Examination of the Effectiveness and Usefulness for Commodity-Dependent Countries of New Tools in Commodity Markets: Risk Management and Collateralized Finance

The paper begins by noting that in 1995, commodities accounted for 64 percent of the exports of Latin America and the Caribbean, 74 percent of the exports of Africa, and 39% of the exports of the countries of Central and Eastern Europe. Asia is the only region where most countries have successfully diversified away from commodities (whose share in total exports is 23 percent), but even here, the authors note, that some groups of countries remain highly commodity dependent.

As such, adverse prices, or adverse trading conditions, can have a major impact on most commodity-dependent countries. The authors argue, that modern market-based financial instruments, such as futures, options, swaps and various forms of collaterised finance, may not be the ideal solution to the problems caused by market instability, but no better alternatives are currently available.

The paper contends that modern market-based commodity trading instruments, such as price risk management tools and various sophisticated financing techniques, are not panaceas; in particular, they will not help much in stabilising world commodity markets – they just help entities to cope better with unstable markets. However, they can serve more modest goals, such as securing budgets, improving cash flow management, improving access to credit or reducing credit costs.

The paper aims to examine the usefulness and effectiveness of these instruments for mitigating risks and reducing transaction costs for important groups of actors – enterprises (irrespective of whether they are privately or publicly owned), farmers and Governments. The practical issues with which these often small actors are confronted when they wish to use these instruments are also examined in the paper.

The paper begins by discussing the usefulness and effectiveness of modern financial instruments for enterprises before looking at the importance of price risk management and access to affordable credit for farmers. It then considers government policy and price risk exposure.

  • Resource type
  • Author United Nations Conference on Trade and Development
  • Organisation
  • Year of Publication1998
  • Region
  • LanguageEnglish
  • Number of pages18 pp.

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