Costs and benefits of agricultural price stabilization in Brazil

In recent years, agricultural price stabilization policies have been recommended in Brazil as a way to reduce government intervention and open the sector for international trade without internalizing the instability of world prices. The proposal discussed (and eventually implemented in 1987) was to establish a system of price bands around a moving average of past prices, with the government relying on stocks to defend the bands. The authors evaluated the"band proposal"for six commodities, using historical data and posing this question: what would have happened if price bands had been adopted in the past six to ten years (compared with free trade)? There were two major findings. First, the implications of adopting a band-rule policy depend heavily on the specific characteristics of the commodities. Second, the welfare gains for risk reduction through agricultural price stabilization are unlikely to be large relative to the welfare gains from price reform that reduces market distortions for these six agricultural commodities. More research into the macroeconomic implications of price stabilization policies is necessary, particularly in countries with unstable but moderate rates of inflation.