Managing Public Grain Reserves

Abstract

The paper draws heavily on my own personal experience in helping Asian countries stabilize their rice prices and contains more autobiographical material than is standard in order for the reader to understand the background. The experience is mainly based in Indonesia, which managed to stabilize rice prices for a quarter of a century, from 1973 to 1998, although I have followed closely the price stabilization activities of China, Vietnam, and the Philippines as well. The essay deals with both the “how” of stabilizing rice prices and the “why.” They are connected, and that is part of the story. There is also a theoretical part to the story, which is discussed briefly.

This chapter is based partly on my earlier work published as: preface to book “Managing food price instability in developing countries: A critical analysis of strategies and instruments (2013)” authored by Franck Galtier Cirad with the collaboration of Bruno Vindel, Agence Française de Développement.

Annex: An Annotated List of 13 Important Works that Form the Core Literature on Food Price Instability

Theodore W. Schultz. 1945. Agriculture in an Unstable Economy. McGraw-Hill, New York.

Although concern over unstable agricultural prices and incomes is centuries old—the English Corn Laws date to 1688 and were concerned with both—the first modern treatment of the causes and consequences of instability in agriculture dates to this volume by T. W. Schultz. He was emphatic in attributing much of the causation of unstable agricultural prices to macroeconomic instability rather than the peculiarities of individual crop supply and demand, a position that put Schultz at odds with much of the agricultural economics profession at the time. In his later volume, The Economic Organization of Agriculture, published in 1953, Schultz carried his perspective to its logical conclusion: “The instability of farm prices is an important economic problem. It is, however, exceedingly difficult to organize the economy so that farm prices will be on the one hand both flexible and free and on the other hand relatively stable.” Schultz resisted efforts to stabilize individual commodity prices from then on.

Newbery, David M. G., and Joseph E. Stiglitz. 1981. The Theory of Commodity Price Stabilization: A Study in the Economics of Risk. Clarendon Press, Oxford.

This volume had a sharp impact on the development community when it appeared three decades ago. One of the first major efforts to put development economics on a firm micro-foundation, it treated commodity price instability as a problem for households and firms, which needed to cope with the risk of price fluctuations. A dynamic optimization model that incorporated risk into household decision making was expanded to prove that international commodity agreements (ICAs) to stabilize prices on world markets could not work—eventually they would run out of funds to buy at low prices or commodities to inject into markets at high prices. The profession has taken to heart the key conclusion from this analysis: It is impossible in theory and in practice to stabilize commodity prices. Of course, this holds only globally, not for individual countries, and all the costs and benefits are micro-based. The costs to the macro-economy stemming from unstable commodity prices, and the benefits from stabilizing them, are dealt within the analysis only briefly at the end of the book. The authors acknowledge that the microanalysis provides an incomplete picture.

Timmer, C. Peter. 1989. “Food Price Policy: The Rationale for Government Intervention.” Food Policy, vol. 14, no. 1 (February 1989), pp. 17–27.

At one level, this paper is an attempt to confront the conclusions from Newbery and Stiglitz with the reality of successful food price stabilization efforts in a number of countries in Asia. The rationale for these stabilization programs is developed at length, with considerable attention to the macro-dimensions of food price instability, which rely heavily on signal extraction problems for investors. Without food stability at the macro-level in major urban markets—proxied in Asia by stable rice prices—countries have a very hard time lengthening investors’ time horizons to fit the needs of modern economic growth. Stable food prices speed up that growth.

Williams, Jeffrey C., and Brian D. Wright. 1991. Storage and Commodity Markets. Cambridge University Press, Cambridge, UK.

This volume builds on a half-century of work on the supply of storage as the basic analytical framework for understanding inter-temporal price formation. A unique feature of commodity storage—it cannot be negative—is used to build a dynamic model of commodity prices. The model is very successful in reproducing the common features of commodity prices, especially their tendency to be low and stable for long periods of time, and then subjected to sharp upward shocks. This volume remains the basic reference on how storage affects price formation.

Timmer, C. Peter. 1995. “Getting Agriculture Moving: Do Markets Provide the Right Signals?” Food Policy, vol. 20, no. 5 (October), pp. 455–72.

This paper appeared in a special issue of food policy that honored Art Mosher and his insights on how to “get agriculture moving.” One of the key questions in the agricultural development literature is the role of price incentives to stimulate adoption of new technology. The basic argument in this paper is that prices on world markets for the key food staples—rice, wheat, and maize—often do not reflect either their long-run scarcity value with respect to investments in agricultural development or their potential to create added value in the form of rural incomes, thus faster poverty reduction. Donors should not use short-run prices in world markets to judge the impact of their investments in agricultural research and infrastructure, but should look at long-run trends and the feedback from current investment decisions to future food abundance and scarcity.

Timmer, C. Peter. 2000. “The Macro Dimensions of Food Security: Economic Growth, Equitable Distribution, and Food Price Stability.” Food Policy, vol. 25, no. 4 (August), pp. 283–295.

This paper demonstrates the interactions among the rate of economic growth, of who participates in that growth, and the level of food prices, as they affect the numbers of people counted as “food insecure.” The basic methodology follows from earlier work by Reutlinger and Selowsky, but introduces food price instability as an important causal factor changing the level of food security. An important conclusion is that stable food prices make the achievement of “macro”-food security much easier, and “pro-poor” growth makes “micro”-food security feasible. In combination, a rapid escape from poverty and hunger is possible.

World Bank. 2005. Managing Food Price Risks and Instability in an Environment of Market Liberalization. Agriculture and Rural Development Department Report No. 32727-GLB. Washington, DC.

Many of the papers in this volume also appeared in a special issue of food policy edited by Derek Byerlee, Thom S. Jayne, and Robert J. Myers that appeared in May 2006. The volume was the result of a free-ranging conference arranged by the World Bank, but this summary reflects a clear neoclassical approach that allows unrestricted price formation with follow-up activities to protect food consumption of the poor if prices suddenly spike. Producers are urged to use modern financial derivatives to hedge their risks from price volatility, whereas poor consumers will need to rely on government-sponsored safety nets when food prices spike. This “Washington Consensus” view of how to deal with food price instability has been challenged by the food crises in 2008 and 2011.

Rashid, Shahidur, Ashok Gulati and Ralph Cummings, Jr., eds. 2008. From Parastatals to Private Trade: Lessons from Asian Agriculture. Johns Hopkins University Press for the International Food Policy Research Institute. Baltimore, MD.

This volume makes the case that food price stabilization implemented via parastatals was necessary and effective for Asian countries to introduce green revolution technologies to smallholders in the context of poor marketing infrastructure. However, as infrastructure and private marketing capacity have developed rapidly, and food parastatals have been subjected to gross mismanagement and corruption, the time has come to turn most of food marketing in Asia over to the private trade. The editors/authors are especially knowledgeable about India.

Abbott, Philip C., Christopher Hurt, and Wallace E. Tyner. 2008. “What’s Driving Food Prices?” (also supplements in 2009 and 2011). Farm Foundation Issue Report (FFIR), Oak Brook, IL.

This was among the first scholarly efforts to understand what was driving the food price crisis in 2008 and has been the standard since. The update for 2011 argues that the drivers are somewhat different than in 2008, when exchange rate movements received a great deal of attention. In 2011, the authors place most of the blame on US and EU biofuel policies and on the Chinese decision to build substantial stocks of soybeans even as the world price was rising. They are increasingly nervous that demand growth for food will outstrip growth in production, with continuing high and unstable prices.

Timmer, C. Peter. 2010. “Reflections on Food Crises Past.” Food Policy. Vol. 35, no. 1, pp. 1–11.

Similarities and differences between the rice price crisis in 1972/73 and the one in 2007/08 are analyzed, especially from the perspective that long-run cycles in funding for agricultural research and infrastructure are the basic cause of periodic food crises. The changes in political economy of responses to spikes in rice prices between the two episodes are dramatic and are determined largely by how well-insulated domestic consumers were from world markets. Case studies of Indonesia, India, and Thailand also show a significant difference in policy response in the face of democratic pressures, which were present only in India in 1972/73, but were a force in all three countries in 2007/08.

Dawe, David, ed. 2010. The Rice Crisis: Markets, Policies and Food Security. London and Washington, DC: Earthscan.

This volume grows out of an FAO-sponsored conference early in 2009 to examine what went wrong with the world rice market. It pulls together a number of country studies as well as several analyses of how the world rice market functioned in 2007/08. The Dawe and Slayton chapter in particular analyzes the role of Japan and its WTO stocks of rice in pricking the speculative bubble in world prices that had formed as a result of panicked buying by the Philippines and widespread hoarding at all levels of the rice system—hoarding that was caused by the expectation of higher prices themselves. The need for more open-trade policies, and larger rice reserves as a way to build confidence in such trade, is stressed in the conclusion.

Gilbert, Christopher L. and C. Wyn Morgan. 2010. “Food Price Volatility.” Philosophical Transactions of the Royal Society, No. 365, pp. 2023–34.

This commissioned review of the literature on food price volatility provides a very careful and sober assessment of recent claims that price volatility is increasing (the evidence is not in, but volatility in the 1970s was as great as now). Gilbert has done much of the high-quality analysis of commodity price trends and variations over the past two decades, and this article summarizes his findings very effectively. Evidence is provided that financial speculation did increase volatility of food prices in 2011, but not as much as in energy and mineral markets. The paper makes a clear case for why the world rice market is quite different from the markets for wheat, maize, and soybeans.

Naylor, Rosamond L., and Walter P. Falcon. 2010. “Food Security in an Era of Economic Volatility.” Population and Development Review, Vol. 36, no. 4, pp. 693–723.

This paper summarizes results from a major research program at Stanford on food security and the environment. It clarifies the debate over how to measure food price volatility and how those measures have changed over time, for the key food staples (and petroleum). The impact of food price volatility on the rural poor is examined in depth, perhaps for the first time. Concerns are raised about the restrictions on trade, especially the widening of FOB-CIF price bands for important food importing countries, that seem to represent a structural shift after 2008.

Source: C. Peter Timmer, “Managing Price Volatility I: Approaches at the global, national and household levels.” In Frontiers in Food Policy: Perspectives on sub-Saharan Africa, edited by Walter P. Falcon and Rosamond L. Naylor (2014). Center on Food Security and the Environment, Stanford University, pp. 407–437.