7:47 AM Feb 1, 1994

IMPROVING EFFICIENCY OF MARKETS

Geneva 31 Jan (Chakravarthi Raghavan) -- Factors affecting commodity markets and ways to reduce distortions as well as ways of improving the efficiency and use of existing mechanisms for management of risks due to commodity price fluctuations are among the issues to be considered at the second session of the UNCTAD Standing Committee on Commodities which began a week-long meeting here Monday.

The Committee elected Ricardo Melendez of Colombia as its chairman.

Also on the agenda are issues relating to compensatory financing of commodity-related export earnings shortfalls.

Another issue to be discussed at the Standing Committee relates to the idea of convening a World Conference on Commodities on which, UNCTAD-VIII has asked the UNCTAD Secretary-General to hold consultations with a view to the Trade and Development taking a decision and asking the UN General Assembly to convene such a conference.

Addressing the opening session, UNCTAD Secretary-General Kenneth Dadzie noted that the meeting was taking place at a time when developing countries have had only limited success in diversification and continued to experience large shortfalls in commodity export earnings.

The depressed prices on commodity markets, Dadzie stressed, were due to structural oversupply, dramatic expansion of mineral exports from eastern Europe, high-levels of producers support to several agricultural commodities in the industrialized world, the recession in industrialized countries and delays in setting up new export structures in developing countries which are undertaking structural reforms.

But an encouraging aspect was the continued producer-consumer cooperation in commodities as evidenced by the agreements last year on sugar and cocoa and last week's agreement on tropical timber.

The protocol amending and extending the International agreement on Olive Oil and Table Oils had been adopted while the international Copper Study group had also been established.

Preparations were also under way for the convening of the UN Conference for renegotiating the International Natural Rubber Agreement,

There was also growing interest now in international cooperation for supply rationalization, particularly in situations of structural oversupply. Consumers (who had been previously opposed) were now coming around to perceive the medium- and long-term dangers inherent in persistently depressed markets that cold lead to under-investment and future scarcity, Dadzie pointed out.

For their part, given the price elasticities of different commodities, the producers had also realized that they were often better off by selling less at a better price than more at a lower price.

While it was too early to judge the results of this new approach to supply rationalization, it was clear that such an approach would have to be accompanied by appropriate diversification of the economies of the producing countries.

This might be an area of further cooperation both among producers and between producers and consumers, in addition to enhanced support from the international community, the UNCTAD head added.

Speaking on his election, Melandez noted that the session was taking place in the context of the conclusion of the Uruguay Round of multilateral trade negotiations which sought to provide a legal framework for trade. The new rules, the Colombian delegate suggested, should help face, although timidly, protectionism and subsidization.

But the conclusion of the Uruguay Round, and the World Trade Organization to be created there, could not be seen as providing a solution to the commodity problems.

The narrow scope of the contractual multilateral trading system left out the main issues relating to commodities -- market transparency mechanisms; concentration of market operations; research and development of new varieties; horizontal and vertical diversification; and management of risk and fluctuation in commodity prices.

These issues could be internationally debated and solutions sought only within UNCTAD, Melandez noted.

The crisis in international commodity markets, he added, was such that the elementary economic function of price stimulating demand was "permanently frustrated and obstructed" in the case of many commodities like coffee, cocoa, bananas, sugar etc.

The Deputy to the UNCTAD Secretary-General and Director of the Commodities Division, Carlos Fortin, said that the agenda was comprehensive and the Standing Committee was called upon to promote sound, compatible and consistent policies at national and international levels.

An informal session on commodity exchanges is scheduled for Tuesday when a number of proposals in the report of an Expert Group on Commodity Exchanges (presented last September) are expected to be discussed.

The Expert Group, chaired by Peter Lai, had proposed actions that could be taken by commodity exchanges, governments, international organizations and others on improving the functioning of commodity markets. Five of the experts will be at the informal (private) sessions to explain and clarify some of their proposals.

The subjects to be covered include role of futures markets and speculative forces and useful role of speculators in future markets, the importance of futures markets in facilitating physical trade and the influence of large producing, consuming or trading firms on price formation processes in futures markets.

Other issues that the experts will cover include role of investment funds in futures markets, problems in developing successful and useful commodity contracts and risk management strategies.

The report of the expert group is before the Standing Committee.

Among others, the experts have recommended that all parties involved in a commodity -- including producers and consumers, traders, other intermediaries such as brokerage houses and banks, processors and non-trade related interests -- should be adequately represented on the governing body of the exchange trading a future contract for that commodity as well as on its advisory bodies. The governing body of such exchanges should also include members representing the general public.

Such changes could be achieved either by the governing body changing its statutes or by government legislation, the experts said.

The experts also noted that there had been attempts to manipulate futures markets and there was a problem about how such manipulation was perceived. While manipulation generally was not at a level to interfere with participation in the market by buyers and sellers, but on occasions manipulation had attempted to interfere with the orderly functioning of a contract.

To increase confidence of market users, the experts suggested that:

* exchanges reducing opportunities for manipulation by encouraging broader-based participation in trading of contracts and ensuring appropriate delivery conditions including warehouse locations;

* market users be assisted in devising trading strategies which include ways of minimizing injury from manipulation attempts;

* rules and regulations on manipulations should be well-defined, strong, fair and transparent:

* the rules under which an exchange handles manipulation attempts should identify clearly measures to be taken and these should be known to market users, and there should be widespread publicizing of information on regulatory safeguards and standards of market behaviour;

* the rules should ensure that members of exchange committees dealing with manipulation cases don't have a conflict of interest of any sort; and

* implementation of all rules concerning manipulation should be subject to close scrutiny by regulatory authorities.