COMMODITY AGREEMENTS

Introduction:
Commodity agreements are arrangements between
producing and consuming countries to stabilise
markets and raise average prices. Such
agreements are common in many markets,
including the market for coffee, tea, and sugar.
Meaning:
International Commodity Agreements which are
inter- governmental arrangements concerning the
production of & trade in, certain primary products
with a view to stabilizing their prices.
MEANING

A commodity agreement is an undertaking by a

group of countries to stabilize trade, supplies, and
prices of a commodity for the benefit of
participating countries.
 Commodity agreement usually involves a consensus
on quantities traded, prices, and stock management.
 It serves solely as forums for information
exchange, analysis, and policy discussion.
In other words, International Commodity
Agreements (ICA’s) are essentially multilateral
instrumentalities of government control that
support the international price of individual
primary commodities, especially through such
arrangements as export quotas or assured
access to markets.
OBJECTIVES:
The basic objective is to stimulating a dynamic & steady
growth & ensuring reasonable predictability in the real
export earnings of the developing countries so as to
provide:
 Expanding the resources for economic & social
development.
 Consider the interest of the consumers in importing
countries
 Considering the remunerative & equitable & stable
prices for primary commodities.
 Considering the import purchasing power
 Increased imports & consumption & also coordination
of production & marketing policies
OBJECTIVES
 Stimulate a dynamic and steady growth in
developing countries.
 Ensure reasonable predictability in the export
earnings to provide them with expanding
resources for their economic and social
development.
 The market for commodities is particularly
susceptible to sudden changes in supply
conditions, called supply shocks (bad weather,
disease, and natural disasters) and cause
commodity markets to become highly volatile. In
order to avoid these situations, commodity
agreements helps the supply to be stable.
 CONDITIONS TO MAKE AN
AGREEMENT
 Inelastic Demand
 Reasonably stable market share
 Mixed producer-consumer interest
 Distress price levels
 Equal representation for importing and exporting
countries
 The assurance of increasing market outlets for
supplies originating in the regions of most
efficient production.
FORMS OF COMMODITY AGREEMENTS
1. Quota agreements: In international trade, a government-
imposed limit on the quantity of goods and services that
may be exported or imported over a specified period of
time. Limits on the amount of a goods produced, imported,
exported or offered for sale.
 International quota agreements seek to prevent a fall in
commodity prices by regulating prices.
 This agreement undertake to restrict the export or
production by a certain percentage of the basic quota
decided by the Central Committee or Council.
 This type of agreement mostly in the case of the
commodities like coffee, tea & sugar
 This agreement avoids accumulation of stocks require no
financing & do not call for continuous operating
decisions.
FORMS OF COMMODITY AGREEMENTS
1.Quota Agreements: This prevents a fall in
commodity prices by regulating their supply. In
this type of agreement, allocation of export
quotas to participating countries according to a
mutually agreed formula takes place. They also
restrict export or production by a certain
percentage of basic quota decided by Central
Committee or Council .
Merit: Avoid accumulation of stocks
Demerit: Misallocation of resources
2.Buffer Stock Agreements: Buffer Stock is a
stockpile of commodities held by an
international organization that aims to stabilize
world market prices by buying for and selling
from its stockpile. They release stocks of
commodities onto the market when prices rise
to a certain level and build them up when they
fall.
Merit: They stabilise price by balancing demand-
supply.
Demerit: Not applicable to goods which is in
danger of deterioration.
2. Buffer Stock Agreements:
 A practice in which a large investor, especially a government,
buys large quantities of commodities during periods of high
supply and stores them so they do not trade or circulate. The
investor then sells them when supply is low. This is done to
stabilize the price.
 It is to stabilizing the prices by maintaining the demand &
supply balance.
 It is more useful for the commodities like tea, sugar rubber,
copper.
 This arrangements only for those products which can be stored
at relatively low cost without the danger of deterioration & this
is one of the limitation of this agreement.
3.Bilateral Agreements: An agreement is entered
between major exporter and a major importer
of a commodity. Two kinds of prices called
upper price and lower price is fixed. When the
prices exists within this limit throughout the
period of agreement, the business is
inoperative.
3.Bilateral or Multilateral Contracts:
 Bilateral agreements may be formed as business or
personal agreements between individuals or companies.
They may also be formed between sovereign countries in
the form of trade agreements or agreements in other areas.
In either case, a bilateral agreement is a binding contract
between the two parties that have agreed to mutually
acceptable terms.
 International sale & purchase contracts may also be
entered into by two or more major exporters & importers.
 Bilateral contract to purchase & sell certain quantities of a
commodity at agreed prices.
 In this agreement, an upper price & a lower price are
specified.
 If the market price, throughout the period of
the agreement, remains within these specified
limits the agreement becomes inoperative.
 If the market price rises above the upper limit
specified, the exporter country is obliged to
sell to the importing country a certain specified
quantity of the upper price fixed by the
agreement.
 On the other hand, if the market price falls
below the lower limit specified, the importer is
obliged to purchase the contracted quantity at
the specified lower price.
If it raises than the upper price, then the
exporting country is expected to sell a
specified quantity at upper price fixed. On the
other hand, if price falls below the lower limit
specified, the importer is obliged to purchase
contracted quantity at fixed lower price.
Merit: Free market conditions are preserved.
Demerit: Creation of two price system.
 IMPERATIVE COMMODITY
AGREEMENTS
1. The International Cocoa Agreement
 In 2003, an agreement was made between the
seven main cocoa exporting countries,
Cameroon, Ivory Coast, Gabon, Ghana,
Malaysia, Nigeria and Togo, and the main
importing countries including the EU
members, Russia, and Switzerland.
 The main purpose of this agreement was to
promote the consumption and production of
cocoa on a global basis as well as stabilise
cocoa prices.
 International Coffee Agreement
 The International Coffee
Organization (ICO) is the
main inter-Governmental
organization for coffee in the
year 1962.
 ICO exporting members
account for more than 97%
of world coffee production,
and its importing members
are responsible for around
80% of world coffee
consumption.
 The main object is increasing world coffee
consumption through innovative market
development activities by means of
statistics and market study and also
promoting the improvement of coffee
quality.
 The United States led recent efforts to
renegotiate the ICA, and seventh
International Coffee Agreement (ICA 2007)
was adopted by the International Coffee
Council on September 28, 2007
 Features of new agreement is a first-ever
"Consultative Forum on Coffee Sector
Finance" to promote the development of
innovations and best practices that enables
coffee producers to better manage financial
aspects of the inherent volatility and risks
associated with evolving markets.

 Other features include strengthening efforts to

develop, review and implement capacity
building projects that are particularly
important to small-scale farmers in key
developing country trading partners.
International Tropical Timber Agreement
 The International Tropical Timber Agreement
(ITTA), established International Tropical
Timber Organization (ITTO), an inter-
governmental organization with 59 members,
with an objective of sustainable management
of tropical forests.
 The agreement was signed in the year 1994 and
it was re-negotiated in the year 2006 for
implementing better policies.
 ITTO promotes market transparency by
collecting, analyzing and disseminating data
on the production and trade of tropical timber.
 It facilitates intergovernmental consultation
and international co-operation on issues
relating to the trade and utilization of tropical
timber and the sustainable management of its
resource base.
International Sugar Agreement
 International commodity agreements, in their
modern form, may be dated from the Brussels
Sugar Convention (1902), the major
contemporary exporters of beet sugar
undertook to support the international market
by abandoning national systems of export
subsidies.
 Floor and ceiling prices were established and
enforced essentially by regulating the
permissible exports of member countries.
 Other Agreements
 International Natural Rubber
Agreement
 International Tin Agreement

 International Wheat
Agreement
 A case on The Organization of
Petroleum Exporting
Countries (OPEC) is also
notable.
 ADVANTAGES DISADVANTAGES
 Such agreements tend  Stabilization of the price
to be strongly favored paid for only a portion of
by the less developed world export sales trends.
countries as a means of  The price swings
“stabilizing” the foreign experienced by these
exchange commodities have by and
 A place for overseas large been reversible.
suppliers within the  The important virtue of
Common Market. taking into account
 Reduce the budgetary fluctuations in export
burden resulting from a volume rather than
combination of direct responding exclusively to
payments, unrestricted variations in commodity
domestic production. prices.
 CONCLUSION
This is to conclude that commodity agreement aims
in bringing stabilized price as allocator of resources
and indicator of trends. Although there are some
difficulties in terms of technology, it is manageable
to make agreements more effective. It is advisable
that the appropriate forms are combined to control
the losses and make the best use of the agreement
to become a self reliant and develop ourselves
rather than using a single technique.