Commodity cartels are a natural subject for financial market research, since effective syndicates set and control asset prices.
The Ivory Coast and Ghana’s formation of a cocoa price syndicate bucks a trend that has seen the breakdown of all bar one of the big commodity cartels launched in the last several decades.
A notable development in commodities markets since the turn of the millennium has been a weakening in the influence over the oil price wielded by the Organization of the Petroleum Exporting Countries (OPEC) – the sole survivor in a line of seven large commodity cartels launched between 1954 and 1980.
Historically, these cartels constituted a significant component of world supply and introduced both distortions and predictable patterns visible in price and volume data.
But while commodity cartels are no longer the force of old, they can never be entirely written off – as Ghana and the Ivory Coast’s announcement of a cartel in cocoa on July 19 showed. Commodities that have become more important recently, such as the ingredients in electric car batteries, would also appear be potential candidates for cartelisation. But the failures of many erstwhile commodity cartels show that mere survival is a tall order.
Cartel Tale Signs
In the period after World War II, commodity exporters formed various cartels to achieve high, stable prices. Through their use of export controls and buffer stock interventions, they had some success in elevating short-term prices as, for example, OPEC did during the 1970s. Generally, however, they failed meaningfully to reduce price volatility or improve their members’ terms of trade.
Of the seven most prominent cartels to emerge, only OPEC still functions as anything approaching an economic force. The others have either collapsed or no longer seek to control prices and are primarily concerned with monitoring. In the section that follows, we examine five triggers for a cartel’s fall.
Five Reasons for Failure
1. Insufficient Market Share
For a cartel to control price and output, it helps for production to be concentrated in just a few countries to enable effective coordination. A measure of a commodity’s suitability for cartelisation (and a cartel’s oligopolistic power) is provided by the four-country concentration ratio – the output of the top four producers as a share of world production. In addition to high levels of concentration, high barriers to market entry and a lack of product substitutes can increase a cartel’s staying power.
As shown below, none of the major cartelised commodities possessed all these characteristics during the 1970s heyday of cartels. Only three out of the seven commodities had a greater than 60% concentration ratio in 1974. As for barriers to entry, only tin enjoyed a strong moat in 1974. Oil and sugar, for example, saw a flood of new producers following the price hikes of the early 1970s, with the European Commission turning from the largest importer of sugar to the largest exporter within just a few years........MUCH MORE
We'll have more on cocoa next week, possibly the greatest (and funniest) tale of commodities ever written.
