Managing price volatility: Approaches at the global, national, and household levels

This paper serves as background to the fourth presentation in a Symposium Series on Global Food Policy and Food Security hosted by the Center on Food Security and Environment at Stanford University and supported by the Bill and Melinda Gates Foundation.

Political dynamics, not economic analysis, drive the domestic policy response to sharply rising food prices. The political objective during a food price crisis is almost always to keep it from happening. In the short run, this means “stabilizing” domestic food prices despite whatever is happening in world markets. Stabilizing domestic food prices in the face of sharply escalating world prices is not a foolish goal—most countries try to do it. The real issue is whether this can be done effectively and efficiently. The answer is always “no” unless the country has planned well ahead for such a contingency and already has an operational food price stabilization program in place. 

As a matter of “good practice,” all countries are discouraged by international donors from conducting such programs. Instead, countries are urged to implement “social” safety nets in times of food price spikes. The economic rationale is clear: let market prices signal the scarcity of food resources so that supply and demand can adjust, and then compensate the poor for deterioration in their standard of living when food prices rise. The problem is that safety nets that reach the poor quickly and effectively take considerable time to design and implement, and are quite costly in fiscal terms if the poor are a substantial share of the total population. Historically, unless the country is already running a cash transfer program to the poor, the emergence of a food price crisis is too sudden for an effective government response. Gearing up emergency food relief safety nets is not an effective response to a sudden spike in food prices.

More active measures to prevent food price spikes are needed, both domestically and internationally. One starting point would be for countries with large populations to gradually build their grain reserves to the point where they do not feel vulnerable to spikes in world prices and to possible grain embargoes from their regular suppliers. It would be desirable to have such stockholding strategies coordinated internationally, but this is unlikely in other than rhetorical terms. Still, the mere existence of these stocks, even if domestically controlled, would have a calming influence on world grain markets (especially on the very thin world rice market). With calmer markets, recourse to more open trade policies becomes politically feasible (and it is almost always economically desirable). Eventually, the reality of the high costs of grain storage will stimulate a more balanced approach to food security, with both reserves and trade playing significant roles.