Grain emergency reserve cooperation – A theoretical analysis of benefits from a common emergency reserve

This paper presents a two country model with private stockholders and producers featuring rational expectations which is used to evaluate emergency reserve, private storage and trade related policies to stabilize grain prices. Contrary to existing works, this paper looks at extreme events besides price volatility, both representing political concerns. Findings illustrate the benefits from trade and that private storage, even if subsidized, hardly manages to avoid extreme price spikes although it is very efficient in reducing price volatility. In contrast, a (common) public emergency reserve allows compensating large supply shortages at a reasonable level of fiscal costs while leaving the lower quantiles of the price distribution largely unaffected. A private storage subsidy significantly impacts trade whereas a reserve hardly does. Policy makers looking for stabilization mechanisms may consider either option or a combination thereof. Free trade is beneficial if stocking policies match while otherwise a free-rider problem is created.