IFPRI leads discussion on costs and benefits of public grain reserves

A handful of maize. Photo credit: N.Palmer/CIAT

Last Friday afternoon, about 20 colleagues from development partners, research organizations, and government ministries gathered at the IFPRI-Malawi office in Lilongwe to join an informal seminar, led by Dr. Nicholas Minot, Deputy Division Director of IFPRI’s Markets, Trade, and Institutions Division. The discussion, “Public grain reserves: International experience and lessons for Malawi,” explored the objectives and tradeoffs of creating public grain reserves and various policy options that affect their performance and cost.

Dr. Minot first provided an overview of the three objectives of public grain reserves. They can serve as a public food distribution network for chronically poor households, they can provide emergency relief assistance during times of crises, such as flooding or drought, and lastly, they can be used for food price stabilization to reduce risk to households and farmers. All of these objectives have their own associated costs and benefits. While using reserves for food distribution is a more traditional approach, its cost-effectiveness heavily depends on appropriate targeting. Using reserves for emergency relief depends on time available to obtain supplies (either from imports or other sources) as well as an understanding of distribution and coverage to be provided in emergency situations.

Minot then elaborated on the price stabilization objective, discussing price bands—mechanisms that seek to maintain a stable market price (usually for a storable staple commodity, such as maize) by setting a range within a floor and ceiling price limit. He explained that a band which is set too high runs the risk of accumulating surplus stocks, which can be costly, while a band that is too low may result in depletion of stock, as agents sell (to keep prices down) more than they buy the commodity.

Likewise, a price band which is too narrow means that the reserve is forced to intervene very often, buying and selling supply to keep prices within that band. Having a wider price band is less costly because it only requires minimal intervention, when the price hits extreme limits. Another option is a ‘moving’ band, which uses a rolling price average and adjusts accordingly to a mid-point.

Minot went on to explain the tradeoffs of each option, offering examples from the region before discussing possibilities within the Malawi context. In practice, public grain reserves tends to be managed by state-owned enterprises, and rarely follows consistent set rules on when to buy and sell supply. Rather than setting floor and ceiling prices in advance, the process is often ad hoc and interventions may only occur in times of crisis.

Minot summarized a few key lessons to prompt discussion. First, there is good rationale to maintain some reserve of maize in Malawi, as well as good evidence that Malawi can shift from direct in-kind aid to various cash assistance. Open trade borders (of imports and exports) will provide a naturally occurring no-cost price band, although a fairly wide one. Price stabilization tends to be relatively expensive. Lastly, evidence has shown that the benefits of price stabilization go mostly to larger commercial farms and enterprises, and not necessarily to poor households.

He ended on an optimistic note, outlining several ways to make price stabilization more market-friendly:

  • Encourage private sector storage and importation of grain
  • Promote the consumption of secondary staple crops, to reduce sole dependency and vulnerability on single crops.
  • Move towards a rule-based price band rather than ad-hoc, discretionary interventions.
  • Adopt a wide price band that only requires occasional intervention, as well as a market-based band which adjusts over time.
  • Promote more transparency on stock levels and predictability in procurement and sales.

 

Download the full presentation here. (PDF 340KB)