||The term commodity (Latin, â€˜item of stockâ€™), in economics, usually refers to a raw material or primary product that is relatively homogeneous, and is traded on a free market. Examples are coffee, tin, sugar, wool, rubber, silver and cocoa. Commodities are bought and sold on a commodities exchange by dealers and commodity brokers or traders. The materials\' homogeneity, fast communications and an efficient system of quality grading and control mean that commodities can be traded without an actual transfer of the goods. Speculators, hedgers and traders buy and sell rights of ownership in spot or forward (also known as futures) markets.
Commodity prices swing more violently than prices of manufactured goods. A small surplus of supply over demand can cause a dramatic slump in prices; floods or frost, for example, in a producing country can send a crop price soaring.
Commodities can be crucial for the welfare of developing countries dependent on one or two exports for most of their foreign exchange earningsâ€”Zambia with copper, for instance, or Ivory Coast with coffee and cocoa. Consumers would prefer more stable prices, too. So two ways (both with faults) have been tried to stabilize commodity prices:
(1) International commodity agreements. These are agreements between producers and consumers which try to stabilize prices using buffer stocks and export or production quotas. They were in vogue in 1977 when the UN conference on trade and development (UNCTAD) recommended 18 commodities for agreements. But this plan got nowhere: the only agreements signed were for sugar, cocoa, tin, rubber and coffee. The trouble with the deal is that often the biggest producer or consumer does not join in. Also, when prices rise sharply, producers try to slide out of the agreement; when prices slump, consumers do likewise. No buffer stock has yet proved big enough to steady prices. The tin agreement, which managed to keep prices relatively stable over many years, collapsed spectacularly in 1986 when the buffer-stock manager ran out of money and the agreement\'s sponsoring governments refused to provide any more. Commodity agreements benefit established (often high cost) producers at the expense of expanding (lower-cost) producers.
(2) Long-term contracts. These offer producers stable prices, but are negotiated with an eye to market prices; the more long-term contracts there are, the more marginal (and erratic) spot prices become. This has happened in the sugar market.
These attempts to stabilize prices have not worked well especially because commodity prices in 1980-85 all slumped at the same time, so swamping the money available, for example, for buffer stocks. So the international monetary fund and European Economic Community have tried to stabilize producers\' export earnings too by compensatory financing making grants or loans to top up income. Here, too, the earnings slump in the early 1980s overstretched the cash on offer. TF