Stabilizing World Prices

Even before the Organization of Petroleum Exporting Countries began jacking up oil prices in 1973, prices for other raw materials were breaking records. Spurred by shortages and rampant speculation in commodities markets, prices for such staples as copper, rubber, cocoa, coffee, platinum and cotton rose sharply; some had doubled or tripled by mid-1974. But after the oil crisis helped push the West into recession, commodities prices tumbled, in some cases to a third of what they had been at the peak. Copper, for example, rose nearly 300% in 17 months, peaking at $1.40 per Ib. a year ago; this month the price fell as low as 560. The roller-coaster performance took its toll on producers and consumers alike. The price upswing aggravated inflation in industrialized countries. The downturn sent shock waves through the nonindustrialized Third World nations, some of whom depend heavily on commodities production for income, and added to pressures for OPEC-style cartels for raw materials other than oil.

Last week, in a move to soften international criticism, the U.S. indicated willingness to abandon its longstanding opposition to agreements aimed at stabilizing commodity prices. In a Kansas City, Mo., speech, Secretary of State Henry Kissinger said: "We are prepared to discuss new arrangements in individual commodities on a case-by-case basis as circumstances warrant."

Kissinger intended to go much further. A supposedly final draft of his speech, circulated by the State Department to other Government agencies for review, called outright for sweeping agreements covering a broad range of raw materials. But other Administration officials, upset by so abrupt a departure from past insistence that market forces should determine prices, appealed to President Ford and got the "case-by-case" wording substituted.

Opening the Door. Even so, Kissinger's speech indicated that the U.S. will consider price-stabilizing deals in international commodity conferences scheduled for this summer and fall. A preparatory meeting for an international energy conference broke up in Paris last month after the U.S. resisted attempts by Algeria and other Third World nations to open the conference to discussions about raw materials in general, not just oil. Kissinger said last week that the U.S. was now prepared to reopen the talks, although he did not specify that materials should be included.

The U.S. has been opposed to price agreements on two grounds: 1) like cartels, they often aim to keep prices artificially high; 2) they do not work anyway--supply and demand reality has usually overwhelmed the terms of the deals. But two models do exist:

P:The tin agreement among 29 countries, which is managed by the London-based International Tin Council, consisting of producers and consumers. (The U.S. does not belong.) The council maintains the metal's price within a specified range, principally by selling from buffer stocks when demand is high and imposing export quotas to restrict production when prices are falling.

P: The Lome Convention (named for Togo's capital city, where the accord was signed) put into effect earlier this year by the European Economic Community and 46 nations, mostly former European colonies in Africa, covering twelve commodities. When export revenues fall below a reference point, the EEC makes compensating cash payments to commodity producers. When incomes rise above the reference point, the producers must reimburse the EEC.

How many more such agreements might be concluded remains to be seen. The Shah of Iran and many Third World leaders want to "index" raw-materials prices to rates of inflation in the West so that commodity prices will rise as much as the prices of manufactured goods. Kissinger flatly opposes that idea, contending that it would hurt the poorest, most populous nations, which import more raw materials than they export. It is doubtful too that the new U.S. willingness to consider stabilization agreements will diminish commodity producers' desire to form cartels that set prices arbitrarily. Nonetheless, international bodies such as the United Nations Conference on Trade and Development are opening a drive to counter price swings by stabilization agreements --and the timing is good. As world recession eases and industrial production returns toward normal, demand for commodities will rise again, threatening to push prices up once more.

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