Description:
In the long view, recent grain price
volatility is not anomalous. Wheat, rice, and maize are
highly substitutable in the global market for calories, and
when aggregate stocks decline to minimal feasible levels,
prices become highly sensitive to small shocks, consistent
with storage models. In this decade, stocks have declined
due to high income growth and biofuels mandates. Recently,
shocks including the Australian drought and biofuels demand
boosts due to the oil price spike were exacerbated by a
sequence of trade restrictions by key exporters beginning in
the thin global rice market in the fall of 2007, which
turned market anxiety into panic. To protect vulnerable
consumers, countries intervened in storage markets and, if
they were exporters, to limit trade access. Recognizing
these realities, vulnerable countries are building strategic
reserves. The associated expense and negative incentive
effects can be controlled if reserves have quantitative
targets related to the consumption needs of the most
vulnerable, with distribution to the latter only in severe
emergencies. More-ambitious plans manipulate world prices
via buffer stocks or naked short speculation to keep prices
consistent with fundamentals. Past interventions of either
kind have been expensive, ineffective, and generally
short-lived. Further, there is no significant evidence that
prices do not reflect fundamentals, including export market access.