The price volatility of agricultural commodities is at the heart of discussions on global food security, as reported by the recommendations of the G20 Agriculture Ministers Meeting held in Paris in June. In this context, we are bringing to your attention an article recently published by the Centre de Coopération Internationale en Recherche Agronomique pour le Développement (CIRAD), and are presenting here key excepts from the paper. Building on an analysis of policies recently implemented by several African countries to manage price instability, the authors bring to light a series of conditions required for the effectiveness of these measures. They must be based on solid grounding, be predictable to provide visibility to players––especially farmers––and their funding must be secured. The authors also underline that public/private partnerships are crucial to stabilize prices, particularly in terms of stocks management.
momagri Editorial Board
Protecting domestic markets
For the past few years and often in response to the 2007/08 turmoil, many developing countries have been strengthening their involvement to stabilize agricultural prices in domestic markets. The policies implemented are aiming to protect domestic markets from price fluctuations in the international market through a combination of border control measures and domestic market measures. They demonstrate the willingness to rehabilitate the role of the State in the regulation of agro-food markets, as well as a loss of confidence in the performance of international trade. […]
Nations have a broad range of measures at their disposal. Border control measures aim to adjust supply and demand in a country by monitoring importations and exportations––custom duties, importing or exporting licenses, public importations, and exportation restrictions. Domestic market measures are more directed at adjusting supply to demand over time, particularly through managing buffer stocks, to which subsidies or taxes on product or agricultural input prices can eventually be added.
To curb agricultural price instability in their markets, African nations combined border control measures with domestic market measures. How effectively? Even if not enough time has passed, some findings are developing from the recent experiments. The research involved five African countries––Madagascar and Mali for rice, and Kenya, Malawi and Zambia for corn. […]
What were the success or failure factors? Beyond the choice of a given measure, the decisive factors appear to be the conditions for its implementation.
Opting for measures based on national specificities
To be effective, each type of measure involves meeting four conditions that are more or less significant depending on the measure. Any intervention must be based on solid grounding, must be predictable, its funding must be secured and its implementation controlled.
Whichever measure is adopted, a good understanding of the situation and the mechanisms at work is required. In practice, access to sound expertise is a determining condition for the effectiveness of public intervention. Technical expertise is the base for negotiations, and guides decisions. What stock volumes are to be built up? At what time? At what price? What is the price level to trigger stock releases? What volumes to be imported? Exported? What level for custom duties? Detailed analyses on accurate data are required to anticipate needs, through early warning systems for instance. […]
State intervention must be publicized, so that private operators can plan accordingly and fine-tune their strategy knowingly.
This condition is necessary, regardless of the measure considered. To monitor importations, private importers must be able foresee the volumes imported by the State, the importation date and the amount of custom duties. As far as domestic market measures are concerned, traders must be able to anticipate the volumes to be released, the release date and the selling price. Without such data, private operators will tend to withdraw from the market. This is what is called a crowding-out effect. And such crowding-out effect can exacerbate price instability. For example, in Zambia in 2005 and in Kenya in 2008, some traders asked the State to abolish duties on imports when they observed an increase in domestic prices. The government agreed in principle, but did not give any implementation date. Waiting for the cancellation, traders postponed importations, which heightened the already soaring prices. […]
The State must be in a position to provide funding to finance the costs involved with public intervention. Such financing ability is crucial for costly measures. In 2005 and 2008 in Mali for instance, the budget earmarked for operating buffer stocks could not allow to provide them with their own working capital, and thus build up adequate volumes to contain soaring grain prices.
Conversely, in Zambia and Kenya, significant financial resources were allocated to buffer stocks and to corn price subsidies. In Zambia, the public budget earmarked for the domestic market amounted to four percent of the total 2007 national budget and was partly financed by mining revenues. […]
The State must be able to ensure that its intervention is effectively implemented and brought to fruition. This monitoring ability is crucial for border control measures. In 2005 in Mali, the government banned grain exports because the national production had been poor. The measure proved to be inefficient due to the difficulty to control borders––a condition all the more challenging because, as in many Sahelian nations, land borders are extensive. Monitoring ability is also required for domestic market inventions, in particular regarding grain consumption subsidies and managing production prices. For example, in 2001 in Zambia, the subsidies paid to traders were not passed on consumers, and thus were unable to curb soaring prices. […]
Public and private partnerships
Beyond searching for miracle cures, governments must make sure that measures can be effective in their specific country’s environment, at the risk of intensifying crises. They must therefore opt for measures based on their own institutional, geographic, social, political and economic environment. For instance, a nation with low revenues, without specific resources, or dependent on lenders of funds for running expenses, must ensure its funding ability before building up public buffer stocks. […]
The four identified conditions relate to the ability of countries to outline and implement policies and to gain players’ trust and esteem in public action. Combining these conditions is problematic in some developing countries because of their fragile institutions.
While the State must play a key role, it will not be able to stabilize agricultural prices in domestic markets by itself. Cooperation between public and private players is crucial for the success of stabilizing policies. Openings for coordination have shown their effectiveness in Madagascar. Public and private partnerships may be considered to manage stocks––cooperation for building-up and operating procedures, shared financing and contracting between State and private players for reserves. Cooperation between public and private operators is still in its infancy in developing countries and must be the subject of additional research. The apparent contradiction between the requirement for transparency on stock volumes to prevent food crises and pursuit of private interests should be particularly examined.