e-mail: david.vanzetti@elspl.com.au website www.elspl.com.au

(C14) Vanzetti, D. (1998) 'Global stocks, price instability and food security'. Report no. 95, Statens Jordbrugs- og Fiskeriøkonomiske Institut, Copenhagen, Denmark.

Global grain stocks in 1995/96 reached levels commonly associated with an impending crisis. Prices of some grains doubled within twelve months, although fell back to trend more quickly than anticipated. These events followed the completion of the Uruguay Round agreement and other policy measures aimed at liberalising agricultural trade, resulting in a reduction in government-held stocks but a limited increase in privately held stocks. Are attempts to liberalise world trade progressing too quickly, placing at risk global food security? Or is the decline in stocks merely a long-delayed rationalisation of inappropriate and expensive agricultural support policies?

At a time of transition from managed markets to an open global economy, the role of governments in stockholding and its contribution to price stability and food security is under scrutiny. The presence of market failure justifies some role for government, but not to the extent seen in the past. The phasing out of policies that insulate domestic markets from world prices, changes in transport and communications, the globalisation of new financial markets and changes in the location of production and consumption of cereals affect the linkages between stocks, prices and food security. These linkages are explored in this paper with the aid of a stochastic, dynamic, ten-region partial equilibrium trade model of the world wheat market.

Simulations indicate that governments have been effective in increasing global wheat stocks and reducing world price variability. The removal of government involvement in the storage of wheat stocks in all countries would lead to a doubling of world price variability but relatively little compensating increase in stocks held by the profit-driven private sector. Linking domestic and global markets is, however, a better way of providing stability. This is shown in the attached chart, provided by the Danish Institute for Agricultural and Fisheries Economics (SJFI in Danish). It shows the coeficient of variation of world wheat prices under various scenarios. The first simulation is the baseline, showing price variability in the absence of any policy change. Converting wheat trade barriers to tariffs, while maintaining the high levels of support to wheat producers, may well reduce world price instability by half. Complete trade liberalisation coupled with zero public stocks is estimated to leave price stability unchanged while reducing storage costs substantially. Estimates indicate that consumers would be prepared to pay $1 or $2 per tonne to avoid the current levels of price instability.

More complete implementing the existing Uruguay Round Agreement would lead to greater stability and pave the way for reduced government involvement in stockholding. This would have only relatively few impacts on food security in developing countries, which is more a matter of distribution rather than global production and storage. Infrastructure developments, aimed at readily deploying available global stocks in times of need, could do much to assist food importing developing countries. Governments in these countries can target food security concerns directly by improving the purchasing power of poorer sections of the community in times of need and in the longer term. The expensive storage of grain by developed or developing country governments is unlikely to be the best method of achieving this.

Link to SJFI.

The simulation model WHEATSIM can be downloaded from here as a zip file (304Kb). The model can be modified and alternative policy options simulated. It requires Excel to run. Download