Background
Motivation
Results - fixed reserve
Costs of cooperation
Conclusion
References
Assessing the costs and benefits of storage coordination
Lukas Kornher and Matthias Kalkuhl
Center for Development Research, Bonn
ZEF-IFPRI Volatility Workshop, Bonn
8th July 2014
Assessing the costs and benefits of storage coordination
Background
Motivation
Results - fixed reserve
Costs of cooperation
Conclusion
References
Background and motivation
After global food crisis in 2007/2008 - discussion on how to prevent renewed
crisis through food reserves (von Braun and Torero, 2009; Sarris et al., 2011)
Number of countries (plan to) introduce/ expand public stockholding and
market intervention (Ghana, Ethiopia, Guatemala) after 2008
Proposal for West African food reserve among ECOWAS countries with
support from G20
Why stocks?
Import dependency creates reliance on free markets (vs. ad-hoc trade
policies; e.g. during global food crisis)
Additional imports need time for shipping (appr. 30 days to West Africa)
Assessing the costs and benefits of storage coordination
Background
Motivation
Results - fixed reserve
Costs of cooperation
Conclusion
References
Food reserves - overview
In classical storage model: optimal stocks increase with production variability
(Gustafson, 1958; Williams and Wright, 1991)
Risk pooling - regional stocks as an insurance against production shocks
General observations:
Importance of clear release rule
International commodity agreements became popular after WWII - UNCTAD
focus on tropical commodity - existing regional reserves: ASEAN+3 and
SAARC (seldom intervention)
Concentration on one or two major commodities
Physical plus financial reserve
Assessing the costs and benefits of storage coordination
Background
Motivation
Results - fixed reserve
Costs of cooperation
Conclusion
References
Institutional environment in West Africa
UEMAO and ECOWAS are among most advanced political and economical
organizations (free trade, common external tariff)
High import dependency in the region for rice
Assessing the costs and benefits of storage coordination
Background
Motivation
Results - fixed reserve
Costs of cooperation
Conclusion
References
Contribution of this study
Quantification costs and benefits of regional cooperation
Provide a simple framework that is easily applicable to different regions
No complex modeling of behavioral responses of the private sector (e.g.
crowding out)
Focus on consumption stabilization
Simulate stock levels for West African countries under different storage rules
Assessing the costs and benefits of storage coordination
Background
Motivation
Results - fixed reserve
Costs of cooperation
Conclusion
Fixed reserve
e.g. emergency or virtual reserve
Allow deviation from expected production by certain %
Required stocks are the difference between largest historic shortfall and
%-threshold
Qt
S ∗ = (1 − %/100)E[Qt ] − Qt if min [ E[Q
]
t]
Assessing the costs and benefits of storage coordination
References
Background
Motivation
Results - fixed reserve
Costs of cooperation
Conclusion
References
Fixed reserve
Source: Own elaboration based on FAOSTAT.
Source: Own elaboration based on FAOSTAT.
7 production shortfall of more than 5%
since 1980
8 production shortfall of more than 5%
since 1980
Allowing for 5% production shortfall
required stocks are 73,686mt
Allowing for 5% production shortfall
required stocks are 258,757mt
73,686mt = 5.96% of 2012 production
258,757mt = 9.4% of 2012 production
Assessing the costs and benefits of storage coordination
Background
Motivation
Results - fixed reserve
Costs of cooperation
Conclusion
References
Fixed reserve
Source: Own elaboration based on FAOSTAT.
7 production shortfall of more than 5% since 1980 if countries had cooperated
Allowing for 5% production shortfall required stocks are 294,735mt compared to a
combined total of 332,443mt
294,735mt = 7.8% of 2012 production
In order to be pareto-improving both countries must not stock more than in
isolation
Assessing the costs and benefits of storage coordination
Background
Motivation
Results - fixed reserve
Costs of cooperation
Conclusion
Figure: CV of cereal production instability in the region
Source: Authors’ computation based on FAOSTAT.
√
CV =
CV2 (
P
1/n
Qi ) =
P
P
(Qt −E[Qt ])2
µ
with E[Qt ]: HP trend value
s2i CV2 (Qi ) + 2
Assessing the costs and benefits of storage coordination
PP
si sj rij CV(Qi )CV(Qj )
References
Background
Motivation
Results - fixed reserve
Costs of cooperation
Conclusion
References
Fixed reserve - results
Table: Results for allowed production shortfall of 5%
country
Benin
Burkina Faso
Cameroon
Cape Verde
Chad
Cote d’Ivoire
Gambia, the
Ghana
Guinea
Guinea-Bissau
Liberia
Mali
Mauritania
Niger
Nigeria
Senegal
Sierra Leone
Togo
Σ
Region
Public stocks
as of 2013
planned in 2020
Regional reserve
per capita cereal
production in 2012
% share in regional
production 2010-2012
production
variability
no. of
shortfalls
required
stocks
stock-to-use
ratio
127.7
214.9
94.8
24.2
138.6
71.7
111.3
83.2
166.7
117.2
53.2
227.3
53.6
262.4
158.6
116.3
97.8
141.5
147.0
3.8
11.8
8.1
0.0
6.4
3.4
0.6
7.3
6.7
0.5
0.5
15.6
0.5
13.1
63.1
3.7
2.4
2.8
100
-
7.6
11.8
6.2
52.9
21.3
3.9
19.9
10.2
2.8
9.1
11.7
10.2
19.6
15.0
6.9
21.4
13.5
6.3
5.6
7
10
5
15
13
2
10
8
0
9
10
11
11
9
4
14
9
7
5
73,686
447,650
132,269
5,693
756,897
58,845
56,712
258,757
0
16,148
18,130
247,780
24,555
431,413
2,836,943
435,668
63,088
38,316
5,902,550
3,091,356
0.07
0.13
0.06
0.09
0.40
0.03
0.17
0.11
0.00
0.08
0.04
0.08
0.04
0.13
0.12
0.20
0.08
0.07
0.12
0.06
Assessing the costs and benefits of storage coordination
227,000
841,000
411,000
Background
Motivation
Results - fixed reserve
Costs of cooperation
Conclusion
Fixed reserve
Figure: Correlation of production shocks in the region
Assessing the costs and benefits of storage coordination
References
Background
Motivation
Results - fixed reserve
Costs of cooperation
Conclusion
References
Fixed reserve
Figure: % of reduction of production variability from country’s joining the reserve union
Assessing the costs and benefits of storage coordination
Background
Motivation
Results - fixed reserve
Costs of cooperation
Conclusion
Linear stocking rule
Ct = Qt + ∆St
with ∆St = St−1 − St
St−1 = α(St + Qt )
1
Define desired level of consumption variability (CV) - e.g. 5%
2
Calculate optimal α using production variability (CV) - e.g. 7%
r
1−α
CV(Qt )
1+α
α = 0.32
CV(Ct ) =
3
Compute required stocks level: S ∗ =
αE[Qt ]
(1−α)
E.g. E[Qt ] = 3,000,000 mt → S ∗ = 1,410,000 mt
Assessing the costs and benefits of storage coordination
References
Background
Motivation
Results - fixed reserve
Costs of cooperation
Conclusion
Summary: Benefits
Regional stockholding reduces the level of required stocks massively
Joint variability of production is lower than individual variability (even if
production is positively correlated) (Koester, 1986)
BUT: required stocks automatically reduce by adding more and more
countries (→ world-wide reserve)
BUT: stock levels should be interpreted cautiously
NO trade
NO private storage
NO transportation costs
Assessing the costs and benefits of storage coordination
References
Background
Motivation
Results - fixed reserve
Costs of cooperation
Conclusion
References
Costs of economic integration
It is not possible to implement “country-specific policies contingent on
countries’ preferences” (Ruta, 2005)
Heterogenous preferences with respect to the level of consumption
stabilization reduce welfare
Cost of joining regional stockholding regime is the difference in preferences
αi − αmedian (Alesina et al., 2005)
e.g. Guinea and Cote d’Ivoire have no interest to join at 5 %
Preferences are not observable but approximable
Assessing the costs and benefits of storage coordination
Background
Motivation
Results - fixed reserve
Costs of cooperation
Conclusion
Existing reserve and buffer scheme in the region
Ghana (both buffer and reserve) since 2009 - 70,000 mt
Mali (both buffer and reserve)
Burkina Faso (both buffer and reserve)
Nigeria (strategic reserve only) - 150,000 mt
Mauritania (strategic reserve only)
Niger (strategic reserve only)
Chad (strategic reserve only)
Source: Own research.
Assessing the costs and benefits of storage coordination
References
Background
Motivation
Results - fixed reserve
Costs of cooperation
Conclusion
Stock to use ratio and propensity to store
Source: FAO Giews.
Source: FAO Giews.
Note: Importing countries have low levels of production.
Production variability seems to play a role for level of stocks
Suprisingly!? countries with food reserves have lower stocks
Assessing the costs and benefits of storage coordination
References
Background
Motivation
Results - fixed reserve
Costs of cooperation
Conclusion
References
Summary: Costs
Production variability largely differs among West African countries (Sahel vs.
coastal)
Stock data suggests heterogeneity of preferences with respect to consumption
stability
BUT: It is key to include countries with low instability
Assessing the costs and benefits of storage coordination
Background
Motivation
Results - fixed reserve
Costs of cooperation
Conclusion
References
Conclusion and next steps
Large benefits from risk sharing in form of storage cooperation
Costs of economic integration are difficult to quantify
Importance to clearly discuss individual contributions and releases to/from
the reserve
Discuss distribution channels in case of emergency
Next steps:
Rule for contribution to regional reserve - introduce costs of joining a union
Price analysis: where do domestic price shocks come frome?
SVAR - international vs. regional vs. national component
Assessing the costs and benefits of storage coordination
Background
Motivation
Results - fixed reserve
Costs of cooperation
Conclusion
References
Thank you very much for your attention!
Comments? Questions? Suggestions?
For more information:
lukas.kornher@uni-bonn.de
http://www.zef.de/volatility.html
Financial support of the Federal Ministry of Development and Economic
Cooperation (BMZ) is gratefully acknowledged.
Special thanks to GIEWS in FAO for helpful comments and provision of data.
Assessing the costs and benefits of storage coordination
Background
Motivation
Results - fixed reserve
Costs of cooperation
Conclusion
References
Qt = E[Q] + (1)
Ct = Qt + ∆St with ∆St = St−1 − St
(2)
St−1 = α(St + Qt )
(3)
∆St = α(St + Qt ) − St
(4)
= (α − 1)St + αQt
(5)
Ct = Qt − αQt + (1 − α)St
(6)
= (1 − α)Qt + (1 − α)St
(7)
(8)
In steady state
E[St−1 ] = α(E[St ] + E[Qt ])
E[St−1 ] = E[St ] = S ∗
S∗ =
Assessing the costs and benefits of storage coordination
αE[Qt ]
(1 − α)
(9)
(10)
(11)
Background
Motivation
Results - fixed reserve
Costs of cooperation
Conclusion
Var(Ct ) = (E[Ct ] − Ct )2
References
(12)
2
(13)
2
(14)
= (1 − α) [Var(St + Qt )]
= (1 − α) [Var(St ) + Var(Qt ) + 2Cov](St + Qt )
Qt i.i.d. and St depends on Qt−1 only → Cov(St + Qt ) = 0
= (1 − α)2 [α2 Var(St−1 ) + (1 + α2 )Var(Qt )]
(15)
2
(16)
α
Var(Qt )
(1 − α2 )
(17)
! = (1 − α) [Var(St ) + Var(Qt )]
2
Var(St ) =
(18)
Assessing the costs and benefits of storage coordination
Background
Motivation
Results - fixed reserve
Costs of cooperation
Conclusion
α2
Var(Qt )
(1 − α2 )
α2
Var(Ct ) = (1 − α)2 [
Var(Qt ) + Var(Qt )]
(1 − α2 )
1−α
=
Var(Qt )
(1 + α)
Var(St ) =
Var(Qt ) = 1/n
X
(E[Qt ] − Qt )2
E[Qt ] : Trendvalue from HP-filter
Assessing the costs and benefits of storage coordination
References
(19)
(20)
(21)
(22)
(23)
Background
Motivation
Results - fixed reserve
Costs of cooperation
Conclusion
References
Alesina, A., Angeloni, I., and Etro, F. (2005). International unions. American
Economic Review, 95(3):602–615.
Gustafson, R. L. (1958). Carryover levels for grains: A method for determining
amounts that are optimal under specified conditions. Technical bulletin, United
States Department of Agriculture.
Koester, U. (1986). Regional cooperation to improve food security in southern
and eastern african countries. Research Report 53, International Food Policy
Research Institute (IFPRI), Washington, D.C.
Ruta, M. (2005). Economic theories of political (dis)integration. Journal of
Economic Surveys, 19(1):1–21.
Sarris, A., Conforti, P., and Prakash, A. (2011). The use of organized commodity
markets to manage food import price instability and risk. Agricultural
Economics, 42(1):47–64.
von Braun, J. and Torero, M. (2009). Implementing physical and virtual food
reserves to protect the poor and prevent market failure. IFPRI Policy Brief 10,
International Food Policy Research Institute (IFPRI), Washington D.C.
Williams, J. C. and Wright, B. D. (1991). Storage and Commodity Markets.
Cambridge University Press, Cambridge, 1st edition.
Assessing the costs and benefits of storage coordination