Milling & Baking News - September 21, 2010 - 40

Regulatory Affairs 

Food security: stocks, speculation
and sanctity of contract
BY ROBBIN JOHNSON

The Russian government's recent decision to embargo wheat exports has
put food security back on the agenda
of policymakers. The food situation
does not seem likely to deteriorate
into the volatility that characterized world markets in 2007-08, when
prices for food staples like wheat and
rice tripled. Prices, however, have not
fallen back to pre-2007 levels, nor has
the number of global hungry retreated
much from its post-2008 spike to 900
million. Consequently, the stress on
the world's poorest and hungriest
may be severe, even with smaller disturbances to global markets.
For this reason, debate is renewing over
what steps may be taken to reduce food insecurity. Three ideas deserve review. They are
global, virtual stocks,
and contract sanctity
(supplemented
with
purchasing-power aid).
Global stocks
The notion of food reserves reaches back to
biblical times, if not before. More recently, it was
the leading recommendation coming out of the First World
Food Conference in Rome in 1974, and it
resurfaces regularly when food supplies
tighten. Unfortunately, it poses several
insurmountable problems.
One involves who should accumulate
and release these stocks. No international agency has the credibility or the
resources to execute such a program.
Moreover, getting agreement on
when to accumulate and when to release stocks has proven elusive. Foodimport-dependent countries want
stocks released at low prices. Export-dependent countries want them released,
if at all, only at very high prices. No
inter-governmental agreement between
these conflicting views seems likely.
Finally, stockholding is a costly exercise. Acquisition costs are incurred up
front. Interest and storage costs accumulate over time. Any "forward positioning" of stocks in regions particularly
vulnerable to shortfalls adds in transportation expenses while putting such
stocks "out of position" to serve emergency needs elsewhere. And the existence of stocks tends to depress prices
40 / September 21, 2010 Milling & Baking News

(which deters production), to displace
private stockholding (which undercuts
the basic purpose of reserves) and to
discourage market- and private-sectoradjustments to supply/demand shifts.
Virtual stocks
Proponents of virtual stocks take
a different approach in assessing the
cause of food insecurity and in addressing its remediation. They acknowledge that tightening carryover
stocks create the preconditions for aggravated food insecurity, but they recognize the costs and burden-sharing
issues that prevent "global reserves"
from becoming a reality.
They conclude that it should be possible to avoid the extremes of price
volatility that occur in tight markets
by counteracting what they label as
speculative buying on futures markets. So, when feverish buying of futures occurs, they would have some
new international entity begin selling
aggressively in those markets to counteract this speculative fever.
Virtual stocks pose many of the
same sovereignty and conflict-ofinterest issues as global stocks do: To
whom should such authority be ceded? How would it be funded? At what
price levels should it act?
To this shared set of problems
should be added one more. Speculative activity in futures markets (as
distinguished from physical hoarding by sellers or buyers) generally has
been shown to dampen price volatility rather than to accentuate it. It does
so by encouraging those who can to
reduce use while signaling producers
to expand output. Trying to counter
such speculation, then, actually could
worsen the situation, and it does nothing to address physical hoarding.
Sanctity of contracts
Rather than blaming markets and
empowering governments to "manage
them better," contract sanctity would
attack public misbehavior in food markets. Global trade in food staples averages around 10% to 15% of annual consumption (a little less for rice, a little
more for wheat). These international
trade flows, in other words, typically
supplement local supplies.
This incremental supply is vital to
market stability. If markets were free
to function, there would be a symbiotic relationship between exporters

and importers (even with traditional
import barriers and export taxes in
place). Exporting countries in particular should recognize that sales to importing countries are as integral a part
of their markets as domestic usage.
Governments have a long history of
distorting markets through subsidies
of various kinds. They also, typically,
give preference to local producers and
consumers. As long as these distortions
are moderate and predictable, exporters and importers may do business reliably and confidently. But when governments replace market forces with fiats
- whether longstanding measures
like usage mandates or unforeseen interventions like price controls, cutting
across contracts or embargoing sales -
food insecurity rises.
Therefore, the simplest, least costly
action with the likely greatest food security benefit would be for food-exporting
countries to renounce such disruptive
actions through enforceable commitments. Such enforceable commitments
may be through the World Trade Organization, where they might be linked to
negotiated market-access commitments
from food-importing countries. They
also may be achieved through bilateral
agreements with importers, where supply and demand commitments could be
made on the basis of a moving average
of recent years' sales.
Respecting contracts between buyers and sellers as sacrosanct would go
a long way toward stabilizing global
markets. Contract sanctity enables
all buyers and sellers to rely on their
commitments and removes the risk of
disruptive government action. The resulting certainty of performance also
would enable markets more generally
to arbitrage shortfalls across time and
geography.
Even so, some poor food-importing
countries likely would need supplemental purchasing power assistance
in years when their food import costs
surge. They also may need assistance
to finance targeted feeding programs
rather than rely on price controls.
Contract sanctity and targeted purchasing assistance, however, are likely
to be less costly and more negotiable
than stockholding regimens, whether
real or virtual. MBN

Robbin S. Johnson, a fellow
with the Hubert H. Humphrey
Institute of Public Affairs,
is a contributing editor at
Sosland Publishing Co.
bakingbusiness.com / world-grain.com

http://www.bakingbusiness.com http://www.world-grain.com

Milling & Baking News - September 21, 2010

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