On 27 January 2017, Dr. Nicholas Minot, Deputy Division Director of IFPRI’s Markets, Trade, and Institutions Division led a seminar at IFPRI-Malawi on, “Public grain reserves: International experience and lessons for Malawi.” His presentation explored the objectives and tradeoffs of creating public grain reserves and various policy options that affect their performance and cost.

1. INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
Public grain reserves:
International experience
and lessons for Malawi
Nicholas Minot
International Food Policy Research Institute
IFPRI-Malawi, Lilongwe,
27 January 2017

2. 2
Outline
• Objectives of public grain reserves
• Current issues
• Public food distribution
• Emergency relief
• Price stabilization
• International experience
• Future directions
• Conclusions & lessons for Malawi

3.  Food and nutrition security: ensuring that all people at all times have
access to sufficient nutritious food for a healthy, active life
 Public reserves can promote FNS in three ways
• Reserves can supply food distribution network
 assistance to chronically poor households
• Reserves facilitate emergency relief
 assistance to temporarily poor household due to flooding,
drought, or other natural disaster
• Reserves can be used for food price stabilization
 reduce risk to households and farmers
Objectives of public grain reserves

4.  Capacity and stocks needed for public food
distribution depend on:
• Monthly quantity distributed (Q)
• Average time (months) in storage (T)
• Capacity requirement = 2QT (under certain conditions)
Current issues:
Public food distribution

5.  Traditional approach: procurement in surplus areas
or from imports, sell to consumers in urban areas
and sometimes rural areas at subsidized prices
 Cost-effectiveness as poverty reduction strategy
depends on targeting
 Studies show leakage to non-poor households is
common
 Shift from universal distribution to geographic
targeting to social safety net programs
Current issues:
Public food distribution

6.  Capacity and stocks needed for emergency relief depend on:
• Time needed to obtain supplies from imports or other
sources
• Distribution of emergency need within that time
• Percentage of emergencies to be fully covered
Current issues
Emergency relief

7.  Fuzzy boundary between emergency relief and price
stabilization, particularly if “emergency” defined
broadly
 Traditionally emergency relief in form of food (cereals,
vegetable oil, etc)
 Increasing use of cash assistance
• Cash assistance is cheaper for government & more
flexible for beneficiary
• Works well if shortages are local and market work well
• Food aid still needed if emergency is national or markets
don’t work
Current issues
Emergency relief

8.  Motivation for price stabilization
Current issues
Price stabilization
By comparison, for six Asian countries, the CV for rice prices
ranged from 12% in Bangladesh to 25% in the Philippines

9.  Benefits of price stabilization
• Importance to consumers depends on share of budget spent
on grains
• Importance to farmers depends on share of income from
grain sales
• Studies find benefits of price stabilization to be relatively
small (0-2% of income) but political pressure for stabilization
remains strong
 Costs of price stabilization to government
• Amortized cost of storage facilities
• Transport and handling
• Spoilage in storage
• Financial costs (buy now, sell later)
Current issues
Price stabilization

10.  If band is too high:
• Buying more than selling
• Accumulation of stocks
• Eventually exhaust
funding or storage
capacity
 If band is too low:
• Selling more than buying
• Depletion of stocks
• Eventually exhaust stocks
 One option: adjust mid-point using
rolling average (e.g. past 3 years)
0
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1 11 21 31 41 51 61 71 81 91
With buffer stock
Without buffer stock
0
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1 11 21 31 41 51 61 71 81 91
With buffer stock
Without buffer stock
Level of price band

11.  Wide band implies:
• Less price stabilization
• Less frequent
intervention
• Lower cost
 Narrow band implies:
• More price
stabilization
• More frequent
intervention
• Higher cost
Width of price band
0
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1 11 21 31 41 51 61 71 81 91
With buffer stock
Without buffer stock
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1 11 21 31 41 51 61 71 81 91
With buffer stock
Without buffer stock

12. 12
Benefits of price stabilization

13. Costs of price stabilization depend on details
0
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Price(US$/tonne)
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Cost(US$million/year)
CVofprice(%)
Price
volatility (CV)
Annual cost of
stabilization
Price ceiling
Price floor
For hypothetical
country producing 2 m
tonnes/year with high
volatility,
relationship between
width of band…
… and cost of price
stabilization for a
country producing 2
million tonnes per year
with high price
volatility

14. Public food reserves in practice
 Typically managed by state-owned enterprise
 Reserves in main staple cereal and 1-2 others
• Root crops and cooking bananas too perishable
 Food reserves in developing countries have multiple objectives
• Price stabilization, preparation for emergencies, support
farm price, keep down consumer prices, etc.
 Food reserves use different types of interventions
• Not just buying & selling, but import & export policy,
government imports and exports, regulations of grain
marketing
 Food reserves do not use consistent buy/sell rules
• Intervention depends on budget resources, politics, etc.

15. Discretionary Rule-based
Definition Decisions about buying and
selling are made based on
judgement based on a wide
range of factors
Decisions about buying and
selling are based on explicit
criteria using a small number of
quantifiable factors such as price
Factors
influencing
decision
Weather, harvest size, world
prices, stocks, availability of
funding, political pressure,
political debate, leadership
decisions
Usually just buying price and
selling price, though may be
adjusted occasionally
Predictability Less predictable Predictable based prices
Effect on
private
sector
Lower investment in storage
and transport capacity because
of uncertainty
Greater investment due to
predictability
Potential for
rent-seeking
Higher Lower
Buying and selling policies
Public food reserves in practice

16. International experience: Eastern and Southern Africa
Public food reserves in practice

17. Public food reserves in practice
Examples of minimal intervention
 Uganda
• Plan for Modernization of Agriculture says:
“The Government recognises that publicly held food reserves are
very expensive under the best of conditions and require careful
management to minimise losses due to spoilage. Such schemes have
had limited success in other countries, but have certainly exerted
substantial demands upon public funds. Therefore, government will
not adopt any policy to accumulate such stocks unless and until
careful studies in Uganda have determined their efficacy.”
 Mozambique
• No strategic grain reserve or price stabilization efforts
 Tanzania
• Has Strategic Grain Reserve but has been too small to affect prices
(purchases are about 1% of production)

18. Public food reserves in practice
Examples of more interventionist policies
 Ethiopia
• Ethiopia Grain Trading Enterprise (EGTE)
• Ad hoc intervention in maize & wheat markets
• In 2006-8, rising grain prices, surpassed import parity
 Inflation
 Harvest smaller than estimated
 No private imports because announced government imports and foreign exchange shortage
 Kenya
• National Cereals & Produce Board (NCPB)
• Successful in partial stabilization and raising maize prices
• Major price spike in 2009 caused by
 High import tariff (50%)
 No private imports because announced government imports
 When tariff lowered, congestion in transport routes
• Major corruption scandal
 Allocation of valuable import licenses
 Allocation of subsidized maize from NCPB

19.  1980s: maize marketing controlled by National Ag Marketing
Board (NAMBOARD), which set pan-territorial and pan-
seasonal prices and handled maize imports and distribution
 1989: NAMBOARD abolished and private trade legalized
 1996: Food Reserve Agency (FRA) formed to administer grain
reserve as buffer stock, private trade remains legal
 FRA procurement was small or zero over 1996 – 2001,
expanded since 2002, dominant buyer since 2005
 Other intervention: export bans, tariff rates, govt maize
imports
Public food reserves in practice
Zambia

20. Study by Mason and Myers (2013)
 Method: VAR time-series analysis of effect of FRA purchase
and sales on maize prices in Zambia over 1996-2008
 Results:
 FRA reduced CV of maize price by 17%
 FRA raised average price of maize by 10%
 Welfare effect of price increases much larger than welfare
impact of stabilization
 Benefits to large surplus farmers, losses to urban consumers
and small net-maize buyers in rural areas
Public food reserves in practice
Zambia

21. Public food reserves in practice
Malawi
• Agricultural Development & Marketing Corporation
(ADMARC) and Food Reserve Agency (FRA)
• Three price spikes since 2000
 Poor rainfall played a role but price spike exacerbated by:
 Lack of transparency about grain stock size
 Government announcements of imports, then delays
 Procurement for government export
• In spite of efforts to stabilize maize price, volatility
among the highest in sub-Saharan Africa
 Question is whether volatility is high in spite of stabilization
efforts or whether intervention may contribute to spikes

22. Maize prices in Malawi
Seasonal price index (1.0=average)
0.8
0.9
1.0
1.1
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M4 M5 M6 M7 M8 M9 M10 M11 M12 M1 M2 M3
2015 2016
SI_NOMINAL SI_REAL

23. Maize prices in Malawi
Admarc sales, retail maize and MFG prices, 2005-2016
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nominalMK/kg
Average National Retail Price
ADMARC Sales Price
MFG maize prices

24. Maize prices in Malawi
Domestic price and import & export parity over 2004-2016 in US$
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nominalUS$permetricton
Export parity (USD/mt) Import parity (USD/mt) Malawi domestic price (USD/mt)

25. 25
“Buffer stocks are notorious for being politicised, and
making variable pricing decisions depending on political
pressures. For this reason, it is argued that they need to
be recast as independent agencies or trusts, with a legal
status that enables them to operate free of political
interference…
maize policy in Malawi is understandably highly political,
and many decisions can only be understood in terms of
electoral cycles, promises made by political parties and
their leaders prior to gaining power, and the goal of
securing political support from important sectors of the
populace in the future.” (Manda, 2010)
Public food reserves in practice
Malawi
Role of political factors in public reserves

26.  With income growth:
• share of household expenditure allocated to food declines
(Engel’s Law)
• Share of food spending allocated to staples declines
(Bennett’s Law)
• Diet shifts away from staple grains and toward meat, fish,
dairy products, fruits & vegetables, and processed foods
 Implications for reserves: as importance of staples in diet
declines, need for grain price stabilization declines
Future directions

27.  With structural transformation of the economy
• Diversification in farm production into high-value commodities,
so that income from staple grains becomes less important.
• Reduction in incidence of poverty due to income growth
• Gradual long-term shift of poverty from rural to urban
• Growth in export value & foreign reserves relative to cost of
imported food, making food imports less of an economic burden
and macro-economic risk
 Implications for public grain reserves: Declining importance
Future directions

28.  With development of infrastructure and markets
• Need to deliver food in kind declines
• Cash assistance is less expensive to deliver and provides
more flexibility for beneficiary
• Cash creates demand, which will draw food supplies to
region if roads are passable and markets functioning
• WFP and several countries switching from in-kind assistance
to cash assistance
 Implications for public grain reserves: Declining need to
store grain for distribution
Future directions

29. Lessons for Malawi
 Consider shifting from direct in-kind food assistance to
cash-based assistance
• Could be provided on pilot basis to test effects
• Studies in other countries show cost savings and
satisfaction among beneficiaries with similar benefits
for food security
 Open borders provide no-cost “price band”
• Impeding imports has exacerbated price spike in
several cases

30. Lessons for Malawi
 Price stabilization is expensive
• Large procurement costs (US$ 20-100 m per year)
• Storage, handling, and overhead
• State enterprises cannot cover costs with stabilization efforts
 Aggregate benefits are small
• Most estimates 0 to 4% of farm income
 Benefits of price stabilization not pro-poor
• Most of benefits to larger commercial farmers, also urban poor
 Food price stabilization prone to “rent-seeking”
 Improve consistency and predictability in govt actions

31. Lessons for Malawi
 Promote private grain storage & imports
• Credit, non-intervention, & storage rental
 Promote consumption of secondary staple crops
• Cassava can act as shock absorber for grain markets
 Rationale for 3 months grain reserve
• To cover period until commercial imports can be arranged
 If price stabilization politically necessary
• Adopt rule-based price band
• Adopt wide & market based price band
• Adjust center of band periodically
• Provide transparency on stock levels and predictability
in procurement/sales activities