Magazine article Modern Trader

Cartels: Price Stability or Fair-Weather Support?

Magazine article Modern Trader

Cartels: Price Stability or Fair-Weather Support?

Article excerpt

Barely heard amid recent drug summit fanfare was Columbian President Virgilio Barco urging U.S. President George Bush to help revive the International Coffee Agreement. Barco's may be a forlorn hope.

As Stephen Platt, a Dean Witter senior analyst, says, "The success of commodity agreements is not good "

Of the active cartels, only the Organization of Petroleum Exporting Countries (OPEC) has had consistent price support success.

"The oil agreement prevents wide price fluctuations, narrows the range and volatility of the market," says Nauman Barakat of Shearson Lehman Hutton.

The only other groups left are the International Sugar Organization (ISO), the International Coffee Organization (ICO) and the International Cocoa Organization (ICCO).

The ISO gave up price management in 1968. The ICO and the ICCO have made on-again, off-again efforts for years. Now it's "off " for both.

Recent bargaining failures by ICO and ICCO members raise questions: * Is the price control function of cartels realistic? * Does it matter to traders that the cartels even exist? * Might other approaches do more?

Each cartel uses a different control device. OPEC members negotiate production quotas. The ICO uses a system of export quotas in which the cartel issues stamps to exporting countries and each importer is supposed to monitor compliance.

In the ICCO's buffer stock arrangement, the buffer stock manager, funded by member nations, buys cocoa as prices dip below agreed levels.

Methods differ, but the idea is the same. By regulating the flow of goods to market, the cartel supports prices. At least that's the theory.

In practice, their success is spotty-. Nations outside the agreement are 21 problem. Worse, recent ICCO talks failed to generate payments to the buffer stock fund. The last buffer stock purchase was in February 1988.

The breakdown of the coffee agreement is more complex. Among the major issues is the failure of the quotas to reflect changing demand.

Platt claims three major coffees vie for market share. African growers primarily produce "robusta." Most Brazilians grow "arabica." Columbia and other Central American nations produce "mild arabica." Consumer perceptions of the moment rank robustas lowest, while ranking fuller flavored, less bitter mild arabicas highest in quality.

Producers of the milder coffees want bigger quotas. Brazil, the largest producer, refuses to give up any of its quota. Negotiators, unable to overcome that standoff, suspended quotas altogether last July.

Commenting on the problematic nature of these agreements, Victor DeMayo, Coffee Sugar & Cocoa Exchange (CSCE) economist, says "commodity agreements work when the supply-demand balance is good, but if there's one problem, and most often it's on the supply side, prices go right through the quota limits."

In effect, that means agreements work best when the cartels need them least. If supply and demand balance, prices behave well for both sides. When they really need controls, the agreements tend not to work.

The most basic problem, though, is supply and demand. Group politics notwithstanding, cocoa has been in surplus each of the last six years.

With fewer members (all of them producers), OPEC has the advantage of fewer opinions to reconcile. …

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