World Bank set to launch commodity hedging

Pete Harrison, Reuters, London

The World Bank plans to bring farmers and producers in developing countries closer to world financial markets with a derivatives trading system that would cushion them against volatile commodity prices.

Over the last few years a task force has road-tested the options trading system in Latin America, Africa and Asia.

"The final model will go before the main board of the World Bank very soon and I personally hope to see something functional on the ground during 2002," task force chairman Roy Leighton told Reuters on Friday.

Leighton said the system had the power to transform commodity markets and the development prospects of the developing world.

"We are on the verge of providing a modern equivalent of what negotiators failed to produce at Bretton Woods in 1944," he told London City University Biennial meeting on Thursday.

He was referring to the 1944 meeting near Mount Washington that spawned the World Bank, the International Monetary Fund and the World Trade Organization, but failed to reach agreement on a World Commodity Fund to help stabilize commodity markets.

"If it doesn't go before the World Bank board this month, then it should do in January or February," said Leighton.

The "Commodity Price Risk Insurance Program" would see cooperatives in developing nations buying options to sell their cash crops such as coffee at forward prices, locking in profitable prices.

Put options on a commodity grant the buyer the right but not the obligation to sell that commodity at a predetermined price over a set period of time, shielding producers from falling prices.

"I'm not suggesting farmers will be logging on from a mud hut to see the price of coffee in New York, but at least they can walk down the road to ask at their local cooperative," said Leighton.

He said local banks appeared happy to fund the option premium as it would secure reliable cash flows for the people they were lending to.

"They'd be turning a finance risk into a performance risk, and they can handle that," he said.

The system was road-tested on copper, coffee, cocoa, rubber and crude oil markets in Uganda, Tanzania, Mongolia, Thailand, El Salvador and Mexico.