Complementing Regional Rice Reserves with Novel Domestic Reserve Mechanisms

7/28/2019 Complementing Regional Rice Reserves with Novel Domestic Reserve Mechanisms

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Complementing Regional RiceReserves with Novel DomesticReserve Mechanisms

Roehlano M. Briones The author is a senior research fellow at thePhilippine Institute for Development Studies.


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Contents

Abbreviations ............................................................................................................................... iiiExecutive Summary ...................................................................................................................... 11. Overview of Self-Sufficiency Policies ........................................................................................ 2

1.1 Flexible Self-Sufficiency ...................................................................................................... 21.2 The Prospect of Extreme Shocks ........................................................................................ 2

2. Storage and Food Security: Background and Conceptual Framework ...................................... 32.1 Supply Shocks and Market Volatility ................................................................................... 32.2 Rice Utilization and Storage in ASEAN ............................................................................... 52.3 Economic Model of Storage ................................................................................................ 52.4 Welfare and Stabilization Policy .......................................................................................... 6

3. Options for Food Security Reserves ......................................................................................... 73.1 Matrix of Options for Domestic Reserves ............................................................................ 73.2 Options for Publicly-Owned Stocks ..................................................................................... 8

3.3 Food Security with Privately-Owned Stocks ........................................................................ 9

3.3.1 Regulatory Arrangements for Option 4 ........................................................................ 93.3.2 Issues in Market Development and Regulation ......................................................... 10

4. Conclusion ............................................................................................................................. 11References ................................................................................................................................. 13TablesTable 1: Indicators of Domestic Utilization, ASEAN Member Countries, 20102011 ...................... 5Table 2: Options for Intervention in Food Storage ......................................................................... 7

FiguresFigure 1: Projected Price of Thai White Rice 5% Freight on Board, Mean and 95th Percentile .... 4Figure 2: Percentage Difference between Projected Mean and 95th Percentile

for Annual Paddy Production of Rice-Exporting Countries ....................................................... 4Figure 3: Percentage Difference between Projected Mean and 95th Percentile

for Annual Consumption of Milled Rice of Rice-Importing Countries ......................................... 4BoxesBox 1: Example of a Nutritional Norm for Per Capita Intake of Rice .............................................. 2Box 2: Warehouse Receipt System ............................................................................................... 9Box 3: The Rice Stockpile Scheme in Singapore ........................................................................ 10
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Abbreviations

ADB Asian Development BankAGRM Arkansas Global Rice ModelASEAN Association of Southeast Asian NationsAPTERR ASEAN Plus Three Emergency Rice ReserveBERNAS Padiberas Nasional Berhad

Unless otherwise noted, $ refers to US dollars.


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Executive Summary

The combination of domestic production, storage, and openness to trade are commoninstruments to achieve food security.1 When supported by interventions to increase food stocksand enhance production, these instruments offer resiliency against a typical range ofenvironmental shocks. However, in a world beset by climate change, extreme production shocksare a tangible reality rather than a hypothetical prospect. Moreover, collateral export restrictionsto contain domestic price instability are also a common response in rice-exporting countries.

Regional rice reserves offer some protection from both extreme shocks and export restrictionsto the extent that the forward contract scheme is a precommitment exempted in principle fromchanges in the supplying country's government policy. Beyond regional reserves, increaseddomestic rice reserves offer the best protection against extreme climate or policy shocks.

Given the high costs of sourcing and stockpiling rice reserves, a careful assessment must bemade of the effectiveness of various options. The two activities of sourcing and storage entail thefollowing combinations of public and private provisions:

Option 1: Publicly owned stocks in public storage Option 2: Publicly-owned stocks in private storage Option 3: Privately-owned stocks in public storage Option 4: Privately-owned stocks in private storage

Option 1 is the traditional scheme. It entails the largest fiscal outlay up front to build warehousesand to purchase rice stocks from farmers, millers, and traders. Option 2 is an emerging schemeas the rice procurement of state trading agencies begins to exceed the capacities of governmentwarehouses. One interesting variation is engaging the private sector in rice distribution as in theEmergency Food Assistance Project of the Asian Development Bank (ADB) in Cambodia.

Option 3 is rarely observed in practice. Option 4 is also not as common as either Options 1 or 2,although there are some practical examples in Southeast Asia, the most ideal of which is found inSingapore. The advantage of Option 4 is that it realizes efficiencies from private sector storageand avoids the fiscal burden of government procurement as well as the management burden ofreleasing and replenishing stocks. The disadvantage is that it requires a strong regulatory armand a private sector that is well developed in terms of logistics and marketing. Nevertheless, withthe increasing emphasis on private sector development and privatepublic partnership, Option 4appears to be the most suitable way forward to address the problem of extreme shocks to foodsupplies and trade.

1 This report was prepared for the Second ASEAN Rice Trade Forum on 45 June 2013 in Yogyakarta, Indonesia. TheAsian Development Bank (ADB) provided technical assistance under TA-REG 7495: Support for the Association ofSoutheast Asian Nations Plus Three Integrated Food Security Framework, with financing from the Japan Fund forPoverty Reduction. The author is a senior research fellow at the Philippine Institute for Development Studies. Thisreport does not necessarily reflect the views of ADB or the Government concerned, or the institutions at which theconsultant works, and ADB and the Government and these institutions cannot be held liable for its contents.


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2 | Second ASEAN Rice Trade Forum 2013

1. Overview of Self-Sufficiency Policies

1.1 Flexible Self-Sufficiency

With few exceptions such as city states or countries with small populations, the bulk of a country'sfood consumption is sourced from domestic supply, evincing a natural tendency toward self-sufficiency. However, total self-sufficiency need not be rigidly imposed. Flexible self-sufficiency,which combines domestic production with trade to meet domestic consumption, can realize bothfood availability and affordability.

One practical formulation of flexible self-sufficiency involves determining a domestic productiontarget that is achievable through productivity-enhancing investments. These investments aim toincrease the average yield and area harvested to the point where the marginal cost approximatesthe world price. As additional protection for food security, this production target will ensure a levelof domestic production equal to per capita intake compliant with nutritional norms (Box 1). Thiscontrasts with the usual self-sufficiency policies that target observed per capita consumption.

In practice, countries combine domestic production with trade. Only the Philippines explicitly

targets 100% self-sufficiency in rice production while Brunei Darussalam targets 60%; Indonesia,90%; Malaysia, 70%; and Singapore, 0% (all consumption utilizes imports).

1.2 The Prospect of Extreme Shocks

Domestic production plus trade appear to be adequate to meet "normal" types of shocks.However, a real threat to food availability is the prospect of extreme shocks, which can occur inthree ways:

(i) Extreme negative shocks. These include widespread and severe plant diseases,pest infestations, droughts, and floods. The latter two are weather-related eventsexpected to increase in likelihood over the coming decades because of climate

change.(ii) Export restrictions or outright bans. These may have broader or more severe

effects than climate change, depending on the stringency of the restriction and thepolicies of the country implementing it.

(iii) Interaction between extreme negative shocks and export restrictions. Exportrestrictions are often imposed in the aftermath or in anticipation of a calamity affectingdomestic harvests. For instance, Russia implemented a ban on exports of wheat in2010 as it was then suffering from a drought, which had destroyed up to 17% of thewheat crop (Welton 2011).

Box 1: Example of a Nutritional Norm for Per Capita Intake of Rice

Suppose the target for average daily calorie intake is 1,200 kilocalories (kcal). If 60% of caloriesshould come from carbohydrates, of which 80% is from rice, then the target kilocalories from rice is1,200 per capita. Assuming 3.5 kcal/gram (raw rice), this translates to 274.2 grams of rice daily. Onan annual basis, this is about 100 kilograms (kg) per capita. This is lower than the estimated percapita consumption of 127.4 kg in Indonesia, 123.3 kg in the Philippines, and 141.2 kg in Viet Nam.

Source: International Rice Research Institute (2013).


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degree of price volatility when supply shocks are sufficiently large.4

Figure 1 presents a simulation using the AGRM for the price of Thai white rice 5% over the period20122022, based on average rates and assuming the occurrence of severe shocks. Whereasthe price per ton on average varies from $403 to $454, the price per ton in case of severe shocksvaries from $504 to $556, a difference of 21.3%. A similar comparison for paddy production

shows a much wider range of variation in rice-exporting countries. On average, the domesticpaddy production in Thailand is 6% lower under extreme shock conditions compared to the mean;for Viet Nam, paddy production is 3% lower (Figure 2).

For rice-importing countries, the range in rice consumption outcomes is likewise quite narrow.The consumption rate in Indonesia is 2.5% lower in the extreme case compared to the meanwhile it is 2.8% lower in Malaysia and 6.2% lower in the Philippines (Figure 3).

Figure 1: Projected Price of Thai White Rice 5% Freight on Board, Mean and 95th Percentile($/ton)

Source: Wailes and Chavez (2013).

Figure 2: Percentage Difference betweenProjected Mean and 95th Percentile for Annual

Paddy Production ofRice-Exporting Countries

Figure 3: Percentage Difference betweenProjected Mean and 95th Percentile for AnnualConsumption of Milled Rice of Rice-Importing

Countries

Source: Wailes and Chavez (2013).

4 In the following example, the impact is based on a market outcome (price or quantity) obtained in the context ofrepeated simulations creating a distribution of runs, based on random draws. A quantile price corresponds to a"sufficiently large" shock if that price exceeds 95% of prices in the distribution of runs. A quantile quantity (productionor consumption) corresponds to a "sufficiently large" shock if it is higher than only 5% of the quantities in thedistribution of runs.

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2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Mean 95th Percenti le

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Complementing Regional Rice Reserves with Novel Domestic Reserve Mechanisms | 5

Hence, large price variations can be triggered by relatively moderate gyrations in yield; asconsumption variations are small, then consumption spending for rice will be subject to largeswings. This means, households are placing high priority on food spending, with corollarycontraction in other consumption items (e.g., health and education) in the event of large pricespikes.

2.2 Rice Utilization and Storage in ASEAN

Table 1 presents utilization indicators for ASEAN countries. Domestic utilization has grownmoderately, except for Thailand (where it fell slightly) and Singapore (registering a high growth,which may be a statistical artifact). The largest import-to-use ratios are observed for Singapore(well above 100%, owing to re-exports) and Brunei Darussalam, in that order. In 2011, the largerice-consuming countries of Indonesia and the Philippines had low import-to-use ratios as a resultof self-sufficiency policies in rice production. Meanwhile, the major rice-exporting countries ofCambodia, Thailand, and Viet Nam are able to generate a surplus of 27% 47% of utilization andto sell this abroad.

Table 1: Indicators of Domestic Utilization, ASEAN Member Countries, 20102011

CountryUtilization('000 tons)

Stocks-to-UseRatio (%)

Imports-to-UseRatio (%)

Exports-to-Output Ratio (%)

2010 2011Growth

(%) 2010 2011 2010 2011 2010 2011

BruneiDarussalam 32 34 3.9 57.6 47.2 88.2 92.4 0.0 0.0

Cambodia 2,961 3,036 2.5 10.9 17.0 0.0 0.0 35.0 35.0

Indonesia 39,034 39,682 1.7 6.1 4.1 0.6 4.1 0.0 0.0

Lao PDR 1,748 1,828 4.6 8.0 14.2 1.3 3.2 2.2 1.3

Malaysia 2,470 2,511 1.6 29.4 30.9 31.6 41.1 0.0 0.0

Myanmar 19,593 19,753 0.8 21.9 20.3 0.0 0.0 4.9 4.9Philippines 11,898 12,414 4.3 22.1 27.6 20.0 5.7 0.0 0.0

Singapore 209 275 31.9 19.2 18.2 118.9 128.7 - -

Thailand 12,120 12,084 -0.3 63.6 65.5 0.0 0.0 42.2 45.6

Viet Nam 19,270 19,468 1.0 29.9 22.3 0.0 0.0 27.8 27.0

Lao PDR = Lao Peoples Democratic Republic.Source: ASEAN Food Security Information System (2012).

Table 1 also provides data on beginning stocks, which represent both private and public stocks.The stocks-to-use ratio is highest for Thailand (the worlds largest rice-exporting country) andBrunei Darussalam (a small rice-importing country). Also with sizeable stocks-to-use ratios areMalaysia and the Philippines. The recommendation of the Food and Agriculture Organization ofthe United Nations is to maintain the stocks-to-use ratio at around 17%. However, the ratios forIndonesia and Lao PDR are below this indicator, with Indonesia, the largest rice-producing andrice-consuming country in the region, having the lowest stocks-to-use ratio (under 5%).

2.3 Economic Model of Storage

Suppose harvest is a random variable subject to independent and identically distributed shocks.


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In the absence of storage services and under reasonable assumptions, it can be shown that (i)prices should likewise be independent and identically distributed, and (ii) positive and negativeprice spikes should be symmetric, such that accounting for inelastic demand, extreme pricedeclines should be as likely as extreme price increases.

When storage is introduced, a new instrument is available to stabilize food availability and prices.

Traders perform intertemporal arbitrage through storage if the future price is anticipated to behigher than the current price. Against this benefit, traders must weigh the costs of maintainingstocks, specifically the storage service plus the opportunity cost of deferred sale. Given thesetrade-offs, an economic model of storage has been developed to describe the behavior of tradersand to compare it with the optimal level of stocks. The workhorse for this type of problem is thecompetitive storage model, pioneered by Gustafson (1958) and elaborated by Wright andWilliams (1982).

In the competitive storage model, speculators hold stocks in anticipation of a future increase inprices under conditions of expected profit maximization and rational expectations. In contrast tothe no-storage scenario, Deaton and Laroque (1992) showed that the market with speculativestorage would exhibit three properties: (i) autocorrelated time series; (ii) spells of relatively stable

prices punctuated by extreme price increases; and (iii) a skewed price distribution, as priceincreases tend to be larger compared to price declines. The first property is a direct consequenceof storage behavior. The second and third properties arise from the fact that inventory is boundedfrom below; during stock-outs, following an extreme negative shock (or series of shocks), themarket reverts to the no-storage scenario. However, during extreme positive shocks, storagecontinues to maintain its stabilizing function.

Deaton and Laroque (1992) showed that these three properties are empirically present incommodity time series. However, the competitive storage model is inconsistent with the highdegree of serial correlation in actual time series. Cafiero et al. (2011) showed that under plausiblenumerical specification, competitive storage models do generate high degrees of seriallycorrelated price series. Hence, competitive storage models are empirically relevant.

2.4 Welfare and Stabilization Policy

The competitive storage model describes the behavior of private traders but it can also be used toderive welfare implications. Gouel (2012) showed that traders will not be able to provide theoptimal level of storage. The reason is that traders are risk-neutral and set storage to maximizeintertemporal expected profit, and they do not account for the risk aversion of consumers. Ideally,consumers are able to purchase state-contingent securities (insurance) to offset price risk, butsuch markets do not exist.

As private storage is not enough, an alternative is public storage. However, Gouel (2012) foundthat under plausible parametrization and simplifying assumptions, the benefit from shifting to

optimal storage using public stocks is minimalless than 1% of commodity expenditure.Convexity of the utility function (giving rise to risk aversion) generates only a weak rationale forintervention.

A more compelling argument invokes food security: in the event of an extreme negative shockcombined with a stockout or the exhaustion of supplies, the poorest consumers face elevatedmalnutrition and mortality. Formally, this can be modeled as a threshold effect (Myers 2006)where sufficiently high prices terminate the enjoyment of health or even life. This suggests theneed for precautionary reserves with a humanitarian purpose, which is clearly outside the


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commercial motivations of traders.

Larson et al. (2011) applied a competitive storage model to analyze a "strategic reserve" that isdeployed in case of extreme price spikes. An "extreme" spike is one that belongs to the upper10th percentile of price variation. The reserve would then have to release stocks to bring the priceback to the limit price; the reserve "fails" when reserves are depleted and the price remains

above the limit. The time path to accumulate stocks up to a target level is specified by a stockingrate. Larson et al. examined the effectiveness and cost of a strategic reserve based on a modelsimulation for the Middle East and North Africa countries at a 2011 baseline. They found that thelikelihood of staving off a price spike rises when the size of the reserve increases, but this comesat higher cost. Targeting releases of the strategic reserve to a needy group (at pre-crisis prices)dramatically reduces costs. Based on plausible parametrization they suggested a reasonableapproach involving a reserve target at 50% of annual consumption with a restocking rate of 10%,resulting in the reduction of domestic price volatility from 16.4% to 14.5%, a failure rate of 0.55%of the time, and at a cost of $827 million per year.

3. Options for Food Security Reserves

3.1 Matrix of Options for Domestic Reserves

The foregoing studies assume that public and private storage incur similar costs. Given theplausibility of market failures, some manner of intervention with regard to storage appearswarranted. However, the manner of intervention as well as the cost of the intervention have to beincorporated in the analysis.

Options for intervention are summarized in Table 2. The columns divide the actors in the produc-tion of storage services, while the rows divide the types of ownership of food stocks. Productioncan be produced by either the public or private sector; likewise, stocks can be owned by eitherthe public or private sector. The combination of public storage of public stocks leads to Option 1,

which is the most conventional form of market stabilization. Private storage of public stocks leadsto Option 2, in which storage function is outsourced to the private sector. Mandatory storage ofprivate stocks in public warehouse for food security purposes is Option 3, which is rarelyobserved in practice. Lastly, Option 4 denotes privately-owned stocks in private storage; suchstocks must be controlled by government regulation if they are to be mobilized for food security.

Table 2: Options for Intervention in Food Storage

Stock SourcingStorage

Public Private

Public

Option 1

Traditional scheme

Procurement of stocks fromfarmers/traders/millers, stored inpublic warehouse

Option 2

Outsourcing of storage and even

distribution to private warehouses Complemented by storage incentives

(concessional loans, tax exemptions,etc.)

Private

Option 3

Compulsory storage in publicwarehouse

Rarely observed

Option 4

Emergency food reserves by regulation

Source: Author.


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3.2 Options for Publicly-Owned Stocks

Option 1 is a traditional scheme for food security in many developing countries, particularly inAsia, which allows the government to exercise the greatest control over the quantity anddeployment of food stocks. It is also the most expensive option, entailing upfront investments (forwarehouses) and maintenance costs.

Parastatals combine marketing, storage, and food security mandates in countries such asBangladesh, India, Indonesia, Pakistan, the Philippines, and Viet Nam. A review by Rashid et al.(2006) noted that the rationale for the initial establishment of these parastatals could be found inthe poor condition of markets, the low adoption of modern technologies, and the fragility ofinternational trade at the start of the postcolonial era. However, in the intervening decades,markets have developed, modern technologies have proliferated (witness the Green Revolution),and international trade has deepened remarkably. The relevance of these parastatals isbecoming increasingly questioned especially in light of evidence suggesting the following:

parastatals operate at higher cost than their private sector counterparts, and have inflicteda large fiscal burden on governments;

there is no demonstrable impact of parastatals on price instability, at least in the recentperiod;

the reduction of market intervention reduces price distortion, public sector costs, andstrengthens private sector trading, which in turn contribute to the deepening of marketsand price stabilization.

These points are echoed in a recent study on public foodgrain stocks (World Bank 2012). Areview of the evidence found that (i) the multiplicity and lack of clarity of objectives of publicstocks lead to failures, (ii) fiscal costs frequently escalate to unsustainable levels, (iii) theeconomic costs of maintaining high food prices are very large, (iv) countries fail to achieve pricestability despite having buffer stocks, and (v) buffer stocks often crowd out the private sector.

Option 2 removes the need for the public sector to make upfront investments and helps loweroperating costs by relying on more efficient private sector storage. Some parastatals, such as theNational Food Authority in the Philippines and the Public Warehouse Organization in Thailand,are already doing this to avoid expanding their overhead costs.

Option 2 can be extended to various forms of publicprivate partnership in food security. Forinstance, rice importation and storage for Brunei Darussalam is handled by BruSiam Foods, a

joint venture between the Government of Brunei Darussalam and a private company in Thailand.In Cambodia, the ADB-funded Emergency Food Assistance Project (EFAP) procured 12,000 tonsof rice stocks from the Federation of Cambodian Rice Millers Associations (FCRMA). At the sametime, the FCRMA was engaged to undertake the distribution of free rice to target communities(EFAP 2009). While the storage duration of EFAP was only about 2 weeks, the contract with the

rice millers could have been written ahead of an emergency and the stocks kept in storage. Suchan arrangement would be a significant departure from Option I.

Nevertheless, Option 2 still entails public financing for the purchase of stocks. Such fiscal burdenis avoided in Options 3 and 4. This paper omits discussion of Option 3, which is rarely seen, andelaborates on Option 4 in the following discussion.


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3.3 Food Security with Privately-Owned Stocks

3.3.1 Regulatory Arrangements for Option 4

Option 4 entails the government regulation of rice stocks owned and stored by the private sector.From the viewpoint of public administration, a major advantage of Option 4 over Option 2 is the

low financial outlay from the government. Costs incurred in the arrangement are shouldered bymarket agents (traders, producers, and consumers), which requires regulation by government toensure compliance with food security measures on storage and release.

One way of enforcing regulation is through warehouse receipts (Box 2). The regulator mayapportion quantities under receipt for mandatory storage. The advantage of this system is that thewarehouse receipt holder may keep their stock in any accredited warehouse. During times ofabundant harvest, the amount for mandatory storage may be raised, reducing the disposablesupply in the market and supporting the market price. Alternatively, when prices rise, the regulatormay relax the mandatory storage requirement in an attempt to raise disposable supply andreduce the price.

In the Philippines, warehouse receipts for sugar are called quedan, which are issued by the sugarregulatory agency and mandatory for all raw sugar milled in the Philippines. Warehouses,however, are privately owned. The quedan is classified by destination: A-sugar is for the UnitedStates (US) export quota; B-sugar is for the domestic market; C-sugar is for reserve; and D-sugaris for export (outside the US). C-sugar may not be released from the warehouse unlessreclassified by the Sugar Regulatory Administration. By adjusting the level of C-sugar, theregulator can raise or lower the amount of sugar in storage.

A warehouse receipt system works well for raw sugar that is a homogenous product. Rice is adifferent matter altogether. It has been difficult to establish a widely accepted warehouse receiptsystem for rice because of difficulties with standardizing rice grades. The example of Singapore,

Box 2: Warehouse Receipt System

A warehouse receipt is a document that certifies the availability of and the rights to withdraw a

quantity of stock, of specific characteristics, to a designated recipient, within the facilities of astorage provider.

Modern warehouse receipt systems can be traced to the United States. The opening of vastfarmlands in the Midwest, together with the development of transport infrastructure, led to amassive inflow of grains to trading centers, most notably in the city of Chicago. In the 19th century,storage providers, called elevators, issued tradable receipts against the stock. Elevators fell undertight regulation from the state of Illinois from the 1960s onward. The Chicago Board of Trade(CBOT) emerged as the dominant commodity trading floor. The market for tradable receiptsexpanded considerably with the opening of futures trading, which was initially intended to ensureEast Coast buyers a price ahead of the delivery of physical grain. Futures trading became thedominant activity in the CBOT. As the scope of the market expanded beyond Illinois, the exchangefell under federal regulation by the 1920s.

Other well-known warehouse receipt systems are in Colombia and Venezuela. Since the 1990s, thesystem has been introduced (with donor support) in Sub-Saharan Africa.

Source: UNCTAD (2009).


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Box 3: The Rice Stockpile Scheme in Singapore

Singapore has no domestic production of rice so any storage for food security purposes requiresimported stocks. Rice is a controlled item under the countrys Price Control Act, and importers andwholesalers must be licensed by the government. The regulatory agency is the InternationalEnterprise Singapore Board (IE Singapore).

Within the framework of the Price Control Act, IE Singapore implements a rice stockpile scheme tomaintain an adequate supply of rice in the market. Under the scheme, the varieties of white,basmati, ponni, and parboiled rice are classified as stockpile grade. Importers of stockpile grade riceare automatically enrolled in the rice stockpile scheme. Participants must precommit the monthlyimport quantity for the domestic market, as well as a stockpile quantity. Importers are free todesignate their monthly import quantity although white rice is subject to a minimum of 50 tons. Themonthly import quantity is allowed to adjust under certain conditions, depending on the state of themarket.

The stockpile quantity is twice the monthly import quantity, and must be kept in a government-designated warehouse, owned and run by a private company. The importer maintains ownership ofthe stockpile quantity. However, the government may acquire the stock during emergency withcompensation. In normal periods, the stockpile quantity shall be rotated by the importer; no batch ofstocks can be kept in the warehouse for more than a year. Currently, there are 41 licensed importersparticipating in the rice stockpile scheme.

Source: International Enterprise Singapore (2013).

however, shows that a licensing system is a sufficient regulatory scheme for implementing Option4 (Box 3).

Once a reserve is set aside, the regulation may specify a trigger price, above which thegovernment can make releases from the reserves to bring prices down to the limit (the same

strategy analyzed by Larsen et al. 2011). To ensure the release, the government may prescribethe mandatory acquisition of the reserve (with compensation). The trigger price may be set atsome extreme level, such as in the 90th95th percentile of the price distribution based on pasttime series.

Another strategy is exemplified by Malaysia where a private entity, the Padiberas NasionalBerhad (BERNAS), is conferred an exclusive right to import rice as part of its contract with theGovernment of Malaysia. While this right, which runs until 2012, can be assigned to the privatesector, BERNAS effectively possesses an import monopoly. The contract in turn obligates it toimplement the National Rice Stockpile scheme, which is now set at a level of 292,000 tons of rice.BERNAS views this role both as a food security function as well as a mechanism to stabilize ricesupplies and rice prices in the country (BERNAS 2013). However, the import monopoly is

controversial because of its highly distortionary market effects and its removal would likelyincrease social welfare gains (Vengedasalam et al. 2011).

3.3.2 Issues in Market Development and Regulation

Option 4 entails the implementation of food security measures by the private sector, which requirea high degree of private sector development in marketing and storage. To assure suchdevelopment, government intervention should be designed to ensure that three conditions willprevail in food markets: i) an adequate degree of price volatility, ii) an adequate collection and


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dissemination of information, and iii) regulatory effectiveness. These conditions are discussed insome detail by Giovanucci et al. (2000).

Adequate degree of price volatility. The incentive for private storage is the expectation of afuture price increase. However, if government intervention to stabilize prices becomes too strong,price volatility will be inadequate. Government must allow some play for market prices to adjust

and to encourage intertemporal arbitrage. Within some range of price variation, private agentsshould be given flexibility in their decisions on production, storage, trading, and importation, withina regulatory framework. The trigger price should, therefore, be set at a high level (a quantile closeto 100%).

Adequate infrastructure and enabling investment climate. Aside from getting price variationright, government must provide an enabling environment for investments in logistics facilities(including storage) and transport equipment. Government needs to invest in complementaryinfrastructure such as roads, bridges, and utilities, by itself or in partnership with the privatesector. Government may also offer incentive schemes for logistics investments.

Regulatory effectiveness. Government must also provide a strong and credible framework to

guide private sector activity. This involves specified and enforced grades and standards for ricevarieties, regulations for warehouse facilities, and a legal system for enforcing contracts. Disputesettlement mechanisms must be put in place to address non-compliance. A functional monitoringsystem must be established to track inventories, and preferably the flow of transactions on aregular basis. As also discussed, the commercial level of inventory must be augmented by a foodsecurity reserve enforced by regulation.

Collection and dissemination of information. The monitoring system can be combined withinan information system that will track and report current and future conditions of supply anddemand. This includes crop forecasting and stocks analysis, to enable the formation of moreaccurate price expectations. A similar point has been made by Mackenzie (2012) in the context ofthe development of a futures market in rice.

4. Conclusion

This paper has reviewed the potential benefit of mobilizing food reserves as an emergencypreparation for extreme supply shocks. While private traders have an incentive to provide storageservices, economic theory implies that their storage levels may be insufficient compared to whatare needed for food security and for protection against risks.

However, the traditional method of supplanting private stocks with public stocks in public storageis inadvisable because it is costly and ineffective based on recent experiences. The ideal strategyemphasizes the role of the private sector, which relies on both private storage and private stocks,

albeit under government regulation. There are precedents for this approach to food security,although these remain less popular compared to the traditional method.

The private sector approach requires an enabling environment for the private sector to function asthe primary provider of storage and logistics services. From the existing statist regimes, theevolution to market-oriented food systems will not happen in the short term or even in the mediumterm. During the interim, governments may pursue publicprivate sector partnerships such asthrough outsourcing storage and food distribution to the private sector. The participation of the


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private sector can gradually increase toward building the resilience of commercial food productionand the distribution system to severe supply shocks.


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Complementing Regional Rice Reserves with Novel Domestic Reserve Mechanisms

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