Commodity agreements, cartels and state trading

1. The commodity problem

Many developing countries depend on exports of a few primary products — coffee, cocoa, sugar, rubber, tin, copper, oil. Their prices swing widely because supply depends on weather and long planting cycles while demand is inelastic, so a good harvest can crash prices. Raul Prebisch and Hans Singer (1950) also argued that the terms of trade of primary exporters tend to decline over the long run. Commodity agreements were the response, pushed especially through UNCTAD.

2. International commodity agreements (ICAs)

An international commodity agreement is an agreement between producing and consuming countries to stabilise the price and supply of a primary commodity. The three types:

(a) Buffer stock agreements

An international authority buys the commodity when its price falls to a floor and sells from its stock when the price reaches a ceiling. The International Tin Agreement ran a buffer stock from 1956; it ran out of money and collapsed in 1985. The International Natural Rubber Agreement (1979) also used a buffer stock and was ended in 1999.

(b) Export quota agreements

Producing countries agree to limit exports to quotas so that supply does not depress the price. The International Coffee Agreements (from 1962, administered by the International Coffee Organization, London) used quotas until they broke down in 1989; later coffee agreements dropped economic clauses and now deal only with cooperation and information. The International Sugar Agreements used quotas in the 1950s–1980s.

(c) Multilateral contract agreements

Importing countries agree to buy, and exporting countries to sell, fixed quantities at prices within an agreed band. The International Wheat Agreement (1949) is the example.

The Common Fund for Commodities

UNCTAD’s Integrated Programme for Commodities (1976) proposed a common fund to finance buffer stocks for many commodities together. The Common Fund for Commodities, based in Amsterdam, came into being in 1989, but by then the buffer-stock approach had failed and it now finances commodity development projects instead.

Evaluation

• Benefits: stable export earnings and planning for producing countries; steady supplies for consumers.
• Weaknesses: the floor price is often set too high, so stocks pile up and money runs out (tin); members cheat on quotas; consuming countries lose interest when prices are low; substitutes (synthetic rubber) reduce the market; agreements cover only a few commodities.
• Today most ICAs are “administrative” study groups without price clauses, and stabilisation is sought through futures markets and compensatory finance.

3. Cartels

A cartel is an agreement among producers (firms or countries) of the same product to restrict output, fix prices or divide markets, so as to earn higher profits than under competition. A commodity agreement includes consumers; a cartel is of producers only.

OPEC

The Organization of the Petroleum Exporting Countries was founded in Baghdad in September 1960 by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela, with headquarters in Vienna. It sets production ceilings for its members. Its embargo and price rises of 1973–74 quadrupled the price of oil and caused a world recession. Since 2016 it coordinates with Russia and other producers in the wider OPEC+ arrangement.

Conditions for a cartel to succeed

• Few producers controlling most of world supply.
• Inelastic demand and few substitutes.
• Members willing to keep to quotas; a dominant member able to absorb cuts (Saudi Arabia).

Effects on international business

Higher and unstable input prices for importers (India imports most of its crude oil), balance of payments strain, inflation, and transfers of income to producers. Private cartels among firms are illegal under competition laws — in India under section 3 of the Competition Act, 2002, which presumes price-fixing and market-sharing agreements to have an appreciable adverse effect on competition. Cartels between states, like OPEC, are outside those laws.

4. State trading

State trading is foreign trade conducted by the government or by enterprises it owns or controls, instead of by private traders. GATT Article XVII allows state trading enterprises but requires them to act on commercial considerations and without discrimination.

Reasons: to secure essential imports (food, fertiliser, oil); to bargain as a single large buyer or seller; to break private monopolies; to promote exports of small producers; to trade with countries that themselves trade through state agencies; and to stabilise domestic prices.

In India:

• State Trading Corporation of India (STC), set up in 1956 to trade with the Soviet bloc and handle canalised imports and exports.
• MMTC Ltd., separated from the STC in 1963 to handle minerals, metals, and later gold and fertilisers.
• Canalisation: some items could be imported or exported only through a named state agency (for example, crude oil through Indian Oil, some food grains through the Food Corporation of India). The list has been cut sharply since 1991, and both STC and MMTC have largely wound down their trading.

Criticism: bureaucratic delay, losses, and a tendency to protect domestic producers at consumers’ cost.

How this is examined

For “various commodity agreements”, explain the problem first, then the three types with an agreement under each, the Common Fund, and an evaluation. For a short note on cartels: definition, OPEC (1960, Baghdad, Vienna, the 1973 shock, OPEC+), conditions for success and effects. Keep the competition-law point to one line; it shows the legal side without turning the answer into a law answer.