ABSTRACT
The main question of this chapter is: how does the current global commodity price setting mechanism based on derivative markets impact on the distribution of price risks in commodity chains? The analysis is based on four case studies of the coffee sector in Ethiopia and the cotton sector in Burkina Faso, Mozambique, and Tanzania. Coffee and cotton are the most important cash crops in SSA upon which millions of smallholder farmers and rural households depend for their livelihood. We assess how global and local institutional changes, particularly global liberalization and financialization and domestic market reform in producer countries, have affected price setting, transmission, and risks of different chain actors. In doing so, we connect global processes of liberalization and financialization to local outcomes in commodity producing countries and make inferences concerning the impact of these processes on the distribution of risks along commodity chains. The paper adds to resource fairness debates by focusing on commodity price risks and the role of financial markets in influencing distributional outcomes. In fairness debates there is often a focus on the real side of the economy, not taking into account the role of financial markets and actors which has become particularly important in the context of financialization. We show that international traders generally use global prices, arising from commodity derivative markets in particular, as their reference point in commodity trading. So export prices in producer countries are linked to futures prices that are set on increasingly financialized derivative markets with implications on volatility and short-termism. However, national price setting arrangements still vary with important implications for producer prices and distribution of risks between international traders, national intermediaries or processors, and producers. They range from atomistic competition where individual producers negotiate prices with intermediaries or international traders, market-based contract farming arrangements with some sort of pre-determined prices, and national commodity exchanges to fixed seasonal producer prices negotiated among associations. In these systems access to PRM tools also varies. However, national actors in producer countries generally do not use hedging as they cannot deal with the involved risks and costs – even more so in the context of financialization – which contrasts with large international and financially adept actors that can benefit from hedging and other financial trading strategies (Newman, 2009). We further argue that discussing commodity price setting and the distribution of price risk from a resource fairness perspective has to go beyond a focus on ensuring that prices are based on economic fundamentals (i.e. via reducing excess speculation) to questioning if markets and, in particular, derivative markets are a useful instrument to ensure the inclusion of economic and social criteria, including social costs, in price setting and risk distribution (see also the discussion on social costs in the chapter by Raza, in this volume). In this context, other factors such as distributional and
poverty impacts, which are not usually reflected in markets – even less so in the very short term functioning of derivative markets – have to be taken into account. Exposure to risk is a particularly important dimension of poverty. Poor households in developing countries are typically more exposed and vulnerable to risk. Further, agriculture – on which the majority of poor people depend – involves particularly high risks, such as bad weather conditions, pests, or effects of climate change. Hence, commodity price risks add to these vulnerabilities, particularly those of the weakest group in the chain, namely, smallholder farmers in developing countries. These distributional outcomes are highly related to questions of representation, that is, the extent to which the interests of different actors are taken into account in establishing and regulating the institutional architecture of price setting and hence which actors can influence rule setting (see also Raza, in this volume, and Pichler, in this volume). This chapter is based on trade, industry, and financial data and interviews with international commodity traders and financial investors conducted at commodity futures markets in New York and London and with local actors in the coffee and cotton commodity chain in Ethiopia, Burkina Faso, Mozambique and Tanzania. During fieldwork in the four SSA countries, semi-structured interviews were conducted with farmers’ organizations, processors, processors’ associations, relevant government institutions, and sector experts.1 The chapter starts with an analysis of global commodity markets with an emphasis on financialization dynamics followed by a discussion of price risks in global coffee and cotton commodity chains. The last section concludes at a conceptual and a policy level, focusing on implications for resource fairness and governance.
