market episodes highlight the need to reform the architecture of international financial and agricul- tural markets to address the problem of price spikes and protect the most needy and vulnerable. In response to the food price crises, a mix of
policy actions have been taken. Many countries have tried to build up costly national reserves, and others have focused on increasing self-sufficiency. Still others have lost confidence in the reliability of food trade in global markets, which has led some countries to acquire farmland overseas to ensure national food security. In addition, some countries are pressing for more regulation of commodity exchanges—however, whether this would pre- vent extreme price spikes or instead distort mar- kets even further is questioned. All of these policy actions threaten to move food and agriculture mar- kets further away from efficient arrangements. A more promising step may be regionally coordinated reserves, as recently planned by the Association of Southeast Asian Nations. Tis global problem needs international institutional responses. Te analysis here points to three clear messages.
First, we need to respond to the structural prob- lems faced by the agricultural sector—that is, the concentration of global exports of staple grains among just a few exporters, the low levels of global grain stocks, and the lack of appropriate informa- tion. Second, it is crucial to evaluate the effects of policies designed to promote biofuels and invest- ments in derivative markets, such as commodity futures, as well as the limited actions taken to cope with the risks of climate change, such as weather insurance. Finally, we will need to carefully moni- tor many current actions being taken to reduce the frequency of price spikes and excessive volatility to assess how cost-effectively they cope with the new developments in global food markets. ■
BOX 2 Rethinking the Role I
of Food Reserves Peter Timmer, Professor Emeritus, Harvard University
n 2011, the world again saw proof that large food reserves dampen the volatility of food prices, as large rice stocks in
India kept global rice prices from following wheat and maize prices to record high levels. Although they are costly to main- tain, larger food reserves provide supplies in times of crisis. More importantly, in vulnerable countries, reserves build confidence that trade remains the most efficient mechanism for stabilizing domestic food economies. Low levels of foodgrain reserves, on the other hand, make commodity markets nervous and subject to sudden demand and supply shocks—and even to speculative activities. Therefore, if less volatile food prices are desired, two questions remain: How large should grain reserves be? And who should own them? Private markets have a clear and coherent answer to the first
question, but only if governments stay out of the business of holding grain stocks. Long-standing models show that optimal storage levels exist when price expectations match the expected returns from holding grain in storage. Unfortunately, with regards to ownership, foodgrain stocks held in private hands are usually insufficient to provide a politically acceptable level of food security, especially in large countries. This typically results in governments stepping in to stabilize domestic food prices, using one of two basic methods: (1) imposing restrictions on food trade, which tends to increase price volatility in world mar- kets, or (2) enabling public ownership of food reserves, which can be expensive. The evidence supporting the need for large grain reserves
clearly exists, but collective action at the global level is not likely. Helping countries build up their own domestic reserves, how- ever, is possible. Larger reserves will help stabilize the global food economy and thus allow trade to play a larger (and less disruptive) role. If the international development community, in partnership with governments of large countries, wants a more stable global food economy, we need to change the long-run incentives for stockholding behavior and use increased stocks to build confidence in the role of the international market for foodgrains. Because holding larger stocks will turn out to be very expensive, a scenario can be imagined where the larger stocks are built gradually and steadily create renewed confidence in the world grain market as prices become more stable. Stocks will then be reduced (gradually) as the reality of the fiscal burden sinks in. What should remain is the renewed trust in trade and how it can help even large countries sustain their food security.
FOOD PRICES 23
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