Forward Contracts or International Buffer Stocks? A Study of Their Relative Efficiencies in Stabilising Commodity Export Earnings

Abstract

The commodities 'debate' of the last decade has not been very successful in creating new international agreements, but it has led to many advances in the economic theory of stabilisation. The early work, such as that of Massell (I969), assumes that complete stabilisation of price is the objective and uses the Marshallian measures of surplus to suggest that producers would gain and consumers would lose from price-stability. The later work, such as that of Newbery and Stiglitz (I98I), assumes that complete stabilisation of prices is neither feasible nor desirable. They show that a reduction in the dispersion of prices is likely to leave producers with lower average earnings, while having little significant impact on consumers. The question from the producers' view-point is whether the risk-benefits are sufficient to offset this loss of earnings. An alternative to collective action by producers would be for each of them individually to make forward contracts. This strategy will tend to stabilise earnings mainly to the extent that the contract price fluctuates less from year to year than the actual or 'spot' price. Since forward prices are likely to be lower than eventual spot prices, such forward contracting also leads to lower average earnings.