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Export bans wreak havoc with commodity markets

These days, forecasting commodity prices has became a crap shoot, especially with foreign governments squirreling away stocks and implementing export bans to insure domestic supplies.

To the commodity markets, these policies are violent rip currents that take prices into uncharted waters. To export competitors, they can be like an all night party accompanied by a fearsome hangover the next morning. To end users, it can be like cutting off a jet engine in mid-flight to save fuel.

In any event, foreign government abuse of free trade principles is becoming more and more troublesome.

For example, there is India’s on again, off again export ban on cotton. When India placed an export ban on cotton in April 2010, it helped push cotton prices to historic levels. But those high prices eventually destroyed some global demand for cotton fiber, and resulted in significant declines in consumption. Not good.

A look at the Web site India’s Ministry of Commerce and Industry shows that export bans are standard operating procedure in the country. In the last couple of years, India has announced bans on rice, cotton, onions, wheat products and edible oils.

Other countries that abandon free trade include Thailand, which has implemented an intervention program for rice, which guarantees domestic farmers $10 a bushel plus for rice. Essentially, they buy rice from farmers and put it in storage. Short-term, this is friendly to the market. But long-term, it creates much more uncertainty – at some point, the stored rice will have to re-enter the market.

Even more troubling is Brazil’s PEP program, which is essentially an export subsidy of about $53 per ton for rice. Itprovides a minimum guaranteed price to producers and cooperatives by paying the difference between the minimum guaranteed price and the market price to purchasers in Brazil who agree to move the rice out of the area of production and/or to the export market. This subsidy program has already negatively impacted U.S. rice exports to Haiti.

The World Trade Organization should look into these intervention policies with the same enthusiasm with which it investigated U.S. cotton subsidies in 2005.  

TAGS: Cotton
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