World Bank Reprint Series: Number 304 Graham Donaldson Food Security and the Role of the Grain Trade Reprinted with permission from American Journal of Agricultural Economics, vol. 66, no. 2 May 1984), pp. 188-93. World Bank Reprints No. 264. Michael Bamberger, "The Role of Self-Help Housing in Low-Cost Shelter Programs for the Third World," Built Environment No. 265. Bela Balassa, "The Adjustment Experience of Developing Economies after 1973," IMF Conditionality No. 266. Bela Balassa, "Outward Orientation and Exchange Rate Policy in Developing Countries: The Turkish Experience," The Middle East Journal No. 267. Dipak Mazumdar, "Segmented Labor Markets in LDCs," American Economic Review No. 268. Stephen P. Heyneman and William A. Loxley, "The Effect of Primary-School Quality on Academic Achievement across Twenty-nine High- and Low-Income Countries," The American Journal of Sociology No. 269. James R. 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Von Pischke, "Agricultural Credit Policy in Developing Countries," translated from Handbuch der Landwirtschaft und Ernfihrung in den Entwicklungslaindern (includes original Gernan text) No. 281. Bela Balassa, "Trade P01icy in Mexico," World Development No. 281a. Bela baiassa, "La politica de comercio exterior de Mexico," Comercio Exterior No. 282. Clive Bell and Shantayanan Devarajan, "Shadow Prices for Project Evaluation under Alternative Macroeconomic Specifications," The Quarterly Journal of Economics No. 283. Anne 0. Krueger, "Trade Policies in Developing Countries," Handbook of International Economics Reprinted from AMERICAN JOURNAL OF AGRICULTURAL ECONOMICS Vol. 66, No. 2, May 1984 Food Security ad the Role of the Grain Trade Graham Donaldson This paper is concerned primarily with reas- grown at a generally increas3ng rate since the sessing the risks associated with developing early decades of the nineteinth century and country reliance on international trade as part has consistently outstripped increases in of a food security strategy. Such a focus is not global population. In the last thirty years grain intended to reflect a judgment on the relative production has grown more than 3% per year importance of this aspect vis-a-vis the several on average and has grown faster in developing other long-run and short-run aspects that re- countries than in developed countries. As a late to food security at the global, national, result, the price of food grains has declined and local levels. It is justified, however, by the steadily in real terms, with temporary inter- reality that the vast majority of households, in ruptions when peace has not prevailed. There developed and developing countries alike, are seems no reason why this trend should not dependent for their food on marketing net- continue through the end of this century (see works that are ultimnately global in nature. The Bale and Duncan, Barr). paper also discusses food supply and trade As global grain output has grown, its year- issues largely in terms of grain. This is because to-year variability has changed very little. grain is the p:rimary staple in the diets of the Using U.S. Department of Agriculture data on vast majority, and because such data as are global production since the early 1960s, we available relate almost exclusively to grain. find that while the absolute size of the annual Official policy statements from many inter- global variations has increased so has the pro- national agencies and developing countries re- duction base; the corresponding coefficient of veal perceptions about the risks inherent in variation was smaller in the 1970s than in the international grain markets that have not 1960s. Further, the global coefficient of varia- changed significantly since the dislocations of tion is smaller than that for most individual the early 1970s. Policy makers remain particu- countries. This indicates that production larly concerned that global supplies may prove shortfalls in any country or group of countries inadequate to meet the needs arising in the has tended to be offset by good harvest else- event of a poor harvest. And even if global where. However, these data do not indicate supplies are adequate, concerns remain about that national production variability is declining the affordability of imports and the possible in most individual countries (in some just the impact of political trade embargoes. Notwith- reverse appears to have occurred in the standing the large investments required to re- 1970s). duce reliance on international markets, there has been little effort made to assess whether, in the light of recent developments in the Changes in World Grain Markets world grain markets, many of the concem s in s he 19Mae about the reliability of world markets are jus- Devthe l970a tifiable. This paper seeks to address this mat- Developing countries have made increasing ter (see also Donaldson and Lewis) use of expanding global markets for grain im- ports to make up for poor local harvests and to dispose of surpluses. However, reliance on World Grain Supplies and Prices international food markets as a means of Although the data on global food trends is stabilizing domestic supplies has seemed poor, it seems clear that grain production has paradoxical to many governments because these markets are so widely perceived as un- The author is Chief, Agricultural Economics and Policy Division, stable. Yet, even in 1973 when export supplies World Bank. The views expressed are not necessarily those of the World were tight and prices high, developing coun- Bank. tries in need were able to import as much grain Copyright 1984 American Agricultural Economics Association Donaldson World Food Problems 189 as they could handle and distribute (its avail- new production areas have been opened up in abiliiy was not limited), although at an in- Southern Hemisphere developing countries, crmased price. This growth in the global grain from which grain arrives in world markets well trade has continued despite greater price in- before the North American harvest, thus re- stability. The reasons for this range from basic ducinig the need for global stocks. Annual changes in the global monetary system to grain exports from South America-mainly rnore mundane technical improvements in Argentina and Brazil-have risen from 10 mil- grain trading. Some of the more important fac- lion tons in the early 1960s to about 40 million tors are described below. tons today. Production increases of a similar size have been achieved in the European Changes in Stockholding and Reserves Community. While the United States has re- The changes in the international markets sice mained the major supplier of grains, it does 1974 have provided a substantial and' effective not exercise monopoly power over the world reserve from which importers may draw. This market. Alternative sources of supply, par- ticularly for nce and wheat where the U.S. reserve has three parts. First are aggregate marke shr is ale than iher grainS, trade flows: these have doubled in volume market share is smaller than in other grains, trade fows ths have doubl 1ed in ve give importers substantial flexibility. 260 m e2mion tons in 1980-81. Second are non- In addition, importing countries are able to 260rmillon stonsin19 1 Srecnd ar non- deal with an increasing number of major trad- gvr a sng ing companies, incuding four Japanese firms about 80 million tons, which backstop trade which handle exports from the United States. flows and are available for delivery within two Studies by the General Accounting Office and to three months. The third and most important independent scholars provide evidence that element in the world's total "buffer stock" is international grain markets are highly compet- the grain being fed to livestock which has in itive and that returns to capital of the major the past been diverted to make up for produc- traders are comparable with those in other tion shortfalls. In the last three years an aver- . . a -e . . age of about 620 million tons of grain (includ- i a - ing soybeans) was fed to livestock. This is porting country infrastructure for grain han- equal to over 60% of annual human grain con- dling and transportation has been expanded and far exceeds the needs of the forseeable sumption and includes large amounts of wheat ftrex (about 80 million tons) and soybeans (about 85 future. million tons), important sources of direct Better Information human nutrition. The feed grain buffer has been tested over Improved information systems including re- the past decade and has provided an effective mote sensing, weather forecasting, and ground and surprisingly timely response to production surveys have permitted major breakthroughs shortfalls. For example, when grain prices in the ability to monitor upcoming harvests rose during 1972-74, the feed consumption ad- throughout the world. This has enabled the justment mechanism proved extremely robust world market to know in advance of excep- and the drop in U.S. feed consumption in tional crop shortfalls and possible import re- 1973-74 was as large as the total global pro- quirements. As a consequence, major produc- duction shortfall (about 30 million tons, or a ing countries, such as the USSR, can no drop of about 21% in U.S. feed consumption). longer surprise the market as they did in 1972. A similar adjustment occurred in 1975-76, Substantial improvements also have been when the global grain production shortfall was made in the mechanisms through which the far larger than in 1973-74 (about 65 million USSR and other centrally planned economies tons below trend) but grain prices remained make purchases, and information exchanges relatively stable. Experience in 1982-83 pro- between them and suppliers have now been vides another example of this grain buffer regularized to minimize the risks from unex- functioning even in the face of ill-timed gov- pected decisions. ernment interventions. Sources of Supply and Competition Integration of the Global Market The increase in demand for grain imports has With improved telecommunications and in- been met by a growing number of suppliers in formation gathering, the organized grain mar- increasingly competitive markets. Important kets now provide an almost instantaneous and 190 May 1984 Amer. J, Agr. Econ. generally accurate reflection of the changing Facility of the International Monetary Fund judgments of buyers and sellers throughout (IMF) has been expanded to include conces- the world. Almost all international trade and sional medium-term credit for cereal imports. the great bulk of marketed production is Loans from the facility are made for five years priced on the basis of changes in a handful of (with two years' grace) at an interest rate of carefufly watched markets. Exporters through- 7%; they are not subject to IMF conditions out the world sell at roughly the same world about the borrower's domestic policies. A market price. even when domestic farmers country cannot draw more from the facility are paid a different price, as they are in the than 100% of its IMF quota (which is not static EEC. And government-to-government sales over time), but the maximum is not affected agreements, increasingly important in trade, by its drawings on other IMF facilities. A re- specify quantity ranges but not prices. Less view of the past twenty years' experience than 10% of current world trade takes place on shows that in practice this drawing limit extra-market terms. should not prove constraining. Growth of Futures Trading Influence of Exchiange and Interest Rates The organized grain fiutures market grew al- Overall, variations in foreign exchange values most twentyfold in the 1970s--the value of over the last ten years have been larger than total annual transactions now approaches $300 variations in food commodity prices. As a re- billion-and now provides an immense base sult, grain traders have resorted to using the for absorbing incremental trading activity that same hedging techniques first developed in the would previously have been disruptive. Even grain futures markets to cover foreign ex- more important, the large volume of trading change and interest rate risks. In termls of na- permits reliable "hedging," through which tional purchasing power, changes in foreign trading partners can lock in acceptable prices exchange values have often proved important for future cash transactions. This also makes it in determining the relative "affordability" of possible for nongovernmental decision makers food imports. For example, the fall in the dol- to hold carry-over stocks profitably, reducing lar's trade value helped buffer the rise in the argument for special buffer stocks. Be- dollar-denominated grain export prices in the cause they reflect current and expected supply 1972-74 period for countries like Germany and demand levels, the futures markets give and Japan; experience among developed coun- clear signals as to when grain should be re- try food importers through 1982 was basically leased into the market or alternatively held in similar. However, in 1983 both the dollar and stock. In late 1980 for example, when prices food export prices appreciated; this was a par- rose more rapidly than in 1972, only moderate ticular problem for many food-importing de- amounts were released from stocks, which in veloping countries. Interest rates have also the aggregate remained sufficient to meet sub- affected commodity prices by raising the cost sequent demand. This was in striking contrast of holding stocks. Overall, exchange and to experience in 1972, when government deci- interest rates have been more variable than sions caused excessive liquidation of stocks. food p.rices (in nominal dollars), and this vari- ability would have made efforts to stabilize commodity prices through interventions such New Safety Net for Poor C'ounitries as buffer stocks almost impossible over the past ten years. Agreements reached by the late 1970s help to ensure that poor developing countries will be able to buy food in the event of local crop Developing Country Food Imports and shortfalls or high import prices. First, a bind- Related Risks ing Food Aid Convention guarantees a mini- mum of 7.6 million tons of concessional deliv- There is a great difference in the food trade eries each year. This is double the amount of dependence of low-income and middle-income concessional food aid actually forthcoming in developing countries. While the latter have 1974 anid is larger than all current net imports increased imports in line with rising incomes, of food by low income countries (excluding the former have not, partly because their in- China). Second, the Compensatory Financing comes have grown less rapidly and from a far Donaldson World Food Problems 191 lower base. In the middle-income country of the purchaser. Recent changes in world groups, where cereal imports grew most rap- markets have helped to widen the gap between idly, per capita food production also grew, but the more efficient traders and those others in order to meet their "affluence require- who have followed inappropriate import prac- ments," the middle-income countries had by tices. Developing countries have not generally the late 1970s passed the industrialized coun- taken advantage of mechanisms, such as basis tries as the largest irnporters of grains. Higher trading (negotiating each element of the deliv- incomes, particularly in urban areas, led to ered cost on the most advantageous terms), changes in the kinds of commodities con- which can help lower the cost of food imports. sumed; wheat has become more important as The cost of retaining systems appropriate in have other higher value foods such as meat the 1960s has proven high. Judging from coun- and fresh vegetables, try case studies-which have been confirmed Among low-income countries, too, degrees by trade sources-developing countries as a of dependence on imported food differ widely. group could save up to $1 billion in foreign Through raising their domestic production, exchange each year out of their total commer- South Asian countries have been able to re- cial grain imports of about $8 billion. The duce their dependence on imports to feed the sources of potential savings include freight urban poor. In Sub-Saharan African countries and handling; purchasing arrangements includ- the food situation is approaching the propor- ing timing, the type and grade specification of tions of a crisis. Although the share of total the food bought, and its point of origin; financ- foreign exchange that they devote to commer- ing and insurance; market intelligence; and cial food imports is quite small and has de- regularized and open trading procedures. That clined somewhat over the past two decades, the potential savings are real is indicated by their volume of food imports has risen in rela- the fact that some countries (e.g., China, tion to domestic production. Chile, and Colombia), in tight market situa- tions, appear to pay prices similar to those Food Imports and the Balance of Payments paid by the most efficier,t traders among indus- trialized countries. For the great majority of developing countries, imports of food are not a major foreign ex- Reliability of Import Access change burden. As always, some countries Much recent policy debate has centered have fared much worse than the average. Much reces of dete has should When their own harvests have been poor, cer- around the issues of whether Countries should tain low-income countries have had to forego risk dependence upon foreign suppliers and planned imports of various kinds in order to uncertain international markets for so vitally buy food. Making these purchases on cor- important an item as food. Fear that exporters mercial terms has sometimes been very costly: may withhold supplies for political reasons certain countries have had to devote, albeit for provides a strong impetus for seeking self- only one year, almost half of their annual sufficiency. However, the last twenty years export earnings to buy food. But for develop- provides little evidence to justify such a con- ing countries as a group, food imports have cern. Even the USSR, the world's largest im- constituted only a small and declining propor- porter and the only country to be subjected to tion of the import bill over the past two de- a food trade embargo, has successfully im- cades. The increased pressure of balance of plemented a food security strategy, the viabil- payments, a serious problem for many rela- ity of which depends on imports; nutritional tively affluent food importers including some well-being has been raised, and consumption oil exporters, has come not from food but from has been made less variable. Small countries oil (the real cost of which increased sixfold also can follow such a strategy. And, in while that of grains declined), from debt ser- emergencies, food need not be purchased di- vicing, and from other imports. rectly from exporting countries; it can be bought in entrepots such as Malta, Rotterdam, or Singapore for only a small premium above Skill in Trading the world price. No developing country has ever been pre- It is also worth noting that the cost of food vented by political action from obtaining imports depends to a large extent on the skill needed supplies. For example, Iran continued 192 May 1984 Amer. J. Agr. Econ. to purchase U.S. grain all through the 1979-80 and hazardous source of supply for all except period when almost all its other commercial, those in major cities. Further, because the financial, and political ties were cut off. In vast majority of the population in developing either tight markets or tense political situa- countries live in rural areas with their incomes tions when supplies were needed quickly dependent on farm production, imports cannot (within a few months), sources have been provide a long-term solution to their food se- found to meet import requirements. Premiums curity. for such rapid delivery have been waived by Similarly, a grain import strategy is no sub- some of the export boards, including the Aus- stitute for a sensible stock-holding policy. tralian Wheat Board and the Canadian Wheat While the additions to storage capacity can be Board. For straight commercial purchases kept to the minimum required for operational made through transshipment facilities in third purposes, i.e., to keep the pipeline full, there countries, and therefore free of exporters' may be domestic political factors that justify political control, the net premium above mar- the holding of additional reserves of grain over ket prices for food imports has not exceeded and above operational stocks. However, such 10%. In recent years this depoliticization of storage is expensive, and the benefits are often food trade has even extended to concessional more psychological than economic. Because food shipments. in order to be useful, a reserve stock has to be However, while the international market kept full even if prices are high, there is sel- system offers increasing opportunities for dom a market advantage to holding reserves. making food more continuously available to The release of grain from an official stock can all, protectionist policies by major trading be effective in buffering short-run price countries restrict the opportunities for devel- changes; but the amounts of storage required oping nations to improve their food security. for this purpose are a marginal addition to Japan, Western Europe, the United States, those required for operational purposes, i.e., and the Soviet bloc shelter their agricultural to ensure continuous supply, and such stocks commodities behind often-rigid trade barriers. need to be backed by an effective trading These reduce food security in both indus- strategy. trialized and developing nations by preventing There is considerable scope for developing cost-reducing adjustments in rich countries country importers to take better advantage of and amplifying production instability in poor international markets. Doing this requires at- ones. More worrisome, however, is the grow- tention to the overall internal distribution in- ing agitation for restrictions of nonfood items frastructure, including point-of-entry facili- such as textiles, steel, and simple electronic ties, storage capacity, and transport systems. equipment. Trade restrictions, whether by It also requires attention to improved infor- quota or other barriers, are likely to reduce the mation systems, both internal (crop produc- export incomes of developing countries. While tion and stock reporting mechanisms) and ex- protectionism can make short-term political ternal (market conditions) and a system of sense to beleaguered officials, its long-run ef- logistics management especially for use in fects are to push economies back towards au- emergency situations. But, mainly it requires tarky, which inevitably increases food insecu- better technical use of the markets for grain, rity. ships, finance, insurance, and risk handling. Often what is needed is not a new organization but a concerted use of hired services to handle these matters. This approach has been used Implications for the Future successfully by a wide range of developing countries including Kuwait, Indonesia, and This review of the scale and mechanisms of Zaire. the grain trade suggest that countries, with Finally, the importance of the grain trade for some confidence, can make use of the interna- promoting global food security suggests a re- tional grain market as a residual source of vised policy agenda, both national and interna- supplies, provided they do so judiciously. tional. This would ineluide greater emphasis on However, a grain-trading strategy is no substi- the need to remove trade barliers, particularly tute for sensible domestic production policies. barriers to improving the mechanisms of Internal distribution problems in importing trade. 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