The public management of price risk after a supply shock: storage versus target price

Exogenous shocks frequently have adverse effects on commodity markets. This article examines the fall in commodity prices resulting from such shocks and explores strategies to manage these declines. Specifically, we compare two public management tools: a storage policy and the implementation of a subsidy to the producer, ensuring a minimum selling price (target price). To analyse these policies, we develop a tractable theoretical welfare model that we simulate. Using a case study of timber price drops following a storm, we demonstrate that a target price is generally socially beneficial from a broader perspective but can be disadvantageous for consumer-taxpayers in the event of a storm of intermediate intensity. Additionally, our findings suggest that a storage policy is socially preferable in cases of low-intensity storms, whereas a target price becomes more effective for high-intensity events. Sensitivity analyses are conducted to assess the robustness of these results.