Collapsing Cartells

NEW YORK-One by one, international commodity price agreements have collapsed. In their absence, spot prices for cocoa, rubber, oil, soybeans, wheat and other commodities have sunk to a near record low, threatening many exporting countries and some companies with bankruptcy.

Industrialized importers on the whole have benefited from the sharp drop in commodity prices over the past twelve months. Cheaper oil alone is said to represent a $20 billion boost to the U.S. economy; all told, the United States may realize up to $40 billion in savings on energy, food, and raw material imports. It is in the Third World where the drop in commodity prices will have the most destructive effect. Recent commodity price declines represent a $65 billion transfer from the Third World to the West.

But, some economists are warning that the breakdown of commodity price agreements could create serious problems for importers as well, should global economic growth resume and current surplus stocks disappear. The United States could see the equivalent of the 1973 oil embargo replicated by a number of basic commodity exporters.

International commodity agreements have often been a double-edged sword. While they can serve to prevent prices from declining too rapidly, Western critics charge that fixed rates set at periodic meetings do not accurately reflect fluctuating market conditions.

Commodity pacts attempt to control prices by limiting production or by financing a buffer stock to stabilize the price when it approaches predetermined "floors" or "ceilings."

But the tremendous pressures exerted by declining demand, falling prices, over-production, and the conflicting interests of producers have destroyed commodity price agreements.

The collapse of the International Tin Council (ITC) agreement illustrates the internal and external pressures many commodity pacts face. The woes of the thirty-year-old ITC agreement are being closely watched by members of other accords.

Tin prices were easy to control in the early days of the pact when just four of the ITC members produced 80 percent of the world's tin. Over the years, however, the ITC position was undermined by weakening markets, competition from aluminum producers and the emergence of major tin producers who stayed outside the agreement.

In order to prop up tin prices on the international market, the ITC increased its buffer stock. But, the price remained low and the ITC ended up sitting on a surplus of 64,000 tons of tin with outstanding debts of $1.2 billion. In October, 1985, the ITC announced that its buffer stock fund had run out of money. The news sent shock waves through the world financial community and sparked a crisis that has yet to be resolved.

The cocoa and sugar agreements are two more pacts which have fallen apart under the strain of tough economic realities, albeit less dramatically.

The International Cocoa Organization (ICO) ran out of funds to finance its buffer stock in 1982 and currently has a surplus of 100,000 tons which it must hold until prices rise. The cocoa agreement, which was to expire in 1984, has been extended twice because members have been unable to agree on a new price.

Forecasts of a 60,000 ton surplus crop in 1986, an amount comparable to last year's surplus, is unwelcome news to cocoa producers, who have found the price of their product lagging as much as 30 percent below the official ICO supported floor of the agreement.

The sugar accord collapsed in 1984 after seven unsuccessful years of trying to stabilize prices. In part, the agreement failed because it did not include the European Economic Community (EEC), a major exporter which dumped so much sugar on the market that it drove the price far below the cost of production.

The failure of these international agreements may spell an end to international efforts to control commodity prices.

"Commodity agreements are becoming useless dinosaurs," said one U.S. trade representative. "They don't work and they are all in trouble."

Until recently, the U.S. government could afford to ignore price volatility in international commodity markets because the farm and mining industries employ less than 5 percent of the U.S. labor force and produce less than 6 percent of the GNP.

But the recent collapse of commodity price agreements has begun to take its toll on the U.S. economy in several sectors including agriculture, mining and energy production.

The most serious problems emerged following the rapid drop in spot oil prices over the past six months. Many banks, which made large loans at home and abroad based on high priced crude are now being forced to write off or reschedule major portions of their loan portfolios. Even banks with relatively low international and energy-related exposures could be hurt as companies dependent on the oil industry contract or as the so-called single "oil banks" seek emergency assistance from the Federal Deposit Insurance Corporation (FDIC).

Major banks in Texas, California, and New York already face serious problems because of their substantial energy related loan portfolios. Most of those loans were made to oil-exporting debtor countries whose ability to repay is now in question. Citibank has more than $4 billion in loans to Mexico and Venezuela-equal to more than half the bank's net worth. Manufacturers Hanover is even more exposed with $3 billion in loans to those two countries equal to that bank's total net worth. The Bank of America and Chase Manhattan are similarly exposed with $4 billion and $3 billion respectively in loans to Mexico and Venezuela.

More immediate problems are emerging closer to home in the oil-belt states-Louisiana, Oklahoma, Texas, and New Mexico. A study prepared for Sen. Lloyd Bentsen, D-Tex., forecast that his state alone could lose $30 billion in purchasing power and 250,000 jobs over the next three to five years if oil prices remain at or below $15 a barrel as predicted.

More ominous is the growing prospect of a default by a major oil-exporting debtor nation, which could create a chain reaction that would severely strain the U.S. banking system.

It is not surprising that the Reagan administration has gone to great lengths to bend the rules for the biggest oil exporting debtor, Mexico. With a total external debt of $96 billion, Mexico is indebted to the U.S. banks for some $32 billion. As oil prices have declined so has the country's ability to repay its debt. In early January, Washington agreed to help Mexico obtain the $4 billion it needed to maintain its debt interest payments for 1986. Within a month, as oil prices plunged, slashing Mexico's prospects for foreign exchange earnings, the amount needed soared to $7 billion. Some financial analysts now say it could exceed $10 billion. But, this is still only a small fraction of the sum that the banking system would need to remain solvent if Mexico actually defaulted on its foreign loans.

While the drop in oil prices has renewed concerns about international debt repayments, the chief domestic impact of lower commodity prices has been felt in agriculture. U.S. farmers have been suffering their worst depression in over 50 years, despite upwards of $17 billion annually in price supports.

Of last year's 120 FDIC-insured failures, 62 involved farm banks. Moreover, while farm banks made up only 28 percent of all FDIC-insured banks, they constitute 40 percent of the nation's 1208 "problem" banks. The full impact of dropping commodity prices on domestic bank loan portfolios has yet to emerge. "It will be several months before the effects of the most recent declines in oil prices will be evident," said one FDIC spokesperson. "The number of adversely affected farm banks is much larger. There are no prospects for an immediate turnaround in the agriculture sector."

Nevertheless, the FDIC has focused its attention on the 500 energy-industry driven banks centered in the Southwest as well as the Midwest where it expects the number of problem banks to increase for the remainder of 1986 and into 1987.

Many foreign observers have been puzzled by the U.S. government's treatment of its domestic casualties of commodity price declines. They see that treatment, at least in the agricultural sector, as cruelly short-sighted-refusing to impose a moratorium on farm debts that would enable family farmers to stay in business until prices rise again. Supplier countries are also puzzled by the degree to which American commodity producers have been unable to make common cause with their foreign counterparts. Copper producers in America, for example, have made no moves to coordinate production and price policies with fellow producers in Australia, Chile, Peru and Zaire.

Similarly, domestic oil producers have made no firm resolve to stabilize prices. Their leading political advocate, Vice-President George Bush, was publicly rebuked by the Reagan administration when he attempted to discuss the price decline and price volatility during a trip to Saudi Arabia earlier this year.

Most U.S. commodity producers have decided to go it alone, gambling that a short-term turn around will yield greater profits. Without effective commodity price agreements, however, long-term security may prove elusive.

The U.N. Attempts to Shore Up Commodity Prices Ironically, even as major tin and oil price agreements were collapsing, organizers of the U.N. sponsored Common Fund for Commodities (CFC) were moving closer to making the fund operational. The Commodity Fund was set up in 1980 to build buffer stocks and price stabilization schemes for key commodities with financing from both developing and developed countries. The 1980 agreement will become effective after ratification by at least 90 states and after two-thirds of the Commodity Fund's $470 million capital pool has been assembled. Already 91 countries have signed the agreement-although the U.S., Japan, and the U.S.S.R. are conspicuously absent. But, funding still remains short of the required two-thirds threshold, so far only $280 million has been collected. Not surprisingly, the most outspoken critics of the Commodity Fund, as well as other price stabilization schemes, have been the industrialized nations. They charge that these pricing schemes are attempts to rig prices at artificially high levels, which invites countries and companies to break rules to increase their market share. But, according to Leong Khee Seong, Malaysia's Minister of Primary Industries, "With structural surpluses in world markets, traditional approaches have proved ineffective. If we return to the totally free market, some of us cannot survive." Other Third World political leaders have long pointed out that U.S. free market policies are not as pure as they seem. The U.S. government provides massive subsidies for various domestically produced commodities, goods, and services. Farm price supports alone exceeded $17 billion last year. Critics claim that the Commodity Fund may be "an idea whose time is long gone" because of dramatic shifts in consumption and changes in price levels. The Fund was first unveiled at the U.N. Conference on Trade and Development (UNCTAD) meeting in Nairobi in 1976. Participants at that meeting had proposed a $6 billion fund, which would also promote the New International Economic Order, long advocated by the Third World. Despite widespread verbal support for the Commodity Fund, from both developing and developed countries-signatories from the West include Canada, France, and England--current market conditions will probably make it difficult to put any price stabilization plan into effect in the near future. - Josh Martin