodities.

I would just like to make a couple of further points, if I may.  First of all, 
I wish to reply to your query about hedging and price insurance.  Hedging is 
routinely carried out by large buyers and sellers of those commodities in which 
futures trading exists, in order to lay off the risk of adverse price swings 
that is inherent in such markets.  It is a normal commercial practice and part 
of everyday trading in such commodities.

However, the point of commodity agreements or other public forms of supply 
management is rather different: to smooth out the fluctuations in market 
prices, rather than insure against them.  As such, it operates in a different 
arena.  When undertaken by public authorities (as opposed to commercial 
cartels), it is something akin to countercyclical fiscal policy or intervention 
by central banks in foreign exchange markets.  Maybe someone out there with 
more direct experience of futures markets will put me right on this, but I find 
it hard to see what role any hedging instrument can play in that.

Secondly, I think I ought to add a health warning to my earlier comments.  
Though probably not necessary for the participants in this consultation, it 
needs to be made just the same.  I drew some examples from the behaviour of 
commercial cartels, some of which might be viewed by many readers with a degree 
of distaste.  I wish to make it clear that I see no moral equivalence between 
the types of supply management we have discussed and price manipulations made 
by commercial firms to exploit their own market strength.  They might use some 
of the same methods, but there is a big difference in the objects of the policy 
and the way it is gone about.  Where markets act to the disservice of poor and 
vulnerable people, I think it is right to intervene and correct that, wherever 
possible.  It must be done in a fully transparent and accountable way, as a 
result of public policy decisions, openly arrived at.  That is not at all the 
same as private cartels operating to maximise their own commercial gains.

Tom Lines

  ----- Original Message ----- 
  From: Duncan Green 
  To: <address removed> 
  Sent: Friday, May 21, 2004 5:08 PM
  Subject: Agriculture and trade theme, fourth summary from themoderator, 20th 
May


  Agriculture and trade theme, fourth summary from the moderator, 20th May
  Commodities and Supply Management
  Finally, he points out that any SM agreement will at some point face severe 
strain, and has to be designed from the outset with that in mind. One thought 
that occurred to me on this - is this somewhere where hedging or other forms of 
risk management might indeed play a useful role? International agreements could 
provide the scale and security required to make them effective customers for 
market-based risk management instruments such as hedging.


  Tom goes onto discuss some other commodity issues. On short-term price 
volatility, he has little time for the World Bank's work on market based risk 
management, seeing it as little more than a business generation exercise by 
traders and financial providers, of little relevance to small farmers. He also 
believes that they offer little solution to the medium term (2-3 year) price 
swings which play havoc with governments.