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Food security: a range of tools for stabilizing prices

23/11/2009 - Article

The 2007-2008 food crisis put price instability back at the heart of the food security debate. A study coordinated by CIRAD has shown that contrary to what has previously been thought, managing the risks arising from price instability by resorting to futures markets and food aid is not enough. Prices have to be stabilized, and to do so, State intervention is indispensable.

From the agricultural liberalization of the 1980s to the crisis in 2008, most economists did not see price instability as a problem. They felt it was sufficient to allow producers, traders and consumers to cover themselves against the risks arising therefrom. Experts recommended using a range of risk management instruments, whether private, such as futures markets or crop insurance, or public, such as food aid or safety nets targeted at the most vulnerable households. This approach proved to be a double failure. In developing countries, private instruments failed to develop, at least for cereals and other staple foods, while public instruments, hinging on the management of food crises, proved incapable of halting the deterioration in the nutritional status of poor households.

Four categories of instruments, three types of instability

A study coordinated by CIRAD has now shown that not only is it necessary to stabilize prices, but that stabilization is impossible without State intervention. The study suggested classing instruments in four categories, according to their objective–stabilizing prices or reducing the consequences of price instability–and the type of governance practised–market-based, or public. Over the past 25 years, the only instruments seen as legitimate have been those intended to reduce the consequences of price instability (futures markets, food aid, etc). Researchers have now demonstrated the need to make use of the other two categories of tools, those that are intended to stabilize prices, either by improving market performance, or by means of State intervention. They have also stated that the four types of tools are not mutually exclusive, and should be used in combination, depending on the cause of the instability in question.

This is another novelty: researchers are now proposing a typology of the causes of price instability in developing countries. Instability may be "natural", for instance as a result of climatic hazards or crop pests. However, it may also be "imported" from international markets or "endogenous", in other words generated by the way the markets themselves function (speculative bubbles, cobweb phenomena, etc). The 2007-2008 crisis in particular revealed the importance of "imported" and "endogenous" types of instability, which had previously been largely overlooked. Experts now seem to agree on the fact that "imported" instability is likely to rise very significantly in the coming years, notably due to more unstable international prices as a result of the lower stock levels than in recent decades on a global level.

Concrete solutions tailored to the type of instability

In practice, how can prices be stabilized so as to secure producer and trader incomes and encourage the investment required to modernize production and markets? For researchers, the answer depends on the type of instability. If the instability is "imported" from international markets, State intervention is required. Price stabilization on a global scale necessarily calls for international market regulation, while on a national or regional scale, it involves controlling borders so as to compensate for the effects of international price variations (as far as WTO regulations permit this, since they forbid variable import taxes). If the instability is "endogenous", public intervention may be required to calm market speculation fever. This may entail regulating markets, resorting to international markets, or using public stocks. Lastly, if the instability is "natural", the solution lies in getting to the root of the problem, by modernizing food product production and trade structures. However, modernization inevitably takes time. Moreover, it calls for a degree of prior price stabilization, since modernizing farms and markets relies on investment on the part of producers and traders, who are reluctant to invest if prices are very unstable. This prior price stabilization will thus mean using fast-acting instruments such as public stocks or border controls. Finally, it is important to bear in mind that for public price stabilization policies to be effective, they need to be realistic, transparent, and credible. What needs to be done is to define a sufficiently wide, flexible price range to determine the thresholds for State intervention. These "intervention prices" will have to be announced publicly, be credible, and be respected, otherwise public intervention could well increase uncertainty among market operators rather than reducing it.

Bibliographical reference

Bricas N., Daviron B., Galtier F., 2009. Marchés alimentaires : à quelles échelles gérer l'instabilité accrue des prix ? Demeter, 2010: 11-53