Monday, April 30, 2012

Can storage help ensure food security?

Larson et al. argue that it can if the target is set high and reserves are adequate. Here is the abstract from their paper:

In times of highly volatile commodity markets, governments often try to protect their populations from rapidly-rising food prices, which can be particularly harsh for the poor. A potential solution for food-deficit countries is to hold strategic reserves, which can be called on when international prices spike. But how large should strategic stockpiles be? This paper develops a dynamic storage model for wheat in the Middle East and North Africa (MENA) region, where imported wheat dominates the average diet. The paper uses the model to analyze a strategy that sets aside wheat stockpiles, which can be used when needed to keep domestic prices below a targeted price. This paper shows that if the target is set high and reserves are adequate, the strategy can be effective and robust. Contrary to most interventions, strategic storage policies are counter-cyclical and, when the importing region is sufficiently large, a regional policy can smooth global prices. This paper shows that this is the case for the MENA region. Nevertheless, the policy is more costly than the pro-cyclical policy of a targeted intervention that directly offsets high prices with a subsidy similar to food stamps.

Meanwhile, Gouel and Sebastien recommend an activist policy to stabilize the impact of high food prices. They argue that the optimal trade policy for a single low-income country is to subsidize imports when domestic availability is low and tax exports when world prices are high, which will benefit consumers at the expense of producers, because it reduces the likelihood of high prices. Meanwhile, a pure storage policy might have an opposite effect: it raises the average domestic price because of the increased stock accumulation, and is detrimental to consumers. They argue that to protect consumers from food price volatility in an efficient way, storage policies need to be complemented by trade policies, which would provide some isolation from the world market.