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Price stabilization, international trade and national cereal stocks: world price shocks and policy response in South Asia

Abstract

The sharp rise in international cereal prices in 2007 and 2008 had a profound impact on food security at national levels for net importing countries, sharply raising the cost of imports. Domestic trade policies and government market interventions in a set of South Asian countries have been critical, however, in determining the effects of the international price shocks on domestic markets. While these price shocks are a sober reminder that reliance on international markets will not guarantee price stability, it is important that governments do not over-react to recent events and adopt policies that ultimately result in large costs in terms of slower economic growth and less poverty reduction. Instead, national policies should involve some combination of (1) national stocks to prevent very large price increases, (2) reliance on international trade to limit the need for government interventions in most years, (3) promotion of domestic production through investments in irrigation, research and extension that is economically efficient when evaluated at medium-term border prices, and (4) targeted (ideally cash-based) safety net programs to address the food security needs of poor households. The appropriate design and implementation of these broad food policy guidelines will necessarily vary according to individual country conditions; the need to avoid government interventions that ultimately have very high costs is universal.

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Notes

  1. 1.

    For reviews of policies in other parts of the world, see World Bank (2006b), Jayne et al. (2006), Dorosh (2008) and Rashid et al. (2008).

  2. 2.

    For example, the total budget share for rice and wheat in Bangladesh was 42% (Bangladesh Bureau of Statistics, 2000).

  3. 3.

    Food stamp programs that entitle holders to purchase a range of private market commodities through private shops (where the private shop is then reimbursed by the government) and direct cash transfers are other common alternative means of subsidizing household consumption.

  4. 4.

    For example, estimates from Bangladesh for 2000/01 (Dorosh et al. 2004) suggest that storage losses for rice were only about Tk 0.26/kg ($4.80/ton at 2000/01 exchange rates), of which the value of losses in quality were estimated at Tk 1.73/kg ($32.10/ton). Assuming that as much as 20% of total marketing and establishment costs of Tk 2.00/kg ($37.1/ton) were costs of storage (interest, warehousing and management), then the total cost of holding stocks was about 2.4 Tk/kg ($44.3/ton). Only in years when import parity prices are in excess of target domestic prices by more than about $44/ton, would it be less costly in economic terms for government to have held stocks for a year rather than to simply subsidize commercial imports.

  5. 5.

    For example, Goletti et al. (1991) and Goletti (2000) emphasized the importance of clarifying the major objectives of holding stocks in Bangladesh (e.g. price stabilization or working stocks for the public distribution) and that lowest costs for the PFDS could be achieved by holding rice stocks mainly for rice price stabilization and lower cost wheat for public distribution system.

  6. 6.

    Maize prices began to increase substantially in 2006, more than a year before substantial price increases for wheat (driven largely by poor harvests).

  7. 7.

    The average procurement for wheat masks wide variations in procurement. From 2000 to 2006, Bangladesh procured almost no wheat from domestic markets.

  8. 8.

    India’s stock to distribution ratio (0.74 for wheat and rice combined) was nearly three times higher than Pakistan’s (0.27) highlighting the India’s excessive stock levels in the 2001 to 2003 period. For 2003–2004 to 2006–2007 India’s stock to distribution ratio was only 45 percent (more than double that of Pakistan (20%) in this period.

  9. 9.

    Concerns with the unreliability of world markets date back at least to the mid-1960s when political considerations reduced U.S. food aid deliveries to India (del Ninno et al. 2007).

  10. 10.

    Most of the benefits of procurement policies accrue to farmers in the few states in which procurement is highly concentrated: Punjab, Haryana and Uttar Pradesh for wheat, and Punjab, Haryana and Andhra Pradesh for rice (World Bank 2004).

  11. 11.

    Government of India (2008), India Economic Survey, 2007–2008, pp. 177.

  12. 12.

    Figures on India’s total non-basmati rice exports in 2007–2008 are unavailable, though Bangladesh import data suggest the total was at least 1.8 million tons.

  13. 13.

    In 2007/2008, the total economic cost of rice was 13.71 Rs/kg (weighted average of common grade and fine varieties) and 15.73 Rs/kg for wheat, far above the respective Above Poverty Line (APL) prices of wheat (Rs 6.10/kg) and common grade rice (Rs 7.95/kg). Thus, sales at the APL price resulted in subsidies of about 61% for wheat and 42 percent for rice; (subsidies for Below Poverty Line and other distribution programs were much larger). The Government of India does not publish data on the cost of stock-holding, however.

  14. 14.

    In all, 2.4 million tons of rice were imported by the private sector from India, most of this by truck after the 1998 floods.

  15. 15.

    Following the 1998 flood, the Government of Bangladesh explored the possibility of drawing grain from the regional stock of the South Asian Association for Regional Cooperation (SAARC). Ultimately, however, this option was not taken because the price at which India’s rice stocks were offered exceeded India’s open market price at which the Bangladesh private sector was importing rice.

  16. 16.

    Figure 5 shows three different import parity prices based on alternative sources of supply (rice priced at India’s Below Poverty Line sales price, rice in the wholesale market in Delhi, and rice exported from Bangkok). In general, in any given period, only the lowest of these prices is relevant for the private trade, which seeks the lowest cost source of supply. However, in 2007 and 2008 when India banned private market exports, neither the import parity from BPL sources nor that from wholesale markets in Delhi resulted in actual trade to Bangladesh.

  17. 17.

    The above calculation assumes an own-price elasticity of demand of rice of about −0.2, similar to earlier analysis of rice demand in Bangladesh following the 1998 flood (Dorosh 2001).

  18. 18.

    If stabilizing rice market prices had diminished the increase in private stock demand, the size of the net injections required would have been correspondingly less.

  19. 19.

    See World Bank (2007) and Dorosh and Salam (2008) for a more in-depth discussion of the political economy of government interventions in the Pakistan wheat market, including restrictions on inter-provincial wheat flows in 2004 (which were subsequently lifted).

  20. 20.

    These calculations are base on an own-price elasticity of demand in the range of −0.3 to −0.5. For further discussion of the impacts of wheat flour exports to Afghanistan on Pakistan’s prices, see Dorosh and Salam (2008).

  21. 21.

    Although the border between Afghanistan and Pakistan is highly porous in terms of movements of small amounts of goods and people, shipment of the hundreds of thousands of tons of grain required to significantly offset the 1.5 million ton production shortfall is not possible on mountain paths and small roads.

  22. 22.

    Transport costs to Kabul in 2005 were estimated at about $20/ton (Chabot and Dorosh 2007). Total milling, transport and marketing cost from wholesale grain Lahore to retail flour Kabul averaged $50/ton (July 2006 to June 2007).

  23. 23.

    Note that poppy cultivation takes up only about 1% of cultivated land, so that the tradeoff of wheat versus poppy is not in terms of competition for land, but competition for labor, since poppy is a very labor intensive crop. See World Bank (2006a).

  24. 24.

    Futures contracts, especially for wheat and maize, can be used to reduce uncertainty regarding the price of potential grain imports. To date, most governments have been reluctant to use futures contracts in part because they essentially function as an insurance policy, with no “payoff” in years when there is no need for imports or when international market prices are below the contracted forward delivery price.

  25. 25.

    Basic inventory control models with exogenous prices or more complex dynamic programming models with endogenous market demand and prices exist to calculate optimal stock levels and price stabilization strategies (e.g. Goletti 2000); these provide guidance in setting the overall policy framework (e.g. international trade combined with national stocks is a more effective strategy than pure self-reliance), but in practice, actual decisions regarding monthly or annual stocks typically are based on less formal analysis.

  26. 26.

    In the mid-1980s, in order to finance the costs of holding a rice buffer stock as total imports (and therefore sales and financial earnings) declined, Indonesia included an explicit line item in the budget.

  27. 27.

    According to the regulations of the SAARC Food Security Reserve, established November 4, 1987, each member was entitled to draw on the foodgrain reserves in an emergency. However, the price and other conditions of repayment were not specified beforehand, but were to be “the subject of direct negotiations between the member countries concerned”. (Article IV.3.). (SAARC 1987). Steps to modify the system and create a SAARC Regional Food Bank began at the 12th SAARC Summit in 2004, and a formal document endorsed at the 14th summit in 2006. Although the document was scheduled to be ratified by July 2007, only four countries had ratified the document by July 2008 and the SAARC Regional Food Bank was still not in place at the end of 2008.

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Dorosh, P.A. Price stabilization, international trade and national cereal stocks: world price shocks and policy response in South Asia. Food Sec. 1, 137–149 (2009). https://doi.org/10.1007/s12571-009-0013-3

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Keywords

  • International trade
  • National food security stocks
  • Food policy
  • Price stabilization