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Implementing physical and virtual food reserves to protect the poor and prevent market failure:

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  • von Braun, Joachim
  • Torero, Maximo

Abstract

"The 2007–08 international food price crisis caused hardship on a number of fronts. The steep rise in food prices led to economic difficulties for the poor and generated political turmoil in many countries. The crisis could also result in long-term, irreversible nutritional damage, especially among children. There is a global interest in preventing such events from recurring. The price crisis was triggered by a complex set of long-term and short-term factors, including policy failures and market overreactions. One important factor in the crisis was the entry of significant financial resources into futures markets, including food commodity markets, which contributed to a price spike during the first six months of 2008. This episode highlights the need to modify the architecture of international financial and agricultural markets to address the problem of price spikes, especially their effects on the livelihoods of the poor. Although a set of guiding principles for regulating agricultural and commodity futures markets should be developed and recent inappropriate trade policy instruments such as export bans should be reviewed, these actions are not sufficient to avoid extreme price spikes and to ensure that the world can respond to emergency needs for food. We propose two global collective actions to meet these goals. First, a small physical food reserve should be established to facilitate a smooth response to food emergencies. Second, an innovative virtual reserve should be set up to help prevent market price spikes and to keep prices closer to levels suggested by long-run market fundamentals like supply and demand. This brief offers some specifics on implementing a proposal described in our earlier IFPRI policy brief titled Physical and Virtual Global Food Reserves to Protect the Poor and Prevent Market Failure (June 2008). Price instability is a general feature of agricultural markets. The proposals made here are designed not to stabilize prices generally, but to prevent damaging price spikes. The proposed actions will entail costs, but the modest costs of the required organizational elements must be balanced against the benefits of more effective international financial architecture. These benefits will include prevention of economic hardship, improved market efficiency, stronger incentives for long-term investment in agriculture, and prevention of political instability." from Author's text

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Bibliographic Info

Paper provided by International Food Policy Research Institute (IFPRI) in its series Policy briefs with number 10.

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Date of creation: 2009
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Handle: RePEc:fpr:polbrf:10

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Related research

Keywords: Food prices; Food policy; Markets;

This paper has been announced in the following NEP Reports:

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Cited by:
  1. Hovland, Ingeborg, 2009. "The food crisis of 2008: Impact assessment of IFPRI's communications strategy," Impact assessments 29, International Food Policy Research Institute (IFPRI).
  2. Christophe Gouel, 2013. "Food Price Volatility and Domestic Stabilization Policies in Developing Countries," NBER Working Papers 18934, National Bureau of Economic Research, Inc.
  3. Minot, Nicholas, 2012. "Food price volatility in sub-Saharan Africa: Has it really increased?," 2012 Conference, August 18-24, 2012, Foz do Iguacu, Brazil 134146, International Association of Agricultural Economists.
  4. Brian D. Wright, 2012. "International Grain Reserves And Other Instruments to Address Volatility in Grain Markets," World Bank Research Observer, World Bank Group, vol. 27(2), pages 222-260, August.
  5. Dethier, Jean-Jacques & Effenberger, Alexandra, 2011. "Agriculture and development : a brief review of the literature," Policy Research Working Paper Series 5553, The World Bank.
  6. Adjemian, Michael & Janzen, Joseph & Carter, Colin & Smith, Aaron, 2014. "Deconstructing Wheat Price Spikes: A Model of Supply and Demand, Financial Speculation, and Commodity Price Comovement," Economic Research Report 167369, United States Department of Agriculture, Economic Research Service.
  7. Larson, Donald F. & Lampietti, Julian & Gouel, Christophe & Cafiero, Carlo & Roberts, John, 2012. "Food security and storage in the Middle East and North Africa," Policy Research Working Paper Series 6031, The World Bank.
  8. Nazlioglu, Saban & Soytas, Ugur, 2012. "Oil price, agricultural commodity prices, and the dollar: A panel cointegration and causality analysis," Energy Economics, Elsevier, vol. 34(4), pages 1098-1104.
  9. Justin Yifu Lin & Will Martin, 2010. "The financial crisis and its impacts on global agriculture," Agricultural Economics, International Association of Agricultural Economists, vol. 41(s1), pages 133-144, November.
  10. Beckmann, Joscha & Czudaj, Robert, 2014. "Volatility transmission in agricultural futures markets," Economic Modelling, Elsevier, vol. 36(C), pages 541-546.
  11. Hernandez, Manuel & Torero, Maximo, 2010. "Examining the dynamic relationship between spot and future prices of agricultural commodities," IFPRI discussion papers 988, International Food Policy Research Institute (IFPRI).
  12. Abbott, Philip C. & Hurt, Christopher & Tyner, Wallace E., 2011. "What’s Driving Food Prices in 2011?," Issue Reports 112927, Farm Foundation.
  13. Minot, Nicholas, 2012. "Food price volatility in Africa: Has it really increased?:," IFPRI discussion papers 1239, International Food Policy Research Institute (IFPRI).
  14. Gentilini, Ugo & Omamo, Steven Were, 2011. "Social protection 2.0: Exploring issues, evidence and debates in a globalizing world," Food Policy, Elsevier, vol. 36(3), pages 329-340, June.
  15. Guenther-Luebbers, Welf & Henke, Soren & Theuvsen, Ludwig, 2012. "Management of Volatility in the Grain Market," 123rd Seminar, February 23-24, 2012, Dublin, Ireland 122548, European Association of Agricultural Economists.

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