Global Policy Forum

By Ken Laidlaw

Farmers in poor countries who have suffered for decades from falling commodity prices might find a new international scheme helpful in shielding them from financial collapse.

A World Bank-convened international task force has drafted a strategy that intends putting the tools of modern markets, such as insurance, credit, futures and options contracts, into the hands of millions of small farmers in the developing world.

Cocoa, coffee, rubber and other commodity producers could hedge their exposure to price fluctuations that have impoverished many producers in those developing countries that are dependent on a few commodities for hard currency earnings.

The scheme devised by a group of financial institutions, major commodity exchanges, international commodity organisations, agricultural producer associations and others began as an experiment in early 1999, looking into the possibility of a commodity price insurance scheme for developing countries.

Under this, risk management instruments would be made available to commodity producers in poor countries - tools to which they lack access.

On 14 December an internal World Bank meeting will examine the proposals and decide whether to go ahead or conduct further studies.

"We have done four case studies and a further four might be available by the time the meeting is held," a World Bank economist connected with the task force told Gemini News Service.

"The World Bank would draw some conclusions on the basis of this. It may tell us to come back in six months' time with more studies or some changes and spelling out the role of the Bank."

The completed studies are on Tanzania, El Salvador (both coffee), Thailand (rubber) and Mongolia (copper).

Those due to be completed soon are on Nicaragua, Mexico, Uganda and Ghana.

The task force in its report, says that "access to the kind of commodity price insurance available in financial markets has tremendous potential for reducing poverty throughout the developing world."

World Bank president James Wolfensohn says that the new scheme, which allows small producers to buy price insurance, is a natural step in assisting farmers to deal with the problem of price variations.

The proposals "could make a huge change in the number of people who live in poverty, and it could make a huge change in the capacity of a lot of these countries to really have a more equitable development," Wolfensohn adds.

World Bank sources describe the scheme as a private-public initiative. The essence of the plan is to make it possible for commodity farmers to buy insurance against a fall in prices of their produce.

"For instance a farmer might buy insurance to the value of one dollar per pound of coffee or cocoa or rubber. If the price falls below a dollar they will get still their dollar. If the price rises above one dollar, they will get the higher price."

Thus the farmer knows the minimum they will get at the end for their crop.

"What we need to establish is a local transmission mechanism. For instance who is going to insure them? Maybe it is a local co-operative which has a credit relationship with a bank. The bank will lend the money to the cooperative which will insure the farmer," the World Bank economist said.

The bank in turn will need to have credit arrangements with national or foreign financial institutions to cover its own back.

However, World Bank sources admit that as the plan is now conceived it will be the financially better off farmer who will have enough to get insurance credit to cover his crop. The plan has to be gradually expanded to cover the poorer commodity farmers in developing countries.

Many poor countries depend on three or fewer commodities for much of their export earnings. A scheme that would allow them to hedge price fluctuations could go a long way in alleviating poverty in developing countries, come economists hold.

Sections of the private sector certainly see it as a way forward.

"While the development institutions have committed billions of dollars to address producers in emerging economies, it was incomprehensible that none had been targeted to risk management," the Chicago Board of Trade's senior vice- president of Strategic Planning, Clifford Lewis, told the task force at the start of discussions on the scheme.

Since then free market enthusiasts have concluded that a commodity price insurance scheme offers a partial solution to the problems producers face as a result of violent price swings.

Their argument is that there are a number of market-based instruments available in developed countries that would enable producers and others to reduce price uncertainty.

The problem has been that producers, marketing agents and financial institutions in developing countries have little access to them.

Since the 1970s, attempts to bring stability to commodity markets have largely failed. These have included buffer stocks, buffer funds, government intervention, international commodity agreements and a Common Fund covering a number of key commodities.

Commodity agreements have fallen by the wayside, turning into commodity associations with no economic clout. And, after years of negotiations, the much-vaunted Common Fund for commodities has been reduced to a financing facility for diversification out of commodity production.

More than 50 developing countries depend on three or fewer commodities for over half of their export earnings. Twenty countries dependent on commodities for over 90 per cent of their total foreign exchange earnings, says the World Bank.

Heavily indebted poorest countries are particularly vulnerable. All are dependent on commodities, which represent more than 80 per cent of their exports.

There is no longer a safety net of government subsidies and price bands within commodity pacts.

The World Bank says prices for many commodities from 1983-1998 fluctuated from below 50 per cent to above 150 per cent of average prices. Farmers using the futures market could make up to 70 per cent of the final market price of the commodity as against 40 per cent now, says Roy Leighton, European Head of Credit Lyonnais.

"Some farmers borrow at 45 per cent interest from local moneylenders because they cannot get credit elsewhere. The scheme will free them from the usurers," says Leighton.

"We are not reinventing the wheel. Futures contracts have existed for at least 2000 years between farmers and merchants," Leighton adds.

The World Bank would act as an honest broker drawing up rules, vetting buyers and sellers of options contracts and helping farmers establish exporters' cooperatives.

The increasing liberalisation and globalisation of world commodity markets have brought with it the need to use market-based approaches for dealing with market uncertainty, says the task force.

The World Bank initiative does not aim to fix prices but it will allow for a guaranteed floor price, which should reduce risk.

The Bank believes a successful market-based scheme to ensure that countries reliant on commodities can develop will be crucial in retaining their loyalty to globalisation.

Whether that loyalty exists at all is, of course, open for debate.

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