Sunday, October 17, 2004

Commodity Futures Market for Vaccines?

I was reading Kevin Drum's article on the vaccine shortage, when a thought occurred to me.

The flu (and other diseases) are recurring costs that need to be hedged against medically. Right now scarcity is not tied to price increases. If a commodity futures market existed for vaccines, vaccine producers could lock in prices ahead of time - a key feature necessary to vaccine production - and could therefore guarentee profits to production schedule commitments. Others would be willing to do this, in order to speculate against the future demand in vaccines.

For instance, a commodity trader thinks that the future price of vaccines is under-priced. So he offers a futures contract to buy an order of 2005 general flu season vaccine. Chiron (assuming it's relicensed)then sells a contract to produce so many batches of vaccine at that fixed contract price. When the 2005 flu season rolls around, Chiron get's paid its fixed sell contract price but if the demand is higher than anticipated and the price goes up then the trader pockets the difference.

This is a time honored, time tested, and if well regulated successful way of moving capital into the hands of commodity producers while insuring producer income against future risk.

It may sound odd to propose a vaccine commodities market, but the alternative is a public health subsidy. We need those vaccine and it is on a statistical scale literally a question of life or death, even if actuarial tables will be needed to be consulted to discern it. We can either put into place a system that locks in producer prices and guarentees them capital and income, or we can make vaccine production a non-profit regulated production for public health consumption.

They only other option is to put up with occasional shortages and chronic market limitations- and people dying when they shouldn't. I'm sure that HMO's and insurance coverage people would start bidding against a vaccine commodity market if it were available to ensure supply and lock in costs.

And six billion while pocket change compared to the overall drug market is sufficiently large (but not too large) to start a commodity futures trading market.

Hmmm ... maybe I should read some more about NASDAQ and NASD and talk to some people who know how it started up.


At October 17, 2004 at 1:46 PM, Blogger Tater said...

What would be wrong with the public health, non-profit approach? As we're seeing, ultimately people do treat it as a government responsibility. Your idea does sound like a decent possibility, but I'm just curious as to what advantages you see it as having over the tax-paid approach.

At October 17, 2004 at 2:13 PM, Blogger Oldman said...

Nothing. I would fully expect a tax-subsidized non-profit approach to work in Canada or Sweden or any number of countries. However in the US we face two problems A) corruption in government procurements and special interest industry lobbying B) very soon our government will be broke.

Neither of these are generally as true of Canada or Sweden. If we started up a "non-profit" approach here, the drug industry ala Halliburton would just get Congress to squeeze through some arcane legislation letting them milk the system. The other problem is that very soon we will have to cut to the bone to balance our budget. That won't happen for a few years, but when it happens ... there simply may not be public sector funding for anything but absolutely vital functions. Vaccines without a strong lobbying constituency would get cut right away.

The non-profit approach is frankly my first instinct but we have to live in the real world - and that world is here in the US summarized by an incredibly corrupt government. Creating a commodity market for vaccines would increase their price in some instances, lower it in others, but generally ensure private sector funding existed to supply this public health necessity.

At October 18, 2004 at 1:09 AM, Anonymous Anonymous said...

Is your idea that the existence of the ability to hedge pricing risk in a futures market encourage the entry of additional players in the vaccine production business?

At October 18, 2004 at 3:29 PM, Blogger Oldman said...


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