Lukas Kornher and Matthias Kalkuhl Center for Development Research, Bonn ZEF-IFPRI Volatility Workshop, Bonn 8th July 2014
Background and motivation After global food crisis in 2007/2008 - discussion on how to prevent renewed crisis through food reserves (von Braun and Torero, 2009; Sarris et al., 2011) Number of countries (plan to) introduce/ expand public stockholding and market intervention (Ghana, Ethiopia, Guatemala) after 2008 Proposal for West African food reserve among ECOWAS countries with support from G20 Why stocks? Import dependency creates reliance on free markets (vs. ad-hoc trade policies; e.g. during global food crisis) Additional imports need time for shipping (appr. 30 days to West Africa)
Food reserves - overview In classical storage model: optimal stocks increase with production variability (Gustafson, 1958; Williams and Wright, 1991) Risk pooling - regional stocks as an insurance against production shocks General observations: Importance of clear release rule International commodity agreements became popular after WWII - UNCTAD focus on tropical commodity - existing regional reserves: ASEAN+3 and SAARC (seldom intervention) Concentration on one or two major commodities Physical plus financial reserve
Institutional environment in West Africa UEMAO and ECOWAS are among most advanced political and economical organizations (free trade, common external tariff) High import dependency in the region for rice
Contribution of this study Quantification costs and benefits of regional cooperation Provide a simple framework that is easily applicable to different regions No complex modeling of behavioral responses of the private sector (e.g. crowding out) Focus on consumption stabilization Simulate stock levels for West African countries under different storage rules
Fixed reserve e.g. emergency or virtual reserve Allow deviation from expected production by certain % Required stocks are the difference between largest historic shortfall and %-threshold S = (1 %/100)E[Q t ] Q t if min [ Q t E[Q ] t]
Fixed reserve Source: Own elaboration based on FAOSTAT. 7 production shortfall of more than 5% since 1980 Allowing for 5% production shortfall required stocks are 73,686mt 73,686mt = 5.96% of 2012 production Source: Own elaboration based on FAOSTAT. 8 production shortfall of more than 5% since 1980 Allowing for 5% production shortfall required stocks are 258,757mt 258,757mt = 9.4% of 2012 production
Fixed reserve Source: Own elaboration based on FAOSTAT. 7 production shortfall of more than 5% since 1980 if countries had cooperated Allowing for 5% production shortfall required stocks are 294,735mt compared to a combined total of 332,443mt 294,735mt = 7.8% of 2012 production In order to be pareto-improving both countries must not stock more than in isolation
Figure: CV of cereal production instability in the region Source: Authors computation based on FAOSTAT. 1/n (Qt E[Q CV = t]) 2 µ with E[Q t ]: HP trend value CV 2 ( Q i ) = s 2 i CV2 (Q i ) + 2 s i s j r ij CV(Q i )CV(Q j )
Fixed reserve - results Table: Results for allowed production shortfall of 5% per capita cereal % share in regional production no. of required stock-to-use country production in 2012 production 2010-2012 variability shortfalls stocks ratio Benin 127.7 3.8 7.6 7 73,686 0.07 Burkina Faso 214.9 11.8 11.8 10 447,650 0.13 Cameroon 94.8 8.1 6.2 5 132,269 0.06 Cape Verde 24.2 0.0 52.9 15 5,693 0.09 Chad 138.6 6.4 21.3 13 756,897 0.40 Cote d Ivoire 71.7 3.4 3.9 2 58,845 0.03 Gambia, the 111.3 0.6 19.9 10 56,712 0.17 Ghana 83.2 7.3 10.2 8 258,757 0.11 Guinea 166.7 6.7 2.8 0 0 0.00 Guinea-Bissau 117.2 0.5 9.1 9 16,148 0.08 Liberia 53.2 0.5 11.7 10 18,130 0.04 Mali 227.3 15.6 10.2 11 247,780 0.08 Mauritania 53.6 0.5 19.6 11 24,555 0.04 Niger 262.4 13.1 15.0 9 431,413 0.13 Nigeria 158.6 63.1 6.9 4 2,836,943 0.12 Senegal 116.3 3.7 21.4 14 435,668 0.20 Sierra Leone 97.8 2.4 13.5 9 63,088 0.08 Togo 141.5 2.8 6.3 7 38,316 0.07 Σ - 100 - - 5,902,550 0.12 Region 147.0-5.6 5 3,091,356 0.06 Public stocks as of 2013 227,000 planned in 2020 841,000 Regional reserve 411,000
Fixed reserve Figure: Correlation of production shocks in the region
Fixed reserve Figure: % of reduction of production variability from country s joining the reserve union
Linear stocking rule C t = Q t + S t with S t = S t 1 S t S t 1 = α(s t + Q t ) 1 Define desired level of consumption variability (CV) - e.g. 5% 2 Calculate optimal α using production variability (CV) - e.g. 7% 1 α CV(C t ) = 1 + α CV(Q t) α = 0.32 3 Compute required stocks level: S = αe[qt] (1 α) E.g. E[Q t ] = 3,000,000 mt S = 1,410,000 mt
Summary: Benefits Regional stockholding reduces the level of required stocks massively Joint variability of production is lower than individual variability (even if production is positively correlated) (Koester, 1986) BUT: required stocks automatically reduce by adding more and more countries ( world-wide reserve) BUT: stock levels should be interpreted cautiously NO trade NO private storage NO transportation costs
Costs of economic integration It is not possible to implement country-specific policies contingent on countries preferences (Ruta, 2005) Heterogenous preferences with respect to the level of consumption stabilization reduce welfare Cost of joining regional stockholding regime is the difference in preferences α i α median (Alesina et al., 2005) e.g. Guinea and Cote d Ivoire have no interest to join at 5 % Preferences are not observable but approximable
Existing reserve and buffer scheme in the region Ghana (both buffer and reserve) since 2009-70,000 mt Mali (both buffer and reserve) Burkina Faso (both buffer and reserve) Nigeria (strategic reserve only) - 150,000 mt Mauritania (strategic reserve only) Niger (strategic reserve only) Chad (strategic reserve only) Source: Own research.
Stock to use ratio and propensity to store Source: FAO Giews. Source: FAO Giews. Note: Importing countries have low levels of production. Production variability seems to play a role for level of stocks Suprisingly!? countries with food reserves have lower stocks
Summary: Costs Production variability largely differs among West African countries (Sahel vs. coastal) Stock data suggests heterogeneity of preferences with respect to consumption stability BUT: It is key to include countries with low instability
Conclusion and next steps Large benefits from risk sharing in form of storage cooperation Costs of economic integration are difficult to quantify Importance to clearly discuss individual contributions and releases to/from the reserve Discuss distribution channels in case of emergency Next steps: Rule for contribution to regional reserve - introduce costs of joining a union Price analysis: where do domestic price shocks come frome? SVAR - international vs. regional vs. national component
Thank you very much for your attention! Comments? Questions? Suggestions? For more information: lukas.kornher@uni-bonn.de http://www.zef.de/volatility.html Financial support of the Federal Ministry of Development and Economic Cooperation (BMZ) is gratefully acknowledged. Special thanks to GIEWS in FAO for helpful comments and provision of data.
In steady state Q t = E[Q] + ɛ (1) C t = Q t + S t with S t = S t 1 S t (2) S t 1 = α(s t + Q t ) (3) S t = α(s t + Q t ) S t (4) = (α 1)S t + αq t (5) C t = Q t αq t + (1 α)s t (6) = (1 α)q t + (1 α)s t (7) (8) E[S t 1 ] = α(e[s t ] + E[Q t ]) (9) E[S t 1 ] = E[S t ] = S (10) S = αe[q t] (1 α) (11)
Var(C t ) = (E[C t ] C t ) 2 (12) = (1 α) 2 [Var(S t + Q t )] (13) = (1 α) 2 [Var(S t ) + Var(Q t ) + 2Cov](S t + Q t ) (14) Q t i.i.d. and S t depends on Q t 1 only Cov(S t + Q t ) = 0 Var(S t ) = = (1 α) 2 [α 2 Var(S t 1 ) + (1 + α 2 )Var(Q t )] (15)! = (1 α) 2 [Var(S t ) + Var(Q t )] (16) α 2 (1 α 2 ) Var(Q t) (17) (18)
Var(S t ) = α 2 (1 α 2 ) Var(Q t) (19) α 2 Var(C t ) = (1 α) 2 [ (1 α 2 ) Var(Q t) + Var(Q t )] (20) = 1 α (1 + α) Var(Q t) (21) Var(Q t ) = 1/n (E[Q t ] Q t ) 2 (22) E[Q t ] : Trendvalue from HP-filter (23)
Alesina, A., Angeloni, I., and Etro, F. (2005). International unions. American Economic Review, 95(3):602 615. Gustafson, R. L. (1958). Carryover levels for grains: A method for determining amounts that are optimal under specified conditions. Technical bulletin, United States Department of Agriculture. Koester, U. (1986). Regional cooperation to improve food security in southern and eastern african countries. Research Report 53, International Food Policy Research Institute (IFPRI), Washington, D.C. Ruta, M. (2005). Economic theories of political (dis)integration. Journal of Economic Surveys, 19(1):1 21. Sarris, A., Conforti, P., and Prakash, A. (2011). The use of organized commodity markets to manage food import price instability and risk. Agricultural Economics, 42(1):47 64. von Braun, J. and Torero, M. (2009). Implementing physical and virtual food reserves to protect the poor and prevent market failure. IFPRI Policy Brief 10, International Food Policy Research Institute (IFPRI), Washington D.C. Williams, J. C. and Wright, B. D. (1991). Storage and Commodity Markets. Cambridge University Press, Cambridge, 1st edition.