Commodity agreements


Free access to the

FT-access-to-schools-logo(11)Sixth formers and their teachersnow get free access to the

To gain free access register your interest here.

Read more
Model agencies collude to fix rates

Regulators find leading model agencies guilty of price fixing.

Read more
Alternative finance

Report on the growth of alternative finance.

Read more

Commodity agreements

The market for commodities is particularly susceptible to sudden changes in the conditions of supply conditions, which are called supply shocks. Shocks such as bad weather, disease, and natural disasters are largely unpredictable, and cause commodity markets to become highly volatile. In comparison, markets for the final products derived from these commodities are much more stable.

As with petrol pump prices, the prices of finished goods rarely reflect changes in the prices of basic commodities from which they are derived. For example, cocoa and sugar prices fluctuate considerably as harvests vary from year to year, but the prices of confectionery rarely change from year to year. There are many reasons for this, including the following:

  1. The cost of the commodity input, such as cocoa, represents a small proportion of total costs of the final product, such as a bar of chocolate. The price of chocolate is largely determined by the refining, manufacturing, and packaging costs of the manufacturer, and the retailer’s costs including labour, rents and marketing costs.

  2. Indirect taxes, like VAT, often form a larger proportion of the price than commodity costs, and such indirect taxes tend to remain stable of time.

  3. The existence of stocks of commodities act as a buffer against sudden changes in commodity prices, so manufacturers will be using old stocks purchased at the old prices.

  4. Futures contracts help reduce some of the underlying volatility in commodity markets. In the case of cocoa, the large confectioners, such as Nestle and Cadbury-Schweppes, agree cocoa prices in advance by fixing contracts with suppliers, such as those based in the Ivory Coast and Ghana, the two largest cocoa exporters.

  5. Manufacturers and retailers may choose not to pass on cost changes following commodity price changes for a number of reasons, such as a preference for stable prices, or the need to remain price competitive.

Commodity agreements

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.

Example - 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, which had been falling steadily. The agreement was planned to continue until 2010, but in that year it was decided to extend the agreement for a further two years, until 2012. In 2012 the signatories decided on a further extension, until 2026.

Commodity agreements often involve intervention schemes, such as buffer stocks, and usually only last for a few years, whereupon they are re-negotiated. They differ from cartels such as OPEC, largely because discussions and negotiations involve both producer and consumer countries, unlike cartels, which are established to protect the interest of producers only.


Read more
GDP latest

UK grows by 0.1% in 1st quarter of 2018.

Read more
Customs unions

Costs and benefits of customs unions.

Read more
New materials

Multiple choice papers for Paper Three.

Read more
Brexit update

Article 50

What trading options are available to the UK?

Savings ratio

Savings ratio falls to lowest level on record.

Read more
Tax avoidance

Double Irish - and a Dutch Sandwich more..

The OECD presents its final package for reform of international tax rules..more

Get the Economics Online app