Agricultural futures markets in LDCs: a policy response to price volatility?

Abstract

Recent policy reform in LDCs has centred on liberalizing markets and removing state intervention. This is of great importance for exporters in these nations as they are becoming exposed to greater price risk. Given the prominent role played by primary commodities in the exports of LDCs it is of interest to see how producers in these markets respond to the new, more uncertain environment. Intervention is no longer feasible or desirable and thus market based measures and risk-management instruments are becoming more popular as a means of reducing risk. This paper discusses one such measure—futures markets—in the light of the possibility of their use in LDCs and explores some of the key issues surrounding the question of whether LDCs should establish new exchanges domestically or simply use existing (often DME) exchanges. To illustrate the effectiveness of futures markets, the paper provides a brief summary of recent attempts by producer nations to employ hedging to minimize price risk. Copyright © 1999 John Wiley & Sons, Ltd.