Grain Expectations

Grain reserves can be key in muting food price shocks and stabilizing food markets, but managing them is complicated. How can policymakers use grain reserves to insure against risk—without busting their budgets?

At its core, the idea of a strategic grain reserve is simple. Droughts, floods, failed harvests, global market volatility, and other factors can reduce food production and push food prices higher than poor people in some countries can afford. When a country’s domestic markets are poorly connected and when transportation and communications infrastructure is weak—as in many developing countries—it is particularly hard for a country to absorb price shocks. The result can be acute food insecurity or, in extreme cases, famine. By maintaining an emergency stock of grain and making it available during times of crisis, a government can help protect national food security.

The idea may be simple, but the execution is not, says IFPRI Senior Research Fellow Shahidur Rashid, who studies grain reserves in Africa and Asia. Under the right conditions, strategic grain reserves can prevent widespread hunger and even save lives. However, if not managed properly, grain reserves can “become expensive, breed corruption, and be dictated by special interests,” says Rashid.

Costly and Complicated

Holding strategic grain reserves is not cheap. According to Rashid, the cost of holding and transporting a sufficient stock can range from US$35 to US$40 a ton. These costs alone can put pressure on a developing country’s budget. In India, the net cost of emergency stocks increased tenfold—from US$160 million to US$1.6 billion—between 1992 and 2002. Similarly, Pakistan’s bills for its grain reserves fluctuated between US$49 million and US$245 million from 1990 to 2003.

Beyond the cost, managing a grain reserve is a complex logistical operation that requires multiple public organizations to work together effectively—“always very difficult,” says Rashid. Creating and managing a reserve involves purchasing the grain, building and maintaining storage facilities, transporting the grain to and from storage facilities, rotating the stock, and deciding when and at what price to release the grain.

Determining the optimal stock level is one of the greatest challenges. If a reserve is too large, not only will the government’s subsidy bills go up, but also the release of the stock will depress market prices and destroy private traders’ incentives to participate in the market. If it is too small, the government will fail to address emergencies and stabilize prices. The political risks of such a situation can be high: witness the food riots in several developing countries during the 2007–08 global food price hike.

Without strict and transparent management, strategic grain reserves, particularly large ones, may open the door to corruption. In a 2007 study of grain-marketing parastatal companies, Rashid and his coauthors found that Indian politicians and farmers in regions that produced surpluses of wheat and rice exerted significant influence in determining government support prices between 1996 and 2001. During this period, government support prices for wheat rose 25 percent faster than wholesale prices, and support prices for rice rose 10 percent faster. By lobbying for these high, guaranteed prices, politicians in surplus regions could bring in higher tax revenues, ensure happy constituents (especially if they were large-scale farmers), and improve their chances of re-election.

Stocking Up Right

Despite the complexity of operating grain reserves, most countries have such stockpiles. One country that has largely managed to sidestep the pitfalls in the past couple of decades, says Rashid, is Ethiopia. Created in the 1980s, the country’s Emergency Food Security Reserve Administration (EFSRA) has a transparent institutional design that minimizes the risk of mismanagement and corruption. All withdrawals from the reserve are subject to strict rules. Well-established, reputable relief agencies, such as the World Food Programme, can borrow grain from the reserve’s inventory and must replace the grain within an agreed-upon timeframe. During large-scale humanitarian crises and times of widespread shortage, other food security programs, such as government social safety nets and price stabilization programs, can withdraw from the reserve.

Two other important features have contributed to the success of Ethiopia’s grain reserve, according to Rashid’s 2011 discussion paper, Strategic Grain Reserves in Ethiopia. First, Ethiopia has kept stock levels low. The guiding principle has been to keep a stock large enough to feed the country’s vulnerable population for three to four months. This policy has kept Ethiopia’s subsidy bills from mushrooming, ensured that private traders are not pushed out of the market, and maintained the quality of the stored grain (lower overall quantity eases the task of rotating old grain out of the stock).

Second, the strategic grain reserve is closely coordinated with the country’s safety net and emergency assistance program, which provides food transfers and cash transfers to vulnerable people. In recent years, as food prices have risen, recipients have begun to prefer food over cash transfers. As a consequence, withdrawals from the grain reserve have jumped. EFSRA’s close ties with the safety net program not only help poor people cope with sudden shocks, but also keep maintenance costs low and ensure that stocks are rotated regularly. And there is potential for more ties of this kind: Rashid points out that linking the reserve to school feeding programs would provide another important safety net.

For more information on this topic:
A compendium of recent thinking on grain reserves

A study linking regional trade and optimal food stocks in Bangladesh