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Commodity Price Volatility

Tackling the price volatility problem

Commodity price volatility has been tremendously problematic in the past. When revenues are high they tend to distort fiscal responsibility and encourage corruption. When revenues slump they slash government revenues, drive unemployment, increase national debt, and undermine health and education spending.

This is not a new problem. The international community and domestic governments have tried many different ways to stabilize prices: quota systems, commodity agreements, marketing boards, compensatory funds and price hedging on futures markets. Few, if any, of these mechanisms have been entirely successful.

Stung by failure and imbued with free-market ideology, the international community has largely rejected the idea of price stabilization. But, rather inconveniently, the problem hasn't gone away.

IISD believes the time is right to revisit the topic of commodity income stabilization for developing countries and producers. By "income stabilization" we mean more than just price stabilization—we are interested in the various tools and mechanisms that can help countries and producers generate more stable, more predictable revenues—which, after all, are a necessary foundation for economic growth, sustainable development and diversification.

Where to Read More...

Commentary

• From Feast to Famine: After seven (relatively) good years, what now for commodity producers in the developing world?
  (PDF - 200 kb)
  In this December 2008 IISD Commentary, Program Manager Oli Brown ponders the fate of commodity producers in the developing world in the wake of the commodity price bubble bursting.

Thematic Paper

• Boom or Bust: How commodity price volatility impedes poverty reduction, and what to do about it.
  English (PDF - 6.8 mb) - Français (PDF - 6.6 mb) - Español (PDF - 6.4 mb) » Oli Brown, Alec Crawford, Jason Gibson, 2008 Commodity price volatility is a serious issue, but not a hopeless one. The basic economic tools necessary to help commodity producers get more predictable incomes are well-known and better understood than ever before. This publication synthesizes a sizeable body of work to investigate the experience, problems and promise of five different types of economic tools: supply management, national revenue management, market-based price risk management, compensatory finance and alternative trade initiatives.
  
  For a hardcopy version, please contact Oli Brown at obrown@iisd.org.
  
  A PowerPoint presentation of the book's key findings can be accessed here (PPT - 2 mb).
  
  

Background Papers

• Boom or Bust: Developing countries' rough ride on the commodity price rollercoaster (PDF - 432 kb) » Oli Brown, Jason Gibson, 2006 Commodity prices, at historic highs by mid-2006, are becoming increasingly volatile. Volatile prices complicate fiscal and environmental planning and undermine the livelihoods of millions of producers in the developing world. Are commodity-dependent countries prepared should the price bubble burst? This paper describes the impacts of commodity price volatility and argues for new measures to stabilize commodity revenues for countries as well as producers.

• Good Times on the Commodity Price Rollercoaster: But how long can they last? (PDF - 230 kb) » Oli Brown, Jason Gibson, August 2006 Commodity prices are at historic highs but are commodity-dependent countries prepared should the bubble burst? Oli Brown and Jason Gibson explore the social and environmental impacts of commodity price volatility, calling for renewed efforts toward revenue stabilization.

Policy Options

• Supply Management: Options for commodity income stabilization (PDF - 243 kb)
  » Tom Lines, May 2007 The first in a set of five reports on ways to tackle the commodity price problem, this paper investigates the role of supply management in smoothing commodity export incomes.

• Market-based price risk management: An exploration of commodity income stabilization options for coffee farmers
  (PDF - 319 kb)
  » Lamon Rutten and Frida Youssef, July 2007 The second in a set of five reports on ways to tackle the commodity price problem, this paper examines the effectiveness of market-based risk instruments as a way of stabilizing commodity incomes.

• Alternative trade initiatives and income predictability: Theory and evidence from the coffee sector (PDF - 314 kb)
  » Jason Potts, July 2007 The third in a set of five reports on ways to tackle the commodity price problem, this paper examines the effectiveness of private sector sustainability standards such as the organic and fair trade movements in the coffee sector as ways to provide coffee farmers with more predictable and stable incomes.

• National Revenue Funds: Their efficacy for fiscal stability and intergenerational equity (PDF - 416 kb)
  » Samuel G Asfaha, August 2007 The fourth in a set of five reports on ways to tackle the commodity price problem, this paper examines the use of national revenue management mechanisms for promoting revenue stabilization and intergenerational equity.

• Compensatory Finance: options for tackling the commodity price problem (PDF - 192 kb) » Adrian Hewitt, November 2007 The last in a set of five reports on ways to tackle the commodity price problem, this paper examines the effectiveness of compensatory financing mechanisms, such as the EU's STABEX instrument, as ways of smoothing revenues for commodity-dependent developing countries.

Case Studies

• Consistently Inconsistent: Addressing income volatility among cocoa producers in Ghana and Côte d'Ivoire (PDF - 458 kb)
  » Jason Gibson, May 2007 The first in a series of seven case studies examining national responses to the commodity price problem, this paper focuses on how Ghana and Côte d’Ivoire have addressed price volatility in the cocoa sector.

• Commodity Revenue Management: Coffee and Cotton in Uganda (PDF - 409 kb)
  » Moses Masiga and Alice Ruhweza, May 2007 The second in a series of seven case studies examining national responses to the commodity price problem, this comparative study focuses on how Uganda has addressed price volatility in its coffee and cotton sectors.

• Tobacco Revenue Management: Malawi case study (PDF - 420 kb)
  » Nelson Nsiku and Willings Botha, June 2007 The third in a series of seven case studies examining national responses to the commodity price problem, this study focuses on how Malawi has addressed price volatility in its tobacco sector.

• Commodity Revenue Management: India's rapeseed/mustard oil sector (PDF - 279 kb)
  » N.C. Pahariya and Chandan Mukherjee, June 2007 The fourth in a set of seven case studies examining national responses to the commodity price problem, this study looks at how India has addressed volatility in its rapeseed/mustard oil sector.

• Commodity Income Management: Selected Southeast Asian Economies (PDF - 207 kb)
  » Hank Lim and Lim Tai Wei, May 2007 The fifth in a set of seven case studies examining national responses to the commodity price problem, this paper looks at how Malaysia and Viet Nam have addressed volatility in their palm oil and coffee sectors, respectively.

• Commodity Revenue Management: The Case of Chile's Copper Boom (PDF - 399 kb)
  » Alejandra Ruiz-Dana, July 2007 The sixth in a series of seven case studies examining national responses to the commodity price problem, this paper looks at how Chile has addressed price volatility in its copper sector.

• Price Volatility in the Cotton Yarn Industry: Lessons from India (PDF - 313 kb)
  » Vijaya Switha Grandhi and Alec Crawford, November 2007 The last in the series of seven case studies examining national responses to the commodity price problem, this paper looks at how India has addressed cotton yarn price volatility in the handloom sector.

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