Christophe Gouel

AGRICULTURAL PRICE INSTABILITY: A SURVEY OF COMPETING EXPLANATIONS AND REMEDIES

There are two explanations for agricultural price dynamics. One follows cobweb logic and models fluctuations driven by expectation errors but emphasises that these expectations create complex dynamics and possibly chaos. The other stems from the rational expectations tradition of dynamics driven by real shocks. The empirical evidence tends to support the latter, but is not conclusive. The rational expectations model generates an optimal dynamic path from which no improvement can be expected from public intervention. However, if we take account of all the potential market failures in agricultural markets, and especially in developing countries, this conclusion might require some qualifications, although an appropriate policy design for stability has still to be achieved. This paper surveys the positive and normative literature on agricultural prices, highlighting empirical evidence and identifying remaining unresolved issues.

Food Price Volatility and Domestic Stabilization Policies in Developing Countries

When food prices spike in countries with large numbers of poor people, public intervention is essential to alleviate hunger and malnutrition. For governments, this is also a case of political survival. Government actions often take the form of direct interventions in the market to stabilize food prices, which goes against most international advice to rely on safety nets and world trade. Despite the limitations of food price stabilization policies, they are widespread in developing countries. This paper attempts to untangle the elements of this policy conundrum. Price stabilization policies arise as a result of international and domestic coordination problems. At the individual country level, it is in the national interest of many countries to adjust trade policies to take ad-vantage of the world market in order to achieve domestic price stability. When countercyclical trade policies become widespread, the result is a thinner and less reliable world market, which further decreases the appeal of laissez-faire. A similar vicious circle operates in the domestic market: without effective policies to protect the poor, such as safety nets, food market liberalization lacks credibility and makes private actors reluctant to intervene, which in turn forces government to step in. The current policy challenge lies in designing policies that will build trust in world markets and increase trust between pub-lic and private agents.

Rules versus Discretion in Food Storage Policies

This article compares various policies in a rational expectations food storage model with risk-averse consumers and missing insurance markets calibrated to represent a developing country. I consider an optimal storage policy under discretion and two optimal simple rules: a constant private storage subsidy and a price band. The storage subsidy achieves welfare gains similar to the discretionary policy. The price band maximizing social welfare is a price-peg scheme: The floor and ceiling prices are the same, and the capacity constraint represents 11% of the steady-state production level. This price band achieves three-quarters of the gains from the optimal policy under discretion. Copyright 2013, Oxford University Press.

Trade Policy Coordination and Food Price Volatility

Many countries adjust their trade policies counter-cyclically with food prices, to the extent that the use of restrictions by food-exporting countries has occasionally threatened the food security of food-importing countries. These trade policies are inconsistent with the terms-of-trade motivation often retained to characterize the payoff frontier of self-enforcing trade agreements, as they can worsen the terms of trade of the countries that apply them. This article analyzes trade policy coordination when trade policies are driven by terms-of-trade effects and a desire to reduce domestic food price volatility. This framework implies that importing and exporting countries have incentives to deviate from cooperation at different periods: the latter when prices are high and the former when prices are low. Since staple food prices tend to have asymmetric distributions, with more prices below than above the mean but with occasional spikes, a self-enforcing agreement generates asymmetric outcomes. Without cooperation, an importing country uses its trade policy more frequently because of the concentration of prices below the mean, but an exporting country has a greater incentive to deviate from a cooperative trade policy because positive deviations from the mean price are larger than negative ones. Thus, the asymmetry of the distribution of commodity prices can make it more difficult to discipline export taxes than tariffs in trade agreements.

Nutrition transition and the structure of global food demand

Abstract Estimating future demand for food is a critical aspect of global food security analyses. The process linking dietary changes to wealth is known as the nutrition transition and presents well‐identified features that help to predict consumption changes in poor countries. This study proposes to represent the nutrition transition with a nonhomothetic, flexible‐in‐income demand system. The resulting model is estimated statistically based on cross‐sectional information from FAOSTAT. The model captures the main features of the nutrition transition: rise in demand for calories associated with income growth; diversification of diets away from starchy staples; and a large increase in caloric demand for animal‐based products, fats, and sweeteners. The estimated model is used to project food demand between 2010 and 2050 based on a set of plausible futures (trend projections and Shared Socioeconomic Pathways scenarios). The main results of these projections are: (a) global food demand will increase by 47%, less than half the growth in the previous four decades; (b) this growth will be attributable mainly to lower‐middle‐income and low‐income countries; (c) the structure of global food demand will change over the period, with a doubling of demand for animal‐based calories and a much smaller 19% increase in demand for starchy staples; and (d) the analysis of a range of population and income projections reveals important uncertainties—depending on the scenario, the projected increases in demand for animal‐based and vegetal‐based calories range from 74% to 114%, and from 20% to 42%, respectively.

Managing Food Price Volatility in a Large Open Country

India has pursued an active food security policy for many years, using a combination of trade policy interventions, public distribution of food staples, and assistance to farmers through minimum support prices defended by public stocks. This policy has been quite successful in stabilizing staple food prices, but at a high cost, and with potential risks of unmanageable stock accumulation. Based on a rational expectations storage model representing the Indian wheat market and its relation to the rest of the world, this paper analyzes the cost and welfare implications of this policy and unpacks the contribution of its different elements. To analyze alternative policies, social welfare is assumed to include an objective of price stabilization and optimal policies corresponding to this objective are assessed. Considering fully optimal policies under commitment as well as optimal simple rules, it is shown that adopting simple rules can achieve most of the gains from fully optimal policies, with both potentially allowing for lower stockholding levels and costs.