Storage, Trade, and Price Policy Under Production Instability: Maize In Kenya

Instability in the production of a staple food causes severe hardship for many countries. For a country that is self-sufficient in its staple food in a normal production year, the large swings in price and consumption that result from an exclusive and uninhibited reliance on trade to stabilize prices are unacceptable. Most countries, therefore, intervene in their domestic cereal markets and move supplies from surpluses to deficit years through storage or by subsidizing international trade. The appropriate method of intervention and the most efficient way to achieve supply stability thus became topics of study. For the most part, economist have encouraged governments to rely more on trade than on stocks to make up deficits on years of production shortfalls. Trade becomes less appealing as an option the larger the difference between import and export parity prices, and the greater the deviation in physical characteristics between the domestically consumed commodity and the imported commodity. Storage is more likely to be appropriate for African countries, since many of them have high transport costs and consume a commodity -white maize-that is often in short supple on world markets. The International Food Policy Research Institute has examined these issues previously in books and research reports. Food Security for Developing Countries, edited by Alberto Valdes, discussed these issues in some detail. International Finance for Food Security, edited by Barbara Huddleston et al., is a study of ways that the international community can remove some of the risk of relying on trade rather than stocks. In IFPRI Research Report 26, Food Security in the Sahel: Variable import Levy, Grain Reserves, and Foreign Exchange Assistance, John McIntire examines various policy options for dealing with instability in the Sahelian region. In this report, Thomas Pinckney developed a general framework for studying these issues and applies it to the case of Kenya. The framework builds both on the optimal storage literature and on simulation studies. Trade-offs between the government objectives of minimizing price fluctuations, imports, and fiscal costs are measured explicitly. The techniques that make optimal policies superior to simpler price band/buffer stock policies are studied in order to provide clues for efficient policy design. In terms of the storage/trade debate, this report finds that Kenya does indeed have a strong rationale for a significant amount of storage when world maize prices are at their present low levels. Techniques developed in this research report have been modified and applied to Pakistan and will be applied to several Southern African countries in the future. This will provide the coherent set of studies to make generalizations about these important questions.