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Food Reserves in Developing Countries: Trade Policy Options for Improved Food Security

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The last few years (from 2006 to 2011) has seen the rise and volatility in prices of primary commodities, including agricultural products.Whereas the rise in food prices is fairly general, the increase in volatility is confined to grains and some vegetable oils.These developments impact particularly acutely on poor and other vulnerable non-farm households who devote a high proportion of their incomes to the purchase of food. The report encourages countries need to achieve a balanced food security policy, through the establishment of complementary strategies to address trade and stocks.It also discusses international and national policies to address high and volatile food prices. Finally, it considers the role of humanitarian stocks in the light of the P.R.E.P.A.R.E proposal by the FAO.

By Christopher L. Gilbert,
University of Trento, Italy

Issue Paper No. 37

ICTSD Programme on Agricultural Trade and Sustainable DevelopmentSeptember 2011

Food Reserves
in Developing Countries:
Trade Policy Options for Improved Food Security

l ICTSD Programme on Agricultural Trade and Sustainable Development

By Christopher L. Gilbert,
University of Trento, Italy

Food Reserves in Developing Countries:
Trade Policy Options for Improved Food Security

Issue Paper No. 37

September 2011

ii C. L. Gilbert - Food Reserves in Developing Countries

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Programmes Director: Christophe Bellmann
Programme Team: Jonathan Hepburn, Ammad Bahalim


This paper was produced under the ICTSD Programme on Agricultural Trade and Sustainable
Development. ICTSD is grateful for the support of ICTSD’s core and thematic donors including the
UK Department for International Development (DFID), the Swedish International Development
Cooperation Agency (SIDA); the Netherlands Directorate-General of Development Cooperation
(DGIS); the Ministry of Foreign Affairs of Denmark, Danida; the Ministry for Foreign Affairs
of Finland; the Ministry of Foreign Affairs of Norway; Australia’s AusAID; the Inter American
Development Bank (IADB); and Oxfam Novib.

For more information about ICTSD’s, and also on our Programme Agricultural Trade and
Sustainable Development, visit our website: www.ictsd.org

ICTSD welcomes feedback on this document. These can be forwarded Ammad Bahalim,

Citation: Gilbert, Christopher L.; (2011); Food Reserves in Developing Countries: Trade Policy
Options for Improved Food Security; ICTSD Programme Agricultural Trade and Sustainable
Development; Issue Paper No. 37; International Centre for Trade and Sustainable Development,
Geneva, Switzerland, www.ictsd.org.

Copyright © ICTSD, 2011. Readers are encouraged to quote this material for educational and
nonprofit purposes, provided the source is acknowledged.

This work is licensed under the Creative Commons Attribution-Non-commercial-No-Derivative
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The views expressed in this publication are those of the author and do not necessarily reflect
the views ICTSD or its funding institutions.

ISSN 1817 356X

iiiICTSD Programme on Agricultural Trade and Sustainable Development


2.1. High Prices or Volatile Prices? 3
2.2. Price Developments Since 2005 3
2.3. Food Prices and the Terms of Trade 5
2.4. How Well Do Food Markets Function? 7

3.1. Biofuels Mandates 8
3.2. Multilateral Contracting 9
3.3. International Stockpiling 10
3.4. Enhanced Regulation of Futures Markets 11
3.5. Increased Market Transparency 13

4.1. The Food Balance 15
4.2. Commercial Policy 16
4.3. Food Security Stocks 16
4.4. The Balance Between Trade and Food Security Stocks 18
4.5. The WTO and Food Exports 19
4.6. Markets and Food Security 20
4.7. Humanitarian and Emergency Stocks – P.R.E.P.A.R.E. 23


iv C. L. Gilbert - Food Reserves in Developing Countries

Prices for key food commodities touched record levels earlier this year, repeating the highs last
seen in 2008. Although real prices may be low by historical standards, sharp upward swings and
downward corrections have impeded the ability of farmers to respond appropriately to both short
and medium term signals. In many cases, people have been priced out of the market and driven to
hunger. Increasingly, a system of reserves, either physical or virtual is being viewed by many as a
key part of any response to food price volatility. Some experts argue that an international system
of reserves may be prohibitively expensive and difficult to maintain. Instead, humanitarian food
stocks at the national and regional levels, particularly in developing countries are gaining currency
in the debate.

Agriculture Ministers from the G20 group of leading economies met and agreed on a proposal for
evaluating and establishing a system of humanitarian food stocks this past July. Although the exact
details of the proposal have yet to be worked out, its intended as a regional system that would
operate using market principles and would only be used towards emergency or humanitarian ends.
A report prepared for the G20 suggests that this may be a far more viable option than a system
intended to achieve price or supply targets.

The rules that govern trade, primarily through the World Trade Organization (WTO), allow
countries some flexibility in maintaining their own reserves of food. The Agreement on Agriculture
(AoA), a treaty enforced by the WTO, limits the amount of government spending on agriculture,
controls state trading enterprises, eliminates fixed price bands and converts volume based tariffs
to percentages. These policies, among others, were often employed to control the production, use
and storage of food crops used in reserves. The AoA does make exceptions for developing countries
in terms of the policies available to them, for example, on the limits to their domestic spending
and ceilings for tariffs on imports. Additionally, Annex 2 of the AoA, the ‘Green box,’ allows
countries to spend without limit on stocks intended for food security. Such reserves must be built
using market prices, cause minimal trade distortion and cannot be used as a price stabilization
tool. Further still, developed and developing countries can use other measures, such as purchasing
at an administered price, to acquire or dispose of food for reserves as long as they stay within their
agricultural subsidy limits. These measures provide sufficient ground for countries to enact their
own reserves to help address food security for those most vulnerable.

Prof. Christopher Gilbert of the University of Trento, in the paper that follows, tries to provide
an impartial, evidence-based analysis of the extent to which food stocks and reserves could help
overcome food insecurity in developing countries, and implications such schemes could have for
trade flows, policies and rules. The findings should be relevant for ongoing discussions at the
Committee on World Food Security, the G-20, the WTO and the many domestic debates in countries
where food insecurity is a problem.


Ricardo Meléndez-Ortiz
Chief Executive, ICTSD

vICTSD Programme on Agricultural Trade and Sustainable Development

Agricultural prices, along with the prices of primary commodities in general, have been both high
and volatile over 2006-11. Whereas the rise in food prices is fairly general, the increase in volatility
is confined to grains and some vegetable oils. However, these are exactly the food products which
are of concern when discussing food security.

These developments impact particularly acutely on poor and other vulnerable non-farm households
who devote a high proportion of their incomes to the purchase of food. At the same time, the terms
of trade of many Low Income Countries (L.I.C.s) are little changed or have tended to improve as
many of these countries have benefited from comparable rises in their own export crops or mineral
resources. This suggests that, for many L.I.C.s, the problem is more one of what government should
do about food security rather than how the international community should fund food security.

The food security debate is often posed as a choice between trade and stocks, but this is misleading
since the two strategies can be complementary. Countries need to achieve a balanced food security
policy. In general terms, food importing countries will need to rely on a mixture of variable import
tariffs and export taxes, together with a food security stock. The precise nature of the balance will
depend on the country’s normal food balance, its grain staple, transport costs and the correlation
between its supply and demand shocks and those in the rest of the world. Asian rice-producing and
consuming countries, many of which have managed to achieve a good balance between trade and
stocks, have typically done this using relatively light government interventions and procurements
allowing an efficient private sector to prosper.

By contrast with Asia, the formal grains sectors in many African L.I.C.s are dominated by government,
the World Food Programme (W.F.P.) and other agencies. There is a widespread view that food markets
function poorly and that crisis management therefore falls entirely on the shoulders of governments
and the agencies. The Asian experience indicates that these concerns are excessive, and the private
sector can play a substantial role both in crisis avoidance and crisis response. It is important that the
governments and the agencies work toward increasing this capacity. One should look for improved
communication and consultation between government and the private sector. Because contractual
performance can be problematic in crisis situations, there is a potential intermediation role for
W.F.P. or other agencies which complements their current role in direct provision of food.

It is useful to distinguish humanitarian stocks from food security stocks on the basis that the former are
targeted specifically at vulnerable groups whereas the latter are directed towards overall availability
and the general level of prices in local markets. Provided the target group is narrowly defined and
the assistance is efficiently managed to minimize leakages, humanitarian stocks will be relatively
robust in relation to the crowding out concerns which apply to wider national food security stocks.
They will also involve a much more limited financial commitment. The danger is that targeting is
imprecise, that the target group is wide and that there is significant leakage into local markets.
If this turns out to be the case, well-intentioned programmes, even when genuinely motivated by
humanitarian concerns, may undermine market mechanisms. The main impact of poorly designed
and executed programmes are likely to be on the distribution of food across households rather than
on the overall level of availability. It is therefore essential than any humanitarian stock programme
is well designed and efficiently executed.

The international agencies have recently launched a joint P.R.E.P.A.R.E. proposal for regionally
based emergency humanitarian stocks. The proposal is a useful starting point for discussion but it is
unbalanced in its current form – it focuses entirely on crisis response without considering how crisis
incidence may be reduced and it pays scant attention to the potential role of the private sector. The
proposal should be welcomed but also remitted for further consideration.


1 C. L. Gilbert - Food Reserves in Developing Countries

Agricultural prices, along with the prices
of primary commodities in general, have
been both high and volatile over 2006-11.
These developments impact the poor and
other vulnerable non-farm households who
devote a high proportion of their incomes to
the purchase of food. In this paper I look at
both international and national policies which
address the resulting food security concerns.

The background to the paper is provided in
section 2. I look at food price developments
since 2005 focusing on grains prices (section
2.2). I note that for many Low Income Countries
(henceforth L.I.C.s)1, the terms of trade have
not deteriorated since many countries have
benefited from comparable rises in their own
export crops or resources (section 2.3). I also
consider possible explanations for the claimed
imperfect functioning of L.I.C. food markets
(section 2.4). This all sets the scene for the
food security discussion.

Governments and international organizations
have employed a range of policies to address
high or volatile food prices. It is useful to draw
a two way distinction:

a) International policies: these are policies
employed by the international community
to lower prices or to reduce volatility.
These include trade agreements, such
as the International Wheat Agreements
(I.W.A.s), a possible international stockpiling
arrangement or controls or limitations on
activities on futures markets. I also briefly
discuss the possible elimination of biofuels
mandates and subsidies.

b) National policies: policies employed by
national governments to lower prices
or to reduce volatility. National policies
include food security stocks, export bans,
variable export taxes or import tariffs,
measures taken at the national level against
speculation and direct price controls.

Section 3 of the paper deals with international
policies. The objective of these policies is

generally to reduce either the level or the
variability of prices on world markets. The
topics considered are comprise the elimination
of biofuel mandates (section 3.1), multilateral
contracting, along the lines of the I.W.A.s
(section 3.2), international stockpiling (section
3.3) and enhanced regulation of grains futures
markets (section 4). In general terms, I remain
sceptical that the policies considered, in each
case for different reasons, will be effective
in obtaining the desired volatility or price
level reductions. Section 3.5 looks (more
favourably) at recent proposals to increase
the transparency both of the physical grains
markets and commodity futures markets.

In section 4 I turn to nationally based food
security policies, some of which I see as more
likely to be effective. The main instruments
available are commercial policy (variable export
taxes or import tariff and export restrictions,
section 4.2) and food security stocks (section
4.3). The suitability of the various instruments
will depend on the country’s normal food
balance (section 4.1) together with transport
access. The two decades prior to 2008 saw a
shift away from national food stocks towards
trade-based policies but this tendency has
moved into reverse over the past four years as
food importing counties have found markets
closing against them just when they need them
most. I argue that trade-based policies and
national stocks should generally be seen as
complementary policies and not as alternatives
(section 4.4). The widespread resort of grains-
exporting countries to restrictions and even
bans has led to calls for actions of this sort
to be more clearly regulated by the World
Trade Organization (W.T.O.) I argue that action
is therefore desirable with the objective of
limiting use of controls (section 4.5). All of
these policies should be seen within a general
objective of improving the functioning of L.I.C.
food markets to reduce the likelihood of food
crises (section 4.6).

Suppose a crisis does occur. Section 4.6 considers
the possible role of humanitarian stocks, targeted


2ICTSD Programme on Agricultural Trade and Sustainable Development

at a narrowly defined group of vulnerable
households in well-defined crisis situations.
While food security stocks will tend to crowd out
private storage and will hence be a costly form
of intervention, a well designed and efficiently
implemented humanitarian stock programme
will have a much more limited market impact
and will be financially less onerous. However, if
poorly designed or inefficiently implemented,

such programmes will generate arbitrary
redistributions while contributing little to food
availability. In the light of these considerations,
the P.R.E.P.A.R.E. proposal, set out as Appendix E
of F.A.O. et al. (2011) is a half full, but therefore
also a half empty, glass – sensible in terms of crisis
response while doing nothing to improve market
functioning and hence lower the probability of
crisis incidence (section 4.7).

3 C. L. Gilbert - Food Reserves in Developing Countries


An initial issue is whether we should be
concerned by the level or the volatility of prices.
These concepts are often confounded in popular
discussion. Volatility refers to the variability of
a price. As a matter of logic, it is possible for
prices to be high but show little variability or to
be low but variable. In practice, price levels and
volatilities tend to be positively associated, in
part because a low carryover from the past will
reduce current availability (current production
plus lagged carryover), exerting upward price
pressure, and will reduce the possibility of using
inventory to meet positive demand or negative
supply shocks, thereby increasing volatility
(Gilbert and Morgan, 2010). Typically, therefore,
when prices are high they are also volatile.

High food prices erode the living standards of
non-farm households. Volatile food prices result
in these households becoming vulnerable to
such erosion. This erosion can be substantial for
poorer households for whom food expenditure is
the major budget item – a household with daily
income at the poverty level of $1.25 per capita,
spending 50% of its income on food and facing a
50% increase in food prices, will require a post-
increase income of $1.56 per capita to purchase
its original basket of goods. In most developing
countries a large proportion of households will be
only modestly above the poverty line and hence
rises in prices of staple foods can substantially
increase poverty. Volatile food prices are
therefore of concern because they create the
risk that more households will be brought below
the poverty level.

Volatility also imposes costs throughout the food
supply chain. In principle, volatility might be
offset by hedging on futures markets. However,
such markets may either not exist or may not
be appropriate for many L.I.C. food crops. Even
where markets do exist, L.I.C. farmers, farmer
associations and cooperatives are likely to find
it prohibitively costly to access these markets
(Dana and Gilbert, 2008). Farmers therefore have
difficulty in knowing whether high prices at the
time of planting will be maintained at harvest
and have difficulty in judging when it is best to

sell their produce. Supply chain intermediaries,
who bear greater risk, will also facer access
problems. Nationally-based intermediaries will
find themselves disadvantaged relative to their
multilateral competitors (Gilbert, 2009). Because
intermediation costs are higher, farmers receive
a lower proportion of f.o.b. prices and consumers
pay a higher margin over f.o.b.

Households will be affected differently according
to their circumstances. Farm households will
benefit from rises in world food prices and
poor farm households may do so sufficiently
to lift them out of poverty. Since changes in
food prices tend to be correlated with changes
in the prices of non-food commodities, such
as tropical export crops and metals, the same
may be true of households engaged in these
commodities – coffee or cocoa farmers and
artisanal miners. While the overall effects of
rising food prices may be complicated, the
incidence will be adverse on urban households
and landless rural households.2

This discussion indicates that high and volatile
food prices will impact most acutely on poor and
other vulnerable non-farm households. While
such households will be found in all economies,
they will be particularly numerous in the poorest
economies. For this reason, I focus on the impact
of food price volatility on L.I.C.s.

World prices of grains and vegetable oils, which
had generally been flat over the first half of
the initial decade of the century, rose sharply
from 2006-07. Figure 1 shows these rises for
maize, palm oil, rice, soybeans and wheat over
the period crop year 1990/91 – 2010/11. The
prices are deflated by the US Producer Price
Index (all items) and normalized at 1999/2000
= 100.3 The price rises were substantial with
palm oil, rice and wheat doubling in price in
2007/08 relative to the 1999/2000 base and
maize and soybeans increasing by more than
three quarters. Except in the case of rice,
prices in 2010/11 have equalled or exceeded
their 2007/08 peaks.

2.1. High prices or Volatile prices?

2.2. price Developments Since 2005

4ICTSD Programme on Agricultural Trade and Sustainable Development

Figure 1: Real prices, 1990/91 - 2009/10

It is also apparent from Figure 1, that both
currently and at their 2007/08 peak, real
prices are at approximately the same level as
in the late nineteen nineties.4 A much longer
perspective shows all five prices to be lower in
real terms in 2007/08 than in the mid and late
nineteen seventies.

Furthermore, although prices were variable
over 2006/07-2009/10, this has also been true
of previous high volatility episodes. It is well
known that periods of high volatility tend to
bunch together. Table 1 compares volatilities
over the most recent high volatility period (the
four crop years 2006/07 to 2009/10) with that
in the previous six crop years, over which time
prices were very stable, and also with the high
volatility period around the nineteen seventies
commodity price boom (the four years 1971/72
to 1974/75).5 Volatility was around twice
as high for the three grains over 2006/07 to
2009/10 compared with 1999/2000 to 2005/06
but comparable with, or only modestly higher,
than in the earlier high volatility period. In the

case of palm oil and soybeans, the increase
in volatility in 2006/07 to 2009/10 was less
dramatic and these resulting levels were lower
than those experienced in 1971/72 to 1974/75.
These results accord with those reported by
Balcombe (2009), Gilbert and Morgan (2010)
and Huchet-Bourdon (2011).

As noted, volatility is positively associated
with price levels. Taking the forty year
period 1970/71 to 2009/10, the correlations
range from 0.17 for rice to 0.63 for soybeans.6
Perhaps less obviously, high volatility is
associated with high cross-commodity
correlations: averaging volatilities across the
five commodities, this shows a correlation
of 0.42 with the intra-crop year cross-
correlations of the five commodities.7 Price
co-movement therefore tends to increase in
periods of high volatility. We therefore tend
to see periods in which food prices in general
are high and volatile. This was true of the
period from the end of 2006 as it was in the
first half of the nineteen seventies.












Palm Oil
































































5 C. L. Gilbert - Food Reserves in Developing Countries

Table 1: Volatilities (selected years)

Maize Palm Oil Rice Soybeans Wheat

1971/74 – 1974/75 22.4% 38.9% 22.7% 34.0% 33.7%

1999/2000 – 2005/06 15.8% 23.3% 11.5% 19.9% 16.2%

2006/07 – 2009/10 28.5% 31.8% 28.0% 24.7% 32.4%

Intra-crop year volatilities of nominal returns at an annual rate averaged over crop years.

These numbers demonstrate that, although the
prices of food commodities were both high and
volatile over the period from the end of 2006,
neither the levels nor the variability of these
prices was historically unprecedented. The
shock of high and volatile prices is to be seen
in the context of the low and stable prices over
the so-called Great Moderation and the likely
impact of these developments on attainment
of the Millennium Development Goals.

Economists often measure the overall impact of
changes in world prices on a particular country
by the terms of trade, defined as the ratio of
the country’s export to its import prices. If
food prices had risen in isolation, they would
have implied a deterioration in the terms of
trade of food importing countries.

There are practical problems in measuring
the terms of trade for developing countries.
Products only have uniquely defined prices
in economics text books. In practice, even
narrowly defined products will be bought and
sold at different prices depending on precise
grades or product specifications, the quantity
and location of the transaction and delivery
conditions and the bargaining power of the
parties involved. This makes it problematic to
obtain a practical measure corresponding to
the theoretical concept.

There are two approaches. First, trade
statistics, such as those for agricultural goods
in FAOSTAT, provide estimates of both the dollar
value and the quantities of imports and exports
of narrowly defined products. These data allow
one to infer unit values (the ratio of dollar
values to quantities) which may be interpreted
as the prices which, when multiplied by the

reported quantities, generate the reported
dollar values. There are well-known problems
with these methods. First, they fail to take into
account quality-improvements in manufactured
goods with the result that unit values tend to
exaggerate the extent of price increases. For
L.I.C.s, who import most manufactures, this will
lead to a general tendency to over-estimate the
decline in the terms of trade overt time (Lipsey,
1994). Second, reported values may reflect the
effects of hedging, transfer pricing and other
practices (some legal and some illegal) which
distort unit values away from the original prices
they are supposed to represent.

The second possibility is to use world prices.
These are well-defined for most primary
products, including food products, but do
not necessarily relate closely to the prices
particular countries pay when importing or
receive when exporting. Furthermore, clearly
defined world prices are only available for
primary products, but even in these cases, they
may not accurately reflect the prices at which
countries trade. In part, this can be because of
grade and quality differences, in part because
transport costs may drive a wedge between a
country’s fob prices and world prices and in
part because the supposed world price does not
move closely with the prices which countries
pay for food imports – see Gilbert (2011a) in
relation to the world rice price.

In Gilbert (2010b), I used this second procedure
to consider the primary terms of trade, being
the ratio of primary export to primary import
prices calculated as base-period value-
weighted averages of world prices for 67 major
primary commodities, for four L.I.C.s – Benin,
Kenya, Malawi and Nepal. These figures are
reproduced in Table 2. The final, adjusted,
column adjusts the crude measure to take
into account the fact the value of primary

2.3. Food prices and the Terms of Trade

6ICTSD Programme on Agricultural Trade and Sustainable Development

Table 2: Changes in price indices and primary terms of trade, selected Low Income Countries,
2005 – 2008 and 2010

imports exceeds the value of primary exports
and supposes no change in the balancing
flows. Over the four year period 2005-08,
the four countries saw increases in import
prices ranging from 38% (Kenya) to 51% (Benin)
but export prices also increased by between

34% and 39%.8 The resulting terms of trade
deterioration was therefore a more modest
10% (Kenya) to 14% (Benin). Furthermore, this
deterioration had been reversed by mid-2010
as import prices fall back but export prices
continued to rise.

The implication is that high food prices over
the period from 2006 have not, in general,
translated into an adverse movement in the
terms of trade for L.I.C.s. This is because the
rise in agricultural prices has happened at the
same time, and for some of the same reasons,
as the rise in energy and metals prices. L.I.C.s
have low manufacturing exports and rely on
primary exports, together with remittances
and overseas assistance, to cover their imports.
Many L.I.C.s have therefore benefited as much
or more, at the aggregate level, from rising
export prices as they have suffered from rising
import prices.9

The fact that the terms of trade have moved
relatively little over the most recent years
does not imply that high and volatile food

prices have had no effect since the incidence
or rising export prices will generally have
been different from that of rising import
prices. Furthermore, the trajectories of the
prices consumers in different L.I.C.s were
required to pay may have differed significantly
from those of world prices (Gilbert, 2011a).
What the result does imply is that aggregate
measures of well-being can conceal the impact
of high food prices on vulnerable groups. It
follows that policy should be more concerned
with the form and direction of assistance than
with the level of resources provided. It also
indicates that governments will not inevitably
lack the funds to deal with food security and
in this respect the FAO-OECD-coordinated
policy report may be over-pessimistic (FAO et
al, 2011, paragraph 127).

Price indices Terms of trade
All imports Food imports All exports raw adjusted

Percentage change 2005 - 2008

Benin 50.5% 38.4% 36.7% - 9.2% - 14.2%

Kenya 38.2% 53.6% 38.6% - 8.3% - 10.1%

Malawi 44.9% 51.8% 34.6% - 7.1% - 13.1%

Nepal 45.4% 53.7% 33.6% - 8.1% - 13.2%

Percentage change 2005 – 2010H1

Benin 32.0% 24.8% 46.0% 10.6% 1.9%

Kenya 23.8% 39.7% 39.3% 12.5% 7.6%

Malawi 30.8% 29.8% 52.4% 16.6% 2.7%

Nepal 30.2% 37.0% 43.5% 10.2% 0.9%

The first four columns of the upper panel of the table report the changes in the price indices
from 2005 (year average) to 2008 (year average). The lower panel reports the changes to 2010
(January-June average). Column 4 reports the same changes for a primary terms of trade index
defined as the ratio of the primary export (column 3) to primary input (column 1) indices. Column
5 adjusts these estimates to take into account lack of balance between import and export values
based on average trade values over 2006-08. Source: Gilbert (2010, Table 1, exert).

7 C. L. Gilbert - Food Reserves in Developing Countries

The answer to this question is fundamental to
any policy discussion. If food markets generally
function well there will be little need for major
interventions and policy should focus on the
exceptions, whether in terms of households
for whom, the periods of time when, or the
countries or regions where market functioning
is poor. If food markets generally fail to
function well, either at a world level, or L.I.C.s,
or at particular periods of time, such as in a
crisis, then more substantial interventions are

The question decomposes into three sets of

i) How well do international grains markets

ii) How efficiently are prices transmitted to
LICs and other developing countries? Do
price shocks get amplified or attenuated in
transmission? Are they able to successfully
insulate themselves from shocks in the
world market?

iii) How well do domestic markets for grains
and other subsistence foods function in
L.I.C.s and other developing countries? How
practicable is it for either government or the
private sector to gain access to additional
grains in a crisis?

These are large questions and it should be no
surprise that the answers differ across foods
and across countries.

I examined the first question in Gilbert (2011a)
and also, in the same chapter, looked at pass-

through over the period 2005-09 to the six
developing countries considered above in Table
2. I concluded that the world maize (corn)
market appeared to function very efficiently,
generating clear price signals which were
transmitted to developing country markets,
except where these countries chose to insulate
themselves from the world markets and had the
means to do this. (This was not withstanding
the price and other differences between
yellow and white maize). Rice was at the
other extreme – world market prices tended
to reflect developments in rice producing and
consuming countries and not to lead and inform
the markets in these countries. I found wheat
to be an intermediate case. Strong varietal and
regional differences make it difficult to define
an informative world wheat price making it
difficult in turn to know what, if anything, is
being transmitted.

It is the functioning, of mis-functioning,
of domestic food markets which has the
greatest policy relevance. Evidently, outside
of war and famine situations, markets do
function in the sense that farmers are able
to sell food, consumers are able to buy food,
and intermediaries are able to do both.
Furthermore, in a large number of developing
countries, prices show a high degree of national
integration in the sense that, despite regional
differentials, prices do tend to move together
across the country (Gilbert, 2010c). Concerns
therefore relate to the ex ante adequacy of
storage and the consequences of any ex post
inadequacy in a food shortage situation. I
discuss storage issues in section 4.3 and market
responses to crisis situations in section 4.6.

2.4. How Well Do Food Markets Function?

8ICTSD Programme on Agricultural Trade and Sustainable Development


Governments and international organizations
have employed a range of policies to address
high or volatile food prices. The following way
classification may be helpful:

a) International policies: these are policies
employed by the international community
to lower prices or to reduce volatility. These
include trade agreements, such as the
I.W.A.s, a possible international stockpiling
arrangement or controls or limitations
on activities on futures markets. I also
discuss the possible elimination of biofuels

b) National policies: policies employed by
national governments to lower prices, to
reduce volatility or to protect vulnerable
households. National policies include food
security stocks, export bans, variable export
taxes or import tariffs, measures taken at
the national level against speculation and
direct price controls.

This section of the paper deals with
international policies leaving national policies
to section 4.

A number of commentators have argued that
the demand for food commodities as biofuel
feedstocks, in particular corn, sugar and
vegetable oils, has both added to overall and
imported energy price volatility from into
grains markets by increasing the correlation
between agricultural prices and the oil
price – see Schmidhuber (2006). Mitchell
(2008) suggested that biofuels demand was
responsible for the largest part of the rise
in food prices but resisted the temptation to
quantify this share. A number of governments,
including the U.S. government, mandate
production of a proportion of petrol (gasoline)
from renewable resources and also subsidize
this conversion. The perception that biofuels
demand is driving up food prices has resulted in
the widely voiced contention that governments

should lift biofuel mandates and remove the
associated subsidies. The E.U. has already
substantially reduced its biofuel mandates.

Biofuels are a new phenomenon and
insufficient data points on biofuels production
are available to allow direct computation of
the price impact of this addition to demand.
Instead, we need to look for indirect evidence.
In a World Bank working paper, Mitchell (2008)
concluded that, although the 2006-08 increase
in food prices was caused by “a confluence
of factors”, the most important of these was
the large increase in U.S. and E.U. biofuels
production. However, his argument was largely
residual – biofuels were seen as responsible
for the large component of the 2006-08
grains price rise that could not be explained
by other factors. Other commentators, more
successful in quantifying the impact of these
other factors, left a smaller residual for
biofuels – see Abbott et al (2008) and Gilbert
(2010a). A more recent World Bank working
paper has concluded that “the effect of
biofuels on food prices [in 2007-08] has not
been as large as originally thought” (Baffes
and Haniotois, 2010). In a detailed study for
the U.K. government, Pfuderer et al. (2010)
concluded “available evidence suggests that
biofuels had a relatively small contribution
to the 2008 spike in agricultural commodity
prices where its impact was largely limited
to the maize market with some knock-on
effects on soybean prices”. There has been
no systematic study of the effect of biofuels
demand on food price volatility, as distinct
from on the level of food prices.

Babcock (2011) produces more complicated
results, simulations from a calibrated
model show that ethanol production has
had a substantial effect in raising U.S. corn
(maize) prices. However, this effect resulted
through the impact of high crude oil prices,
which made it attractive to convert corn
into ethanol, and not from mandates and
subsidies. The implication is that, at least
to the present, it has been market forces

3.1. Biofuels Mandates

9 C. L. Gilbert - Food Reserves in Developing Countries

and not government policies which are
responsible for the biofuels pressure on food
prices. However, Babcock also notes that
in the event of a poor corn harvest, biofuel
mandates could put strong upward pressure
on prices, effectively by making a large part
of demand completely price inelastic. See
also Babcock and Fabiosa (2011). According
to this view, biofuels mandates and subsidies
have not been quantitatively important up to
the present, in line with the views of Gilbert
(2010a) and Pfuderer et al (2010), but may
become important in the future, in line with
fears of the biofuels critics.

The biofuels debate interacts with trade issues
(see Al-Riffai et al., 2010) since Brazilian
sugar-based ethanol has the potential to be
substantially cheaper, on a full cost basis,
than U.S. the maize-based product, but
currently faces a large U.S. tariff barrier.
Many have argued for liberalization of ethanol
commerce. Currently, however, the U.S. is an
ethanol exporter so elimination of the import
tariff would have no effect on food prices
(Babcock, 2011).

The four post-war I.W.A.s, starting with that of
1949, were based on multilateral contracting.
I.W.A. exporting members guaranteed assured
supplies of wheat subject to a maximum
price while importing countries guaranteed
purchases subject to a minimum price. These
provisions were maintained in the 1953, 1956,
1959 and 1962 I.W.A.s. Contractual floor and
ceiling prices were absent from I.W.A.s after
1971 (International Wheat Council, 1993;
Gilbert, 2011b).

The I.W.A. multilateral contracts were contracts
between governments. This was natural at a
time in which international trade in wheat was
dominated by intergovernmental transactions
and in which the prices paid to farmers in
wheat exporting countries were set or heavily
influenced by national farm support policies.
Except in rice, grains commerce is now largely in
the hands of private companies which contract

on the basis of market prices. Governments
would therefore currently need to enforce
commitments of this sort through a regime of
taxes and subsidies. However, W.T.O. regulations
require countries to reduce export subsidies
thereby making it difficult for governments
to guarantee agreed maximum prices. Even if
it were judged desirable, the original I.W.A.
concept of multilateral contracting would
therefore no longer be feasible.

Multilateral contracts are a form of forward
contracting. The I.W.A.s extended for three
years, so the I.W.A. multilateral contracts may
be regarded as a set of one, two and three
year forward contracts, for quantities which
were not specified but implicitly related to
past transactions, capped at predetermined
floor and ceiling prices. These prices are
negotiated to be fair to both exporting
and importing countries at the start of the
agreement so, at that time, they have zero
value to either side, i.e. neither exporters
nor importers are financially better off as the
result of the contracts (Hull, 2006). However,
as market conditions change during the course
of the agreement, the contracts have positive
equity for one side and negative for the other
– if prices rise, importers gain from the price
ceiling at the expense of exporters while if
they fall, exporters gain from the floor at the
expense of importers. Once the losses from
adherence to the negotiated ceiling prices
become substantial, there is pressure from
farmers to renegotiate or renege, as in the
Commonwealth Sugar Agreement (also based on
multilateral contracting) in 1973. If the losses
from sticking to the negotiated floor prices
become substantial, consumers and importing
governments seek renegotiation, as in the
1967 I.W.A. a year after its negotiation.

Multilateral contracting can work well so
long as price volatility remains low but lacks
enforcement mechanisms and hence credibility
when volatility becomes high. It is ill-adapted
to a world in which commerce takes place
between private companies. It is in no way
prejudicial to the historical I.W.A. experience
to state that this approach is not well-suited
to current circumstances.

3.2. Multilateral Contracting

10ICTSD Programme on Agricultural Trade and Sustainable Development

Policies which result in higher levels of storage
than would otherwise have been the case
may be expected to lower prices and reduce
volatility. This raises the question of the
adequacy of storage in the absence of public
intervention. This question may be posed either
at a global or a national level. In this section, I
discuss the adequacy of global stocks from an
economic theory perspective and then move
to the practical difficulties in an international
stockholding scheme.

Economists discuss the adequacy of global grain
stocks in terms of whether private stockholding
decisions will result in “optimal” outcomes.
Gardner (1979) argued that private stockholding
will be sub-optimal because price volatility
results in negative externalities. It is difficult
to make this view rigorous – the dangers arising
from food riots might be one possible route.

Price risk is generally not insurable, since it is
common across the entire range of producers,
consumers and intermediaries, but it may be
possible to offset these risks, either directly
or indirectly, through hedging on organized
exchanges where these exist. Supply chain
intermediaries in developed economies,
including those involved in physical storage,
will routinely access these markets. Producers
may benefit indirectly if these benefits are
intermediated to them by, for example, purchase
contracts which provide price-fixing options.
Governments might in principle operate in the
same manner for consumers. A second reason
for supposing that private stockholding will be
inadequate is therefore that those impacted
by volatility are unable to offset the resulting
uncertainty either by hedging on futures or
options markets.

The extent to which global stocks are adequate
can therefore not be separated from the
question of the adequacy of risk-sharing
arrangements. These arrangements will be
least effective for those products where the
markets themselves work least well. In the
grains complex, this is most evidently the
case with rice. For other grains, there is a

choice between taking the state of risk sharing
arrangements as given and focussing policy on
augmenting storage, or, alternatively, of taking
storage levels as adequate and focussing policy
on improving the access to and the effectiveness
of risk management.

If global grains storage is regarded as
inadequate, governments might either
attempt to augment private stocks by public
food security storage programmes or provide
incentives to the private sector to carry
additional stocks. The public storage approach
has the major disadvantage that it will
discourage, and possibly eliminate, private
storage. Miranda and Helmberger (1988) have
shown how public stockholding, for instance by
a buffer stock agency, changes the incentives
for the private sector to hold stocks. At the
same time, if the stabilization band (the gap
between the ceiling and floor prices) is narrow,
intervention will limit potential capital gains
to private stockholding. If market conditions
are sufficiently weak, the public sector may
end up holding the entire market deficit. This
was the situation under the sixth International
Tin Agreement which collapsed in 1985 – see
Anderson and Gilbert (1988). Clearly, a floor
price, at which the public sector is obliged to
purchase, can make buffer stock stabilisation
extremely expensive.

A stabilisation ceiling price can also be
vulnerable to speculative attack (Salant,
1983). If speculators perceive the stocks held
by the stabilization agency as possibly insufficient
to maintain the ceiling price in the future, they
will compete to buy the entirety of the agency’s
remaining stock in order to take advantage of
likely capital gains. Recognizing this, Wright
and Williams (1991) suggested that, while a
stabilization agency might choose to defend a
defined floor price, price band schemes, with
both ceiling and floor prices, offered few, if any
additional advantages. In particular, the apparent
symmetry of the price band is only superficial
since once the stock is exhausted, there is no
means of defending the ceiling. If a public storage
scheme is initiated it should act opportunistically,
like central banks (Bagehot, 1873), and avoid firm
commitments to support levels.

3.3. International Stockpiling

11 C. L. Gilbert - Food Reserves in Developing Countries

These considerations make it more attractive
to work towards improving the incentives to
private storage rather than investing in public
storage schemes which are likely to exacerbate
the inadequacy of private storage. Wright and
Williams (1991) found that subsidization of private
storage was superior to public storage schemes.

It is widely held that low grain stocks are a
significant contributory factor in explaining
recent high grains prices and elevated volatility
– see Wright (2009). Poor harvests in 2010
certainly have reduced stocks to low levels
and resulted in rises in prices in the second
half of that year. However, the importance of
stocks was less clear in 2007-08.

Gilbert (2011b) discusses the evolution of world
grain stocks over the most recent decades.
The general picture is one of trend declines
in wheat and maize stock-consumption ratios
taking place simultaneously with declines in
real grains prices, although rice has seen rising
stock-consumption ratios. Some part of the
trend decline in these rations is attributable
to change in developed country agricultural
policies (Mitchell and Le Vallee, 2005).
Overlaying this, there was a very substantial
accumulation of grain reserves on the part of
China, starting with rice in the late nineteen
eighties and following through into wheat and
maize in the nineteen nineties followed by
disaccumulation in the first five years of the
new century.

Taking a long period view, declining stock-
consumption ratios in wheat and maize
probably result from greater production and
organisational efficiency in the food processing
industry. The more general decline in stocks
in all three grains over the most recent
decade, by contract, is the result of Chinese
destocking – see Dawe (2009) and Wiggins
and Keats (2010). Part of the argument as
to whether world wheat and maize stocks
are now too low therefore revolves round the
issue as to whether Chinese stocks were, in
the past, available to the world economy to
provide a cushion in the event of a negative
shock. A negative answer to this question
would suggest that the decline in Chinese

stocks may not be important in understanding
recent and current high grains prices.

My conjecture is that even though Chinese
stocks may not have been available to the
rest of the world, they shielded world markets
from rapid growth in Chinese demand in the
first five years of the new century and may
explain why agricultural prices were followers
in the most recent commodity price boom in
contrast with their leading role in the 1973-74
boom (Cooper and Lawrence, 1975).

A number of informed commentators (Desai,
2008; Masters, 2008; Soros, 2008), along with
much popular discussion, blame speculation on
organized futures markets for high food prices
and increased volatility levels. Such critics tend
to point to the enormous increase in futures
market transactions relating to agricultural
products over the past two decades, an
increase which is much larger than that in the
quantities of physical products bought and
sold. They suggest that either limitations on
futures market trading of food commodities
or taxation of such transactions would reduce
price levels and volatilities.

By analogy with insurance markets, speculators
will expect to profit in aggregate and hedgers
to pay for this risk transfer. A traditional view
is that speculation will tend to be stabilizing
(i.e. volatility reducing) because destabilizing
speculation will be unprofitable and will
therefore not persist (Friedman 1953). This
probably remains the standard opinion of most
economists. However, both financial economists
and behaviouralists (see, for example, Laibson,
2009) offer a more nuanced view.

Modern finance theory distinguishes between
informed and uninformed speculation
(Bagehot, 1971; O’Hara, 1995). According to
this view, informed speculation is the channel
through which private information becomes
impounded in publically-quoted prices.
Uninformed speculation should either not have
such effects, or in less liquid markets, should

3.4. Enhanced Regulation of Futures

12ICTSD Programme on Agricultural Trade and Sustainable Development

not have persistent effects. If uninformed
trades do move a market price away from its
fundamental value, informed traders, who
know the fundamental value of the asset,
will take advantage of the profitable trading
opportunity with the result that the price will
return to its fundamental value.

Bubbles are a particular concern, and it is
hard to argue that commodity futures market
will be immune from this phenomenon, in
particular since the first documented bubble
relates to an agricultural (but not food)
commodity – tulips in the Netherlands in 1636-
37 (Krelage, 1942; Dash, 1999). De Long et al.
(1990) provide an account of how such bubbles
may emerge. Seeing a rise in the price of a
financial asset, uninformed traders may
guess that informed traders have received
information which increases their valuations.
They therefore buy and push the price further
upward increasing the positive momentum.
The result may be that the price now exceeds
the revised valuation of the informed traders.
Alternatively, if the initial rise in price was
just have a random effect arising out of “noise
trading”, the market price again exceeds its
fundamental value as the result of trend-
following speculation. However, it is not clear
that the informed traders, who see the over-
valuation, will attempt to reverse this move.
De Long et al (1990) showed that, if informed
traders have short time horizons (perhaps as
the result of performance targets or reporting
requirements) and if there are sufficiently
many uninformed (trend-spotting) speculators,
they may choose to bet on continuation of
the trend even though they acknowledge it is
contrary to fundamentals.

The view can also make concrete which
the Diba and Grossman (1988) concept of a
“rational bubble” in which explosive asset
prices satisfy the first order (Euler) condition
equating the expected rate of appreciation
to the return on assets of similar riskiness
through the rationally perceived possibility
of the bubble bursting generating a large
negative return. On commodity futures, see
Irwin and Yoshimaru (1999), Irwin and Holt
(2004) and Gilbert (2010b).

The 1999-2000 internet equities bubble
appears to fit this description. Phillips et al.
(2011) have developed a methodology which
allows the identification of asset market
bubbles, at least ex post. In Gilbert (2010b), I
use the Phillips methodology to ask how much
of the 2006-08 price boom was due to bubble
behaviour, at least in the (narrow) sense or
a rational bubble. The answer in that paper
is “not much”. There is evidence of bubbles
in the copper market but, contrary to the
results reported by Phillips et al. (2011), the
tests for crude oil were inconclusive. The only
agricultural products where bubbles were
detected were soybeans and soybean oil, but
these bubbles were small and not long-lasting.
However, the testing methodology is new and
relatively untried – other investigators claim
more substantial evidence for agricultural
price bubbles in 2007-08.

More recently, a significant group of institutional
investors have started to invest in commodity
futures through index-based swap transactions
as a portfolio diversification strategy and to
assume exposure to the commodity ‘asset
class’. In agricultural futures markets, these
positions are often large in relation to total
activity – up to 40% of market open interest
(Gilbert 2010b). Differently from traditional
speculation, these positions are relatively long-
term and are predominantly long, i.e. they
involve purchase of futures contracts which are
then held as long-term investments. The sharp
rise in index-based investment in commodity
futures over the past five years may therefore
be seen as a positive shock to inventory
demand. Gilbert (2010a) argues that this shock
was a significant contributory factor to the
2007-08 food price spike. See also U.S. Senate
Permanent Subcommittee on Investigations
(2009) and Baffes and Haniotis (2010).

In summary, there is substantial evidence
the futures market activity contributed in
some way to the 2007-08 agricultural futures
market spike, although there is less evidence,
at least currently, that these factors have
been important in 2010-11. These perceptions
have led a number of politicians to argue for
greater regulation of agricultural commodity

13 C. L. Gilbert - Food Reserves in Developing Countries

futures markets. This regulation might take
the form of

a) Prohibition of certain type of transactors,
in particular index providers and/or hedge
funds. (Note that we never observe the
motivations for trades so we cannot easily
prohibit particular types of transaction).

b) Taxation of futures markets transactions,
along the lines of the Tobin tax.

c) Increased market transparency (discussed
in section 3.5 below).

The proposal to prohibit index providers
and hedge funds from accessing agricultural
futures markets is based on the premise
that their activities fail to serve any useful
function and add to volatility. It is probably
true that index providers did indirectly raise
food prices in 2008. They certainly also lost
money when prices fell in the second half of
that year in line with Friedman’s (1953) claim
that destabilizing speculation will result in
financial loss. However, it was less obvious ex
ante that these investments were ill-advised.
Index-based investment in commodity futures
may be seen as a form of macroeconomic
speculation – unable easily to invest directly
in China and some other emerging markets,
investors take positions in the commodities
that China will need to purchase if it is to
continue to grow rapidly. These investors failed
to foresee the financial crisis. With this event
behind us, commodities have again seemed an
attractive investment in a low return world.
On this view, it is an error to see index-based
investment as non-fundamental. Rather, these
investors are taking a longer term view of
fundamentals than that taken by participants
in the physical markets.

The claim that index investors and hedge
funds fail to fulfil a useful social function is
also mistaken, since they provide liquidity to
commercial transactors who wish to hedge
their positions. Liquidity provision will be
volatility-reducing. The evidence suggests
that it is the hedgers who tend to increase
volatility by attempting to protect themselves

against possible future price movements.
However, it is never suggested that hedging
should be prohibited.

The Tobin tax proposal runs into the same
problems. First, it would have a negligible
effect on index investment since index
investors typically follow a buy-hold strategy,
the result being that then tax would add
negligibly to their costs. More generally, the
tax would be a tax on liquidity provision and
would be therefore likely to increase and not
reduce volatility. Neither of these proposals
therefore makes much sense. By contrast, the
proposal for increased market transparency is
generally seen as desirable, in particular in
Europe which lags U.S. practice. The impact
on volatility would primarily be through better
informed speculation.

It has been suggested that there should be
limits on large positions. Some exchanges do
impose such limits on expiring contracts. This
is a proposal which is worth studying but its
effects would be to restrict opportunities for
market manipulation, which is already illegal,
and not to reduce volatility since in general
few commercial transactions are based off
the prices of these expiring contracts.

There is general agreement that international
responses to both the 2008 and 2010-11 price
shocks have been hampered by a lack of
comprehensive information on the physical
supply and demand situation, in particular in
relation to the level and availability of grain
stocks. Both the F.A.O. and the U.S. Department
of Agriculture (U.S.D.A.) provide an efficient
and timely assessment of grain production
at the world level but they are constrained
to base their estimates on data collected by
national agencies. At the country level, both
the U.S.A.I.D.-financed Famine Early Warning
System (F.E.W.S.) Network and the F.A.O.-
supported Global Information and Early Warning
System (G.I.E.W.S.) work efficiently. However,
some users complain that G.I.E.W.S., which is
currently still in the process of development,

3.5. Increased Market Transparency

14ICTSD Programme on Agricultural Trade and Sustainable Development

remains insufficiently comprehensive in relation
to country coverage and often lacks timely
information. This suggests that funding levels
may be inadequate.

The largest gap remains comprehensive
information on inventories. To cite one
example, I noted above in section 3.3 that
although reported world grain stock levels have
fallen sharply over the past decade, this fall
is largely due to an apparent fall in Chinese
stocks but that it is unclear whether this fall is
real and whether the Chinese stocks reported
in the 1990s would have been available to the
world market if required. In Gilbert (2011b) I
stated that it would be very helpful if agencies
could work with the Chinese government to
increase transparency on grains stock levels
and to establish, with greater certainty and on
a consistent basis, what stock levels were over
the past decade.

This is the basis for the current G20 proposal
for an Agricultural Market Information System
(A.M.I.S.).10 Details of the how the A.M.I.S.
may work are set out in F.A.O. et al. (2011).
Its objectives would be both the compilation
of comprehensive information and the
coordination of policy responses. In general
terms, any proposal which will result in more
comprehensive, consistent and timely statistical
information is to be welcomed. The success of
the A.M.I.S. will, however, be measured less
in terms of what it manages to achieve at the
multilateral level than in terms of the extent
to which it can persuade or pressure national
governments, particularly those of the large
emerging economies, to increase both the
amount of information they collect and the
extent to which they share this with the wider
international community.

Transparency issues also arise in relation to
futures markets. The U.S. Commodity Futures
Trading Commission (C.F.T.C.) provides detailed
information on so-called commercial and non-
commercial trading positions, loosely identified
as representing hedging and speculative activity
respectively, through its weekly Commitments
of Traders (C.O.T.) reports. Since 2006, these
reports have been augmented for agricultural
commodities by a supplementary report

detailing the holdings of various categories
of financial market participants. The C.O.T.
reports are widely followed by market analysts
but are only available for U.S. markets. There
is widespread, but not universal, support for
the view that comparable reports should be
issued for non-U.S. markets, in particular for
the London and Paris futures markets.

Many commentators appear to take the view
that increased financial market transparency
is always a benefit. The academic finance
literature fails to support this position. The
level of transparency affects the distribution
of profits amongst market actors as well as
its level and this prohibits simple conclusions
– see Pagano and Röell (1996). In extreme
cases, market transparency can make trading
by particular parties completely unprofitable
with the result that liquidity declines perhaps
leading to disappearance of the market. It
should therefore not be surprising that some
futures market participants oppose increased

There is room for debate on the adequacy of
the current level of transparency enforced
by the C.F.T.C. on U.S. futures markets.
Nevertheless, it does seem difficult to make
a case that extension of the same level of
transparency to European markets would in
any way impede their functioning. So long
as reporting requirements remain lower in
European markets there is a danger that traders
who wish to hide their activities will choose
the less transparent European markets over
the more tightly regulated U.S. markets. There
is only anecdotal evidence that such evasion
currently takes place, but a level playing field
would enable European markets to more easily
rebut that suggestion.

Increased futures market transparency will not
have any direct impact on food price volatility.
However, by throwing light on the existence
of large positions, it should make market
manipulation more difficult, and indeed this
is the primary objective of the C.O.T. reports.
Along with increased transparency on stocks
and production, it should also result in better
informed speculation perhaps thereby decreasing
the probability of speculative bubbles.

15 C. L. Gilbert - Food Reserves in Developing Countries


Increased food prices and the associated
volatility have brought food security concerns
back into prominence. An elementary but
important observation is that countries differ
markedly in their food security situations.
Although we can find some general principles,
country diversity should make us cautious in
offering universal food security recipes.

The normal food balance is the most important
difference across countries in relation to food

a) Some countries are always, or almost always,
grain exporters. These countries will rarely
face problems of lack of food availability, and
in the few cases that this problem arises, it
can be dealt with by a small food security
stock. Instead, their problem is that, through
trade, countries import price variability
from world markets to domestic markets.
Governments of these countries often seek to
insulate domestic consumers from imported
price variability.

b) At the other extreme, some countries are
always, or almost always, dependent on
grains imports. These countries face both the
problem of variable prices on world markets
and possible problems of lack of availability if
world markets cease to function efficiently.
In particular, they find suppliers reneging on
contracts if prices rise sharply.

c) A much larger number of countries find
themselves in an intermediate position in
which they are normally food self-sufficient
but in which they need to import if bad
weather results in a poor harvest.

Historically, population centres have been
located in terrain in which they can feed
themselves. On a self-sufficiency model, most
countries find themselves in the third category.

Fast population growth can reduce self-
sufficiency moving countries from category (c) to
(b). Comparative advantage-based specialization
can also move countries out of group (c). Either
the shift of the labour force into manufacturing,
as in Korea, or deagriculturalization resulting
from resource extraction, as in Nigeria, can
turn previously self-sufficient countries into
importers. Agricultural specialization has
allowed agriculturally-based development in
which countries become major exporters, as in
Brazil and Thailand.

Climate change may interact with these factors.
There is an old concern that global warming
may result in desertification so that previously
self-sufficient countries become dependent
on imports. This is a slow process. Perhaps
of more immediate concern is the perception
that weather patterns may be becoming more
variable. Climatologists have focussed less on this
aspect of climate change. Increased variability
can translate into a greater proportion of poor
harvest years and larger losses when harvests
are poor. This is consistent with the evidence
cited above in section 2.2, that grains price
volatility appears to have increased over recent
years. However, it is also consistent with grains
production moving to more marginal land, such
as Ukraine and Russia, where weather conditions
have always been variable.

A second important difference across countries
relates to the staple food. Asia is largely
dependent on rice, southern and eastern Africa
are dependent on maize while north Africa and
the Middle East largely consume wheat. Latin
America shows more diversity with maize, rice
and wheat contributing to different extents
in different countries. These differences
are important because of differences in the
importance of international trade across the
three major grains markets and also because
of differences in the extent to which markets
function. Rice is characterized by a low
proportion of total world production entering

4.1. The Food Balance

16ICTSD Programme on Agricultural Trade and Sustainable Development

trade and by poorly functioning international
markets with most trade remaining on an inter-
governmental basis – see section 2.4. This makes
reliance on international trade more dangerous
for rice-importing countries than for those
countries which import maize or wheat.

Commercial policy – import tariffs and
export taxes, quotas or outright restrictions
– allow governments of exporting or near
self-sufficient countries to insulate domestic
prices from shocks to the world market. Asian
rice producing and consuming countries have
a long history of successfully using these
instruments to stabilize domestic prices –
see Timmer (2010). Thailand and Vietnam,
the two most important rice exporters, have
successfully used variable export taxes to
shield domestic consumers from movements
in world prices over a number of decades.
Siamwalla (1975) discusses the Thai experience
in the initial postwar decades. Indonesia,
which for many decades was not quite self-
sufficient, employed an import monopoly
(Ellis et al., 1991). Both Indonesia and the
Philippines intervened “at the margins of the
private marketing system” (Timmer, 2010) in a
manner which contrasts with the African model
in which public activities tend to squeeze out
the private sector.

These price stabilization programmes have
been similar in both design and effect to the
(evolving) E.U. Common Agricultural Policy
(C.A.P.). Timmer (2010) argues that these
policies have enabled Asian governments to
deliver substantial price stabilization benefits
to consumers.

Stabilization policies of this sort impose
costs. One cost element is the government’s
fiscal contribution. This has provided the
dominant theme in the E.U. C.A.P. debate.
Redistributional impacts have also been
important. In exporting countries, export taxes
and outright bans have redistributed purchasing
power from producers to consumers and from

the countryside to the cities as producers
have been prevented from taking advantage
of high world prices. Since the rural poor are
generally poorer (as well as less politically
vocal) than the urban poor, the result has been
to redistribute from the very poor to the poor.
In importing countries, domestic prices have
been held above world levels redistributing
from consumers to producers and from cities
to the countryside. This has also been the
European C.A.P experience.

Export controls are an alternative to variable
export taxes and have been widely used
over the years since 2007 – see, for example,
DEFRA (2010). Such controls are less market
compatible than variable taxes, in particular
since they will often result in non-performance
on existing commercial contracts. Export
bans affect the commercial reputation of
the exporting country and of private firms
involved in the export sector. A reputation for
poor contractual performance will often result
in lower prices once the controls are lifted
as counterparties seek discounts relative to
world prices to compensate for possible future

The lessons from food price stabilization
schemes in food exporting developing countries
is therefore that they can be successful in
protecting countries against price shocks but
they are also redistributive, in certain cases
unfavourably so. Variable export taxes are
preferable to quantity-based restrictions.

Standard definitions of food security run in
terms of the availability of adequate food
and access to this food – see, for example,
Pinstrup-Andersen (2009). We can think of
food security at the national or the household
level. Access problems arise at the household
level since even if a country has potentially
adequate food availability, not all households
will have adequate access to food.

At a national level, a country may be said to
be food secure if it can guarantee adequate

4.2. Commercial policy

4.3. Food Security Stocks

17 C. L. Gilbert - Food Reserves in Developing Countries

food to its citizens with a reasonable degree
of certainty over the future, even if access
problems may prevent some households
from obtaining adequate food. Countries
may choose to hold stocks either to ensure
availability of food on domestic markets and
thereby stabilize domestic prices or to protect
food access for specific vulnerable groups in
the event of a food shortage. I refer to the
first of these as food security stocks and the
second as humanitarian stocks. Although this
conceptual distinction is clear, it is not always
made and, in practice, stocks may be held for
a mixture of motives. I concern myself in this
and the next section with food security stocks,
as defined above, and postpone discussion of
humanitarian stocks to section 4.7.

Food security at the national level, in the
precautionary sense defined above, is not
a serious problem in the major developed
market economies. No developed economy
experienced problems in obtaining the food its
citizens required either in 2007-08 or 2010-11.
Furthermore, there does not appear to be any
likelihood of food availability problems in the
future. Contrast the situation of grains with
energy where it is easy to envisage political
conflict which closes the Straits of Hormuz
drastically limiting petroleum availability in
Europe. It is true that high food prices will
erode living standards, even in developed
economies. However, the share of food total
household expenditure in the nineteen nineties
was less than 20% in all developed economies
and as low as 8% in the USA (Mitchell et al,
1997). Because the farmgate share of many
food products is also as low as 20%, a doubling
of farmgate food prices will have a significant
but not serious impact of around 1%-5% on the
overall household budgets, greater for the
poor and less for the rich.

Food importing countries, including countries
which are normally exporters but import
occasionally, are likely to consider national
food security stocks to shield themselves
against lack of availability or high prices on
world markets. The standard argument from
economic theory that private stockholding

will be adequate to control volatility loses its
validity in poor economies. That argument is
based on an absence of externalities and the
ability of stockholders to offset their price
exposure on futures markets – see Gilbert
(2011b). Futures markets will generally be
absent or inaccessible from these countries.
To the extent that it does store food, the
private sector will do so to meet the likely
purchases and not the needs of the poor and
vulnerable groups.

On top of this, policy risk may imply that they do
even less than this. Because staple foods form
a large part of the budgets of poor households,
food prices and availability become acutely
political issues. Governments are therefore
unable to credibly and effectively commit
not to intervene in the event that a shortage
arises. However, this makes it unattractive
for private merchants to store grains until
government has announced its intervention
decisions. By the time governments have
made these decisions, it is likely to be too
late for the private sector to act effectively.
In turn, governments justify intervention
by reference to the unpreparedness of the
private sector (Jayne and Tschirly, 2010).
These problems are largely absent in middle
income and developed economies in which
governments typically follow policies based
on pre-announced intervention rules.

There is a further problem which relates to
the meaning of the word “stabilize”. Timmer
(2010) states that, the anticipatory action of
private sector stockholders tests to destabilize
the market price “when there are expectations
of shortages and rising prices” (italics in
original). Standard economic arguments would
indicate that anticipation of likely future
price rises is likely to reduce price variability
by providing timely signals to producers and
consumers. However, governments may prefer
to delay bad news in the hope that matters
improve – see section 4.6, below.

Finally, food price volatility may impose
negative externalities (Gardner, 1979). The
major impact of these externalities will
typically be on supply chain intermediaries,

18ICTSD Programme on Agricultural Trade and Sustainable Development

in developing countries particularly acutely
on locally-based intermediaries with limited
access to credit and futures markets. The
consequence is that such intermediaries will
often operate at inefficiently small scale and
will be at a competitive disadvantage relative
to multinational competitors (Dana and
Gilbert, 2008; Gilbert, 2009).

National food security stocks are particularly
attractive for landlocked countries where
transport costs are high and can also rise
sharply in the event of an urgent requirement
to transport large quantities – Dana and Gilbert
(2008) note that the cost of transporting maize
into Malawi from South Africa can rise sharply
during a shortage as the result of limited
truck capacity. In principle, road transport
constraints may be circumvented by use of rail
links but railways typically prioritize long term
minerals transportation contracts over crisis
food transportation, which, although urgent,
will not constitute a long term opportunity for
the rail company.

The experience over a number of decades
indicates that national stock policies have
been costly – they tie up scarce resources, the
grain is vulnerable to deterioration, they are
vulnerable to corruption and theft and, like
internationally held stocks, they discourage
private stockholding. In an authoritative
review, Knudsen and Nash (1990) concluded
that stabilization schemes should “avoid
handling the commodity when possible”. If
other options are available, they are likely
to be preferable. Nevertheless, and contrary
to the view expressed by Knudsen and Nash
(1990), the Asian experience with national
rice stockpiles has been generally positive.
Indonesia, for example, has managed to
insulate its domestic consumers from volatility
in world rice prices by using a combination of
export taxes and a small buffer stock – see
Sicular (1989) and Timmer (2010).

The resolution of this difference in views rests
on two considerations. Those Asian countries
which have successfully used rice stockpiles
have generally been close to self-sufficient and

have experienced only modest weather shocks.
Consumption variability is low. Variable export
taxes or import tariffs have been largely
sufficient in insulating domestic markets
from world price shocks with buffer stocks
playing a supporting role. This experience
may not translate well to countries which
are major importers or which can experience
severe weather shocks. Second, grains
storage is technically demanding and storage
agencies are vulnerable to both favouritism
and corruption. Governments may therefore
benefit by seeking assistance in administering
national food security stockpiles.

The most recent rise in food prices, which
started in the 2010 northern hemisphere
summer, has left food-importing L.I.C.s in a
difficult position. This would be an expensive
time in which to accumulate a food security
stock but the 2008 experience has led many
governments and commentators to the view
reliance on trade may be ill-advised. In
general terms, this conclusion is misconceived.
Maize and wheat markets functioned well
over 2007-08 and continue to function well
now. The problem with these markets is the
unpredictability of the prices that importers
will need to pay, not availability of the grains
themselves. It is this price unpredictability
that governments need to address. For many
countries, stockpiling will be an expensive
way to do this although this may nevertheless
be the best response in landlocked countries.
I outline an alternative market-based food
security strategy in section 4.6 below.

Timmer (1986) argued for a move away from
national food security stocks towards food
security via trade and production based
on comparative advantage. This view was
reflected in the policy advice offered by the
multinational development agencies over the
two decades prior to the 2007-08 food price
surge. If supply (harvest) shocks are largely
uncorrelated across countries, governments

4.4. The Balance Between Trade and Food
Security Stocks

19 C. L. Gilbert - Food Reserves in Developing Countries

can import when they need to do so without,
on average, paying high prices. A trade-based
food security policy requires access to foreign
exchange but does not tie up resources in
those years in which supplies are adequate.
It is less vulnerable to corruption. However,
trade based food security works less well if
imports are required at a time when a demand
shock has driven up prices on world markets,
and are less attractive in landlocked countries
than in countries with good port access.

Gouel (2011) has explored the optimal balance
between trade and a national food security
stock for a small grain importing developing
country. He supposes that storage is optimal in
both the country in question and in the world
economy in the sense defined by Gustafson
(1958) that stocks earn the expected (possibly
risk-adjusted) rate of interest. Gouel supposes
that this results from public storage both in
the small economy and the world economy,
but it could equally well result from offering
subsidies to private sector actors. In the
event of a shortage, the small country has the
choice between consuming out of inventory,
supposing this to be positive, or importing. In
the event of a surplus, the country can either
add to inventory or export. The possibility of
importing and exporting reduces, but does
not eliminate, the incentive to hold stocks.
Domestic stocks are valuable when the world
price is high and storage is attractive when
it is low. Storage is more attractive when
transport costs impose a high wedge between
import and export parity prices. Storage is
probably also more attractive when shocks in
the small country are correlated with those in
the world market, although this goes beyond
Gouel’s model.

Gouel’s analysis leads to three important

a) It emphasizes that trade and storage are
complements and not substitutes – the
issue is one of balance.

b) It implies that countries which are
dependent on food imports should not be

afraid to export in the event that they find
themselves with a surplus over domestic
requirements in a year in which world
prices are high. There are many L.I.C.s,
such as Malawi and Zambia, which are self-
sufficient in good years but need to import
if weather conditions are poor. Often, these
countries ban exports in order to ensure
that any surplus to ensure that any surplus
is available for inventory. This policy may
be misconceived.

c) Transport costs are a major reason that
national stocks remain an important food
security instrument. Improving transport
links, in particular port efficiency and rail
access, is an important and simple means
of increasing food security.

The response of rice exporting countries
to export controls in 2007-08 and the
similar response of Russia in wheat in 2010
have persuaded many developing country
governments that trade fails to deliver on food
security in precisely those circumstances that
it is required – see Christiaensen (2009) and
DEFRA (2010). This has resulted in a reversal
of the move towards trade-based food security
and a revival of interest in food security and
humanitarian stocks. Post-2008 attempts by
countries to restore grain stock levels in what
was already a tight market may have been a
contributory factor behind the renewed rise
in food prices in 2010.

By insulating domestic producers and
consumers from the world market, export
restrictions and variable export taxes force the
burden of adjustment on importing countries.
In many cases, these countries may be poorer
and less well-equipped to cope with the price
volatility than the exporters. Widespread
resort to controls reduces the depth of the
world market and increases the volatility of
prices on what can become a residual market
of last resort. Variable export taxes result
in incomplete or absent communication of

4.5. The WTO and Food Exports

20ICTSD Programme on Agricultural Trade and Sustainable Development

price incentives for increased production to
producers in exporting countries. Quantitative
restrictions or bans on exports are likely to
reduce availability at the world level at just
the time shortages are occurring.

Faced with this high price volatility and the
threat of export bans, importing countries
have felt themselves obliged to institute food
security stocks. Seen in this light, export
restrictions generate a familiar Prisoners’
Dilemma: both exporters and importers are
better off if in the long run if exporters forbear
from restricting exports but the governments
of exporting countries are unable to commit
not to resort to such controls if they become
expedient in the short term. The consequence
is a “bad” equilibrium in which importing
countries run national food security stockpiles
and aim for food self-sufficiency despite the
high costs involved and exporting countries
are unable to fully exploit their comparative
advantage and their farmers are unable to
profit from periods of high world prices.

How can the world escape from this “bad”
equilibrium? There is a growing consensus
for discussion of possible limitation of the
use of export controls within the W.T.O.
Fan (2010) has argued that “governments
should be encouraged to eliminate existing
export bans and refrain from imposing new
ones”. Sharma (2011) emphasizes the current
asymmetry in W.T.O. provisions in relation
to imports and exports. Currently, countries
are only obligation to notify the W.T.O. of any
restrictions they wish to impose, and many
fail even to do this. F.A.O. et al (2011) makes a
number of specific proposals for strengthening
current W.T.O. export disciplines. However,
any strengthening of W.T.O. disciplines on
export controls will require a balancing of
the interests of both exporting and importing
countries – see Konadreas (2011) and Sharma
(2011) for discussion.

A number of proposals have already been
tabled to increase these obligations – see
Mitra and Josling (2009). Some of these

proposals would go beyond notification to
consultation and even arbitration. Sharma
(2011) is sceptical whether these proposals
will go sufficiently far in disciplining countries.
He considers both a Tax Rate-Quota (TRxQ)
system and a variable export tax. Given that
export controls have achieved significant
success in stabilizing domestic grains prices
across a range of countries, it is unrealistic
to expect the governments of these countries
to accept major curtailment of their current
rights. As was the case with imports under the
G.A.T.T., formalization of the circumstances in
which and the modes by which controls can
be imposed and would be a useful first step
leading in time to eventual reductions.

Of the major grain markets, it is that for rice
which functions least well– see section 2.4. It
was also shortages of, and high prices for, rice
which generated most of the 2008 food price
riots. The argument, which is frequently made,
that many L.I.C.s could not access food in 2008
is only valid for rice. A pragmatic approach
might therefore distinguish between those
countries which depend on wheat or maize
imports, and those which depend on rice. In
current circumstances, L.I.C.s can probably
rely on being able to import additional maize
or wheat if this proves necessary, but may
justifiably be worried about being able to do
so for rice. This points towards the need for
contingency arrangements for rice – either food
security stocks, or formal trade agreements
with rice exporters or, where this is feasible,
a move towards rice self-sufficiency.

I raise two issues in this section – how well
do markets cope in crisis situations and
what means are available to improve their

There is a widespread view that L.I.C. food
markets fail to cope well in periods in which
prices are rising rapidly, whether these rises
are the consequence of a poor domestic

4.6. Markets and Food Security

21 C. L. Gilbert - Food Reserves in Developing Countries

harvest or are imported from regional or
world markets.

• One frequent charge is that of “hoarding”
whereby private traders hold inventory off
the market in the expectation that prices
may rise further, an expectation which may
become self-fulfilling – see the comment
from Timmer (2010) quoted in section 4.3.

• A second charge is that the private sector
may fail to mobilize supplies from outside
the country or the affected region in
the fear that the profitability of these
trades will be undermined by subsequent
government intervention. This inaction then
provokes exactly the official interventions
that the private sector feared – see Jayne
and Tschirley (2010).

• It is further asserted that even if government
or the private sector does contract for
additional supplies in advance, either on
an unconditional or a contingent basis, it
is likely that foreign counterparties will
renege on contracts which have become ex
post unattractive. The widespread resort
to bans and controls by food exporters
contribute to this fear – see section 4.5.
This suggests that there may be little value
in advance planning since it provides no
more than a false sense of reassurance.

Governments of many L.I.C.s, particularly
in Africa, have therefore come to the view
that they cannot rely on market responses in
food crisis situations. The result has been to
push food security and crisis response almost
entirely into the hands of governments and
international agencies, in particular the World
Food Programme (W.F.P.).

It would be incorrect to imply that the private
sector is excluded in this process. W.F.P. in
particular makes is concerned to maximize
local sourcing. However, a consequence is
that the private sector comes to service
government, the W.F.P. and other agencies and
not directly serve the consumers themselves.
In that sense, government and the W.F.P.
supplant the market.

Does this matter? In a crisis, the answer is no.
The imperative is to get food to mouths and
the government-agency-dominated structure
is effective in doing this. In other periods,
the answer is probably that it does have
negative consequences in that it reduces the
space left for the private sector and tends to
induce a food dependency culture. In non-
crisis situations, government and the agencies
should measure their success by how little,
and not how much, they are doing. Such a
strategy will reduce the role they need to
take on when crisis times recur.

The failures of the market11 that I listed at the
start of this section are different and need to
be addressed in different ways. Worries about
hoarding and inappropriate governmental
intervention can be reduced if government
talks to and consults the major private sector
grains traders talk in a regular basis. Discussion
can avoid the emergence of very different
views of likely market developments whereby
“prudent action” on one side is seen as “anti-
social hoarding” by the other. Consultation can
ensure that, when government does intervene,
it respects existing contractual arrangements.
Some sort of national grains council would
provide an enabling framework.

Problems of contractual performance are
less tractable since it will often be foreign
counterparties that renege. In this instance,
W.F.P. and other agencies have a comparative
advantage in enforcement since their reach
is wider and few suppliers are likely to risk
subsequent exclusion from their procurement
processes. This suggests that, in non-
crisis times, these agencies should focus
on contracting and not on direct provision.
Futures market clearing houses provide a
model – when two parties transact on a futures
exchange, their transaction is immediately
intermediated by the exchange clearing house
such that each now has a contract with the
clearing house – see Edwards (1984).

The emphasis on contracting meshes with the
so-called market approach to managing grains
price volatility discussed in Dana et al. (2006),
Sarris et al. (2006), Dana and Gilbert (2008),

22ICTSD Programme on Agricultural Trade and Sustainable Development

Sarris (2010) and Sarris et al. (2011). This
involves setting up structures and institutions
which allow governments and supply chain
intermediaries to cope with price volatility
instead of attempting to reduce or eliminate this
volatility and without resorting to extraordinary
government intervention. It can be applied to
either food security stocks or to humanitarian
stocks. The approach was embraced by the
G20 Agriculture Ministers in their June 2011
declaration (G20, 2011, Annex 5) and also in
the joint policy report coordinated by the FAO
and OECD (FAO et al, 2011).

The principal instruments involved are
futures and options contracts or “over the
counter” (O.T.C.) instruments, by means of
which providers (usually international banks)
intermediate the hedging instruments to the
governments or entities concerned. Prior to
the most recent decade, the use of these
instruments was typically discussed in relation
to protection of commodity exporters against
price falls. However, they turn out to be even
better suited to the protection of commodity
importers against price spikes.12

Consider a government which wishes to protect
itself against a possible grains price spike. By
buying futures contracts in the appropriate
grain, the government locks in the grain
purchase price. It will typically not take
delivery on this purchase and will close out at
the time it, or the national importing companies
or agencies, purchase spot grain. On average,
this hedge should neither lose nor make money
and there will be a modest reduction in the
variability of grain purchase prices. The major
advantage to the hedger is that the purchase is
known more or less accurately at the time the
hedge is initiated.13

In practice, for a mixture of political, credit
and anti-money-laundering concerns, L.I.C.
governments and enterprises are likely to be
constrained to hedging with option contracts
– see Dana and Gilbert (2008). Options allow
a government to secure price protection at a
certain level in return for a fixed premium.
For importers, a call option has the effect
of putting an approximate ceiling price on

the contracted quantities. A ceiling price is
particularly attractive if the intention is to
hedge against a price spike in which case
the “strike” (i.e. contractual ceiling) price of
the call option can be significantly above the
market price level at the time of contracting.

A major advantage of the call strategy is that
it has a market price. The cost of protection
is therefore known (and will typically also
be paid) in advance. Purchasers can decide
on the level and duration of protection that
they require or can decide that the cost is too
high and they prefer to remain unprotected.
In developed and middle income economies,
the cost of staple grains is no longer a major
component of household budgets and the
resulting diversification implies that self-
insurance is likely to be the preferred outcome.
On the other hand, many L.I.C.s may value this
type of price protection. Others may regard it
as inappropriate or too costly.

Call options can be structured either on a
purely financial basis (i.e. using exchange-
traded contracts), or on a physical basis (i.e.
by integrating the price “cap” into a purchase
or supply agreement). In countries where food
import prices are not closely correlated with
world prices (the basis risk problem), physical
option strategies (i.e. contingent purchase
agreements) might be more suitable. For many
L.I.C.s, interest in a purely financially settled
product may not be useful since it would not
result directly in food shipments moving into
the country, typically an important priority for a
country facing a shortage or food price shock.

Finally, governments may decide that the funds
required for payment of the premium could
be better spent on other projects. The result
of these multiple considerations will be that
this sort of strategy becomes appropriate for
those for whom it has the greatest value. As a
result, it may be significantly less costly than
the establishment of an international grain
reserve which will offer a uniform (but low)
degree of protection to all grains consumers.

Market-based protection against grains price
spikes is feasible for many countries and

23 C. L. Gilbert - Food Reserves in Developing Countries

is likely to be affordable for at least some.
Where it is feasible and affordable, agencies,
such as the W.F.P., will be better employed
in facilitating such contracts rather than
in organizing direct provision of food. The
fact that not all governments will wish to
purchase this form of protection is probably
an advantage since it will ensure funds are not
wasted. Unlike public storage, this approach
also encourages additional private storage
and trade finance. These additional benefits
in terms of strengthening the roles of private
actors suggest that these ideas deserve further
and wider discussion. They may be seen as
reinforcing trade-based food security policies
and thereby obviating the need to retreat
back to more expensive stock-based policies.
They will encourage the development of an
efficient consumer-orientated private sector
in grains which should be in a position to
better cope with any eventual crises.

What happens when, notwithstanding the best
developmental efforts, a food crisis does occur?
The P.R.E.P.A.R.E. scheme, set out in F.A.O. et
al. (2011), addresses this question and proposes
a system of regional, humanitarian emergency
stocks. The rationale for humanitarian stocks
is that of protecting poor and vulnerable
households from the impact of food shortages
and food price spikes:

“Relatively smaller food security emergency
reserves can be used effectively and at
lower cost to assist the most vulnerable.
Unlike buffer stocks that attempt to offset
price movements and which act as universal
subsidies benefiting both poor and non-
poor consumers, emergency food reserves
can make food available to vulnerable
population groups in times of crisis. In
addition, emergency reserves of relatively
small quantities of staple foods will not
disrupt normal private sector market
development which is needed for long
term food security”. F.A.O. et al. (2011,
paragraph 111)

Maxwell and Smith (1992) discuss the
relationship between poverty, vulnerability
and food security. At the household level,
food insecurity correlates with poverty.
National poverty lines should be defined
such that a non-poor household will have
sufficient resources to purchase adequate
food but, since poverty is a broader concept
than food insecurity, not all poor households
will necessarily lack adequate food (consider
subsistence farmers with little cash income).
Just as poverty statistics are snapshots, so are
food security statistics based on availability
measures. Vulnerability may be thought of as
the probability that a non-poor, food-secure
household finds itself poor or with inadequate
access to the food in the future. In that sense,
it is reasonable to state that a household is
food-secure if it not only currently has access
to sufficient food but if it can also reasonably
expect continued access in the future. Many
poor households will lack this guarantee even
if they do currently possess adequate food.

This discussion raises two questions:

a) Which are the vulnerable households?

b) How can assistance be efficiently targeted
at this group?

Humanitarian stocks will generally be
distributed directly to qualifying households
if the need so arises. Possible mechanisms
include school and hospital meals. If the
qualifying groups are carefully specified,
these households would only have been able
to buy small amounts of food from local
markets in the absence of the assistance.
Provided distribution is efficient, there will be
little leakage into local markets. These issues
were not directly addressed by either FAO et
al. (2011) or G20 (2011) These considerations
indicate that the price impact of well-
conducted humanitarian assistance should be
small and, by implication, the crowding out
effect on private stocks should also be small.
Provided the qualifying group is narrowly
defined, the financial cost of the programme
should be small and, in view of the favourable
terms of trade movements experienced by

4.7. Humanitarian and Emergency Stocks
– p.R.E.p.A.R.E.

24ICTSD Programme on Agricultural Trade and Sustainable Development

many L.I.C.s (see section 2.3), manageable
within the country’s own resources.

Humanitarian stocks therefore do appear to
be a potentially effective means of protecting
poor and vulnerable households from low
food availability and high food prices. At the
same time, it is important to underline the
qualification that the qualifying households
should be carefully, and probably narrowly,
identified and that distribution should be
efficient to minimize leakages into the wider
market. If these conditions cannot be met –
for example, if assistance is to be targeted
at entire urban populations – the earlier
discussion of sections 4.3 and 4.4 apply.

Poorly conceived and badly executed
humanitarian stock programmes will do little
to increase food availability. Their main impact
will be to redistribute food from the market
to those households who are favoured by the
programmes. Both the markets themselves
and the private stockholding function will be
undermined. Non-favoured households will
pay more and consume less. The result will
be arbitrary redistribution and, very probably,
resentment amongst the non-favoured. None
of this argues against humanitarian stocks, but
it does emphasize the importance of careful
design and efficient implementation.

It is against these criteria that we should
judge the P.R.E.P.A.R.E. (Pre-Positioning for
Predictable Access and Resilience) system set
out in Appendix E of F.A.O. et al. (2011). The
objective is to ensure that small regionally
pre-positioned emergency humanitarian
food reserves be available in order that the
international community can respond rapidly
to any emergency. Possible concerns over the
proposal include:

a) The extent to which vulnerability can be
defined and isolated. The F.A.O. et al. (2011)
discussion is clear on this requirement.

b) The proposed delivery channel, including
whether in terms of food or cash, and
the extent of any leakage. F.A.O. (2011)
discusses some of these issues.

c) The proposal envisages the possibility of
regional stocks. There are two problems
here. First, the extent of any cost savings
from regionalization will depend on food
shortages being uncorrelated across
countries. Second, transportation costs
between regional centres can be very high,
particularly in emergency situations where
speed is important. If regionalization is to
be pursued, it may be preferable to hold
stocks in ports rather than inland centres.
Further study is required.

d) There is an obvious danger that the
existence of an emergency humanitarian
stockpile may discourage governments from
making their own food security provision.
This is likely to result in pressure for non-
emergency calls on the humanitarian
reserve. It may even result in a lower
level of food availability in an emergency
situation that would have been the case
in the absence of the scheme. At the very
least, the P.R.E.P.A.R.E. scheme should be
coordinated with the efforts of national
agencies. Better, the proponents of the
new scheme should consider arrangements
which enhance the capacities of national
food security agencies rather than attempt,
as in the current proposal, to substitute

e) Missing from the F.A.O. et al. (2011)
discussion is any consideration of the role
of the private sector, emphasized in section
4.6. It is suggested that procurement will
be based on “optimized spot purchasing
that takes advantage of bulk purchases,
relative commodity pricing, regional and
international sourcing and seasonal price
movements” (ibid, Appendix E, paragraph
18), but such policies tend to favour
multilateral over local intermediaries.
W.F.P. already occupies a dominant
monopsonistic role in the food supply chains
of many developing countries and even if, as
I believe, it exercises its monopsony power
benevolently, this does little to encourage
the growth of resilient and independent
local supply intermediaries.

25 C. L. Gilbert - Food Reserves in Developing Countries

The outcomes from the P.R.E.P.A.R.E. scheme
may be complicated and its authors are correct
that a pilot programme will be necessary
to permit a reasonable evaluation. The
P.R.E.P.A.R.E. proposal starts from the premise
that it is the obligation of the international
community to provide humanitarian assistance
to developing countries. This is correct, but it
is only half the answer.

In the aftermath of the riots which took
England by surprise in August 2011, politicians
on the right argued that the rioters should be
strongly punished, implicitly as an example
to others. Politicians on the left instead
stressed the need to address the causes of
youth disaffection. Both views were correct,
but neither is sufficient alone to ensure that
riots do not recur. The same is true of the

P.R.E.P.A.R.E. proposal. It is sensible and
desirable in terms of crisis response but fails
to address the causes of the poor functioning
of L.I.C. food markets which underlies the
emergence of many food crisis situations.

Like British politicians, the G20 should beware
of an unbalanced knee-jerk reaction to the
recent food crisis. I recommend that, in
welcoming the F.A.O. et al. (2011) proposals,
it asks the authors to complement these by
proposals which will foster private sector
development in the food sector of L.I.C.s in
such a way as to reduce their likely future
dependence on P.R.E.P.A.R.E. or similar
schemes. I further recommend that active
consideration be given to the possible
intermediation role of agencies in contracting
as set out above in section 4.6.

26ICTSD Programme on Agricultural Trade and Sustainable Development


Food prices surged in 2007-08 and again in
2010-11. Volatility has also increased over the
levels experienced at the start of this century.
Whereas the rise in food prices is fairly
general, the increase in volatility is confined
to grains and some vegetable oils. However,
these are exactly the food products which are
of concern when discussing food security.

A number of international initiatives have
been suggested to lower prices and limit
volatility. In this paper, I have argued that
these initiatives are unlikely to succeed and in
some cases will make things worse.

• I argue that the role of biofuels mandates
and subsidies in driving food prices upward
have been exaggerated. Nevertheless, it
does appear that high crude oil prices have
fed through into grains prices via biofuels
demand for maize.

• Multilateral agreements, along the lines of
the International Wheat Agreements, rely
on government-to-government commerce
which is now the exception in international

• On stocks, it is true that these are now low,
but it is unclear whether the fall in stocks
over the period top 2005, largely resulting
from a decline in Chinese stocks, was a
major driver of the price rises in 2008.
In any case, it would be folly to build up
stock levels in the current period of tight
demand and high prices.

• Although there was some evidence of
speculative bubbles in the 2007-08 grains
markets, speculators are liquidity providers
and in general terms reduce volatility.
There may be other arguments for tighter
regulation of grains futures markets, but
trading restrictions or a Tobin tax are both
likely to result in increased volatility and
more costly hedging.

On the other hand, increased transparency,
both in relation to food production and stocks

and in the operation of European commodity
futures markets, where transparency is lower
than on U.S. markets, will be beneficial, even
if it will have little direct impact on food price

National food security policies offer the
prospect of more favourable returns. The
debate is often posed as a choice between trade
and stocks, but this is misleading since the two
strategies can and should be complementary.
Countries need to achieve a food balance. In
general terms, food importing countries will
need to rely on a mixture of variable import
tariffs and export taxes, together with a food
security stock. The precise nature of the
balance will depend on the country’s normal
food balance, its grain staple, transport costs
and (although this remains a conjecture) the
correlation between its supply and demand
shocks and those in the rest of the world.

Export bans, and to a lesser extent export taxes,
impose external costs on the remainder of the
world. The world market becomes residual and
hence more volatile and importing countries
find grain supplies are unavailable at the very
time that they are required. This forces them
to tilt the policy balance away from trade and
towards stockpiling and national self reliance,
which are likely to be more costly options. The
result is a bad equilibrium with lower trade and
greater food security costs than in the good
equilibrium in which exporters forbear from
controls. The hope is that by regulating the
use of controls, the W.T.O. might prevent the
world from slipping into this bad equilibrium.
The current asymmetry in W.T.O. export and
import disciplines should be addressed.

Asian rice-producing and consuming countries,
many of which have managed to achieve a
good balance between trade and stocks,
have typically done this using relatively light
government interventions and procurements
allowing an efficient private sector to
prosper. This contrasts with the situation in
much of Africa where there is a widespread
view that food markets do not work well,

27 C. L. Gilbert - Food Reserves in Developing Countries

particularly in crisis situations. A consequence
is that grains commerce has come to be
dominated by governments and the agencies.
I have suggested that it is important in these
countries to identify why markets are thought
not to work well and hence suggest ways which
might improve their functioning.

There are two major reasons why grains
markets work poorly in some L.I.C.s. The first
is a lack of trust and communication between
government and private sector actors. Lack
of communication can result in the two
groups holding divergent views on likely
market developments. This may sometimes
lie behind accusations that the private sector
is “hoarding” grain in a shortage situation.
Lack of consultation can result in government
making regulations, or undertaking trades on
its own account, which undermine private
section actions. Lack of communication and
consultation results in a fear that government
may act in this way even if, subsequently, it
does not intervene. Creation of improved
communication and consultation channels can
help resolve these difficulties.

A second problem relates to performance risk
in contracting. In the event of sharp price rises,
suppliers with fixed prices supply contracts to
L.I.C. governments or enterprises may believe
that the costs of default are small relative to
those of performance on the contract. Redress
will be difficult and costly and, in any case, would
not resolve the food situation. The situation
will be exacerbated if exporting governments
impose restrictions. A planned food policy
at most gives a false sense of security. This
suggests that W.F.P. and other agencies should
consider taking on an intermediation role in
the contracting process, thereby allowing L.I.C.
governments and enterprises to make viable
plans in advance of any crisis.

These considerations are relevant in the context
of the discussion of emergency humanitarian
stocks in the current G20 meetings. I distinguish
humanitarian stocks from food security stocks
on the basis that the former are targeted

specifically at vulnerable groups whereas the
latter are directed towards overall availability
and the general level of prices in local markets.
Provided the target group is narrowly defined
and the assistance is efficiently managed to
minimize leakages, humanitarian stocks will be
relatively robust in relation to the crowding out
concerns which apply to wider national food
security stocks. They will also involve a much
more limited financial commitment. The danger
is that targeting is imprecise, that the target
group is wide and that there is significant leakage
into local markets. If this turns out to be the
case, well-intentioned programmes, even when
genuinely motivated by humanitarian concerns,
may undermine market mechanisms. The
main impact of poorly designed and executed
programmes is likely to be on the distribution of
food across households rather than on the overall
level of availability. It is therefore essential
than any humanitarian stock programme is
well designed and efficiently executed. Note,
however, that neither of the proposals advanced
above for better consultation and for more
reliable contracting involve any multilateral
agency holding stocks additional to those they
already carry.

The W.F.P., in conjunction with other agencies,
has recently launched a P.R.E.P.A.R.E. proposal
for regionally based emergency humanitarian
stocks. A number of detailed points are unclear,
in particular with regard to how P.R.E.P.A.R.E.
stocks would be coordinated with national
food security provision. More generally, the
proposal starts from the premise that it is the
obligation of the international community to
provide humanitarian assistance to developing
countries rather than to facilitate their own
efforts to become more resilient to food crises.
The proposal is unbalanced, both in its lack of
consideration of crisis avoidance in addition to
crisis response and its neglect of the potential
role of the private sector. I suggest that, in
welcoming the P.R.E.P.A.R.E. proposal, G20
members also ask the sponsoring agencies to
reflect further on how the proposal may be
broadened to work towards a situation in which
the L.I.C.s can become less crisis-prone.

28ICTSD Programme on Agricultural Trade and Sustainable Development


1 See http://data.worldbank.org/about/country-classifications

2 A reviewer has suggested that farm households also fail to benefit from higher prices since
they are obliged to sell immediately after the harvest. It is correct that many households do
sell a proportion of their crop in this way to meet urgent cash requirements. However, high
prices will be reflected in early as well as in late season prices and will reduce the quantities
that farmers need to sell early.

3 Source: IMF, International Financial Statistics. 2010/11 figures are October-June.

4 Palm oil prices have exceeded their 1990s levels in 2011. In deflating food prices by the U.S.
P.P.I., I am effectively comparing these prices with the general level of wholesale prices.
Deflation by consumer prices might give qualitatively different results but these will be
country specific and there is no reason to take the U.S. Consumer Price Index (C.P.I.) as
representative even of other developed economies. Developing country C.P.I.s are not always
available over long periods of time and, in any case, it makes little sense to deflate food
prices by a C.P.I. which has a high food content.

5 Volatilities are calculated as the standard deviations of monthly nominal returns (changes in
the logarithms of monthly average prices) within each crop year averaged over crop years.

6 Maize 0.22, palm oil 0.24, wheat 0.42.

7 The ten cross-commodity correlations are averaged for each crop-year. The correlation of
this average correlation with the average deflated price is also positive at 0.25. High cross-
commodity return correlations are indicative of common demand shocks – see Gilbert (2010).

8 Weights are import and export value shares averaged over 2004-06 – see Gilbert (2010c) for
methodology and data sources.

9 The terms of trade are a very imperfect welfare measure. They do not take into account
movements in the prices of non-traded goods (including staple foods) or of goods which
are not traded at current border prices. In both these cases, the resulting redistribution of
welfare is internal to the country – but that is not to imply that it is unimportant. Neither do
they take into account the incidence of price changes across households which may be quite
different for imported and exported goods.

10 Financial Times, 7 June 2011. The French Minister of Agriculture Bruno Le Maire is quoted as stating
“Markets cannot operate blindly. We need reliable information on stocks and production”.

11 I deliberately use this phrase rather than the more theoretically-laden “market failures”.

12 Because commodity price distributions are skewed with flat bottoms and sharp peaks (Wright
and Williams, 1991; Deaton and Laroque, 1992), protection against the price spikes is more
valuable than protections against low prices.

13 The hedge is only approximate because of “basis risk”, i.e. the fact that the country’s import
prices will be less than perfectly correlated with the exchange price. As basis risk increases,
the usefulness of the hedge decline – see Dana and Gilbert (2008).

29 C. L. Gilbert - Food Reserves in Developing Countries


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The Impact of Trade Liberalization and the Global Economic Crisis on the Productive Sectors, Employment and Incomes in Mexico. By A. Puyana. Issue
Paper No. 15, 2010.
Globalization in Chile: A Positive Sum of Winners and Losers. By V. E. Tokman. Issue Paper No. 14, 2010.
Practical Aspects of Border Carbon Adjustment Measures – Using a Trade Facilitation Perspective to Assess Trade Costs. By Sofia Persson. Issue Paper
No.13, 2010.
Trade, Economic Vulnerability, Resilience and the Implications of Climate Change in Small Island and Littoral Developing Economies. By Robert Read.
Issue Paper No.12, 2010.
The Potential Role of Non Traditional Donors ‘Aid in Africa. By Peter Kragelund. Issue Paper No.11, 2010.
Aid for Trade and Climate Change Financing Mechanisms: Best Practices and Lessons Learned for LDCs and SVEs in Africa. By Vinaye Dey Ancharaz.
Issue Paper No.10, 2010.
Resilience Amidst Rising Tides: An Issue Paper on Trade, Climate Change and Competitiveness in the Tourism Sector in the Caribbean. By Keron Niles.
Issue Paper No. 9, 2010.
dispute Settlement and legal Aspects of International trade
Conflicting Rules and Clashing Courts. The Case of Multilateral Environmental Agreements, Free Trade Agreements and the WTO. By Pieter Jan Kuijper. Issue
Paper No.10, 2010.
Burden of Proof in WTO Dispute Settlement: Contemplating Preponderance of the Evidence. By James Headen Pfitzer and Sheila Sabune. Issue Paper No. 9, 2009.
Suspension of Concessions in the Services Sector: Legal, Technical and Economic Problems. By Arthur E. Appleton. Issue Paper No. 7, 2009.
Trading Profiles and Developing Country Participation in the WTO Dispute Settlement System. By Henrik Horn, Joseph Francois and Niklas Kaunitz. Issue Paper
No. 6, 2009.
Fisheries, International trade and Sustainable development
The Importance of Sanitary and Phytosanitary Measures to Fisheries Negotiations in Economic Partnership Agreements. By Martin Doherty. Issue Paper
No. 7, 2008.
Fisheries, Aspects of ACP-EU Interim Economic Partnership Agreements: Trade and Sustainable Development Implications. By Liam Campling. Issue
Paper No. 6, 2008.
Fisheries, International Trade and Sustainable Development. By ICTSD. Policy Discussion Paper, 2006.
Intellectual Property Rights and Sustainable development
Sustainable Development In International Intellectual Property Law – New Approaches From EU Economic Partnership Agreements? By Henning Grosse
Intellectual Property Rights and International Technology Transfer to Address Climate Change: Risks, Opportunities and Policy Options. By K. E.
Maskus and R. L. Okediji. Issue Paper No. 32, 2010
Intellectual Property Training and Education: A Development Perspective. By Jeremy de Beer and Chidi Oguamanam. Issue Paper No. 31, 2010.
An International Legal Framework for the Sharing of Pathogens: Issues and Challenges. By Frederick M. Abbott. Issue Paper No. 30, 2010.
Sustainable Development In International Intellectual Property Law – New Approaches From EU Economic Partnership Agreements? By Henning Grosse
Ruse – Khan. Issue Paper No. 29, 2010.
trade in Services and Sustainable development
Facilitating Temporary Labour Mobility in African Least-Developed Countries: Addressing Mode 4 Supply-Side Constraints. By Sabrina Varma. Issue
Paper No.10, 2009.
Advancing Services Export Interests of Least-Developed Countries: Towards GATS Commitments on the Temporary Movement of natural Persons for
the Supply of Low-Skilled and Semi-Skilled Services. By Daniel Crosby, Issue Paper No. 9, 2009.
Maritime Transport and Related Logistics Services in Egypt. By Ahmed F. Ghoneim, and Omneia A. Helmy. Issue Paper No. 8, 2007.
environmental Goods and Services Programme
Harmonising Energy Efficiency Requirements – Building Foundations for Co-operative Action. By Rod Janssen. Issue Paper No. 14, 2010
Climate-related single-use environmental goods. By Rene Vossenaar. Issue Paper No.13, 2010.
Technology Mapping of the Renewable Energy, Buildings, and transport Sectors: Policy Drivers and International Trade Aspects: An ICTSD Synthesis Paper.
By Renee Vossenaar and Veena Jha. Issue Paper No.12, 2010.
trade and Sustainable energy
International Transport, Climate Change and Trade: What are the Options for Regulating Emissions from Aviation and Shipping and what will be their
Impact on Trade? By Joachim Monkelbaan. Background Paper, 2010.
Climate Change and Trade on the Road to Copenhagen. Policy Discussion Paper, 2009.
Trade, Climate Change and Global Competitiveness: Opportunities and Challenge for Sustainable Development in China and Beyond. By ICTSD.
Selected Issue Briefs No. 3, 2008.
Intellectual Property and Access to Clean Energy Technologies in Developing Countries: An Analysis of Solar Photovoltaic, Biofuel and Wind
Technologies. By John H. Barton. Issue Paper No. 2, 2007.
Regionalism and ePAs
Questions Juridiques et Systémiques Dans les Accords de Partenariat économique : Quelle Voie Suivre à Présent ? By Cosmas Milton Obote Ochieng.
Issue Paper No. 8, 2010.
Rules of Origin in EU-ACP Economic Partnership Agreements. By Eckart Naumann. Issue Paper No. 7, 2010
SPS and TBT in the EPAs between the EU and the ACP Countries. By Denise Prévost. Issue Paper No. 6, 2010.
Los acuerdos comerciales y su relación con las normas laborales: Estado actual del arte. By Pablo Lazo Grandi. Issue Paper No. 5, 2010.
Revisiting Regional Trade Agreements and their Impact on Services and Trade. By Mario Marconini. Issue Paper No. 4, 2010.
Trade Agreements and their Relation to Labour Standards: The Current Situation. By Pablo Lazo Grandi. Issue Paper No. 3, 2009.
Global economic Policy and Institutions
The Microcosm of Climate Change Negotiations: What Can the World Learn from the European Union? By Håkan Nordström, Issue Paper No.1, 2009.

These and other ICTSD resources are available at http://www.ictsd.org

ICTSD’s Programme on Agricultural Trade and Sustainable Development aims to promote food
security, equity and environmental sustainability in agricultural trade. Publications include:

• Global Food Stamps: An Idea Worth Considering? By Tim Josling, Issue Paper No. 36, 2011.

• The Impact of US Biofuel Policies on Agricultural Price Levels and Volatility. By Bruce
Babcock. Issue Paper No. 35, 2011.

• Risk Management in Agriculture and the Future of the EU’s Common Agricultural Policy. By
Stefan Tangermann. Issue Paper No. 34, 2011.

• Policy Solutions To Agricultural Market Volatility: A Synthesis. By Stefan Tangermann. Issue
Paper No. 33, 2011.

• Composite Index of Market Access for the Export of Rice from the United States. By Eric
Wailes. Issue Paper No. 32, 2011.

• Composite Index of Market Access for the Export of Rice from Thailand. By T. Dechachete.
Issue Paper No. 31, 2011.

• Composite Index of Market Access for the Export of Poultry from Brazil. By H. L. Burnquist,
C. C. da Costa, M. J. P. de Souza, L. M. Fassarella. Issue Paper No. 30, 2011.

• How Might the EU’s Common Agricultural Policy Affect Trade and Development After
2013? An Analysis of the European Commission’s November 2010 Communication. By Alan
Matthews. Issue Paper No. 29, 2010.

• Food Security, Price Volatility and Trade: Some Reflections for Developing Countries. By
Eugenio Díaz-Bonilla and Juan Francisco Ron. Issue Paper No. 28, 2010.

• Composite Index of Market Access for the Export of Rice from Uruguay. By Carlos Perez Del
Castillo and Daniela Alfaro. Issue Paper No. 27, 2010.

• How Would A Trade Deal On Cotton Affect Exporting And Importing Countries? By Mario
Jales. Issue Paper No. 26, 2010.

• Simulations on the Special Safeguard Mechanism: A Look at the December 2008 Draft
Agriculture Modalities. By Raul Montemayor. Issue Paper No. 25, 2010.

• How Would a Trade Deal on Sugar Affect Exporting and Importing Countries? By Amani
Elobeid. Issue Paper No. 24, 2009.

• Constructing a Composite Index of Market Acess. By Tim Josling. Issue Paper No. 23, 2009.

• Comparing safeguard measures in regional and bilateral agreements. By Paul Kruger,
Willemien Denner and JB Cronje. Issue Paper No. 22, 2009.

• How would a WTO agreement on bananas affect exporting and importing countries? By
Giovanni Anania. Issue Paper No. 21, 2009.

• Biofuels Subsidies and the Law of the World Trade Organisation. By Toni Harmer. Issue
Paper No. 20, 2009.

• Biofuels Certification and the Law of the World Trade Organisation. By Marsha A. Echols.
Issue Paper No. 19, 2009.

For further information, visit www.ictsd.org


Founded in 1996, the International Centre for Trade and Sustainable Development (ICTSD) is an
independent non-profit and non-governmental organization based in Geneva. By empowering
stakeholders in trade policy through information, networking, dialogue, well-targeted research
and capacity building, the centre aims to influence the international trade system such that it
advances the goal of sustainable development.