Risk and Vulnerability Mailing List Archive

["Vinay Chand" <<address removed>>]

One of the methods of reducing risk and vulnerability is stabilising prices. At 
an international level, that implies supply management and has been touched on 
in the global trade debate and hopefully will be explored further. In this 
contribution I would like to focus on attempts to stabilise prices within 
developing countries in order to reduce risk and vulnerability.

In a relatively open economy which is dependent on a small range of commodity 
production mainly for the export market, prices are determined by global 
markets and farmers often including those in LDCs face serious cashflow 
problems due to market movements. Sometimes, these are on a cyclical basis as 
is the case for oilseeds and edible oils. Others may not have distinct cycles 
but price movements can be drastic and spread over time altering the commercial 
viability of particular crops in relatively high cost countries and this can be 
the case for coffee, cocoa, rubber and spices. 

Where there is a cycle, it is possible to have a commodity stabilisation fund 
with a levy in good price years and a compensation in bad ones. Much depends on 
the cost of operation and who bears this cost. In self financing schemes, a 
high cost of provision can result in a drastic case in farmers actually getting 
less in every year than they would on the open market (Western Samoa cocoa and 
copra funds until 1986) and clearly that is not acceptable. An efficient scheme 
with limited intervention, stabilisation helps especially if costs of 
administration are subsidised by compensatory arrangements such as STABEX 
payments in the past (Kiribati copra fund). However, compensatory payments are 
often treated separately by Governments and absorbed by them as national 
earnings compensation. 

Non cyclical price support for commodities with adequate shelf life can be 
linked to food security stocks or central procurement for distribution to poor 
(Food Corporation of India). again the cost of administration is important and 
care to ensure quality of produce procured and warehoused. This form of 
intervention can also be geared to helping farmers postpone decisions to sell 
in adverse market conditions. There are ongoing discussions about making the 
system more sophisticated by issuing warehouse receipts which can be sued as 
collateral or going further and making such receipts negotiable to allow 
futures trading to help bring stability.

Price intervention can also become necessary where there has been a major 
natural development such as excellent rainfall or a bad season. In democratic 
countries with large farmer populations where farmers are near the poverty line 
or below it, such intervention is a political and humanitarian necessity but 
often short term.

Stabilisation measures can also be accompanied by market operations to minimise 
what the funds have to purchase themselves. Fund operations have a direct 
impact on prices and anticipations of changes and it is possible in adverse 
conditions to help bring about a comfort price by market intervention. However, 
this requires rules and skills that are rare in the public sector.

The two problems that need further exploring in this Consultation are: who pays 
and how can DFID and others help if they decide that the interventions are 
indeed desirable. The first thing to do is to ensure that whatever system is 
adopted operates efficiently in technical and economic terms. Costs can be 
greatly reduced through efficiency and here the role of the private sector 
becomes important since warehousing and quality control are two of the 
activities that can be contracted to the private sector allowing them to invest 
in the infrastructure. Aid can be directed at assisting such investment and 
what would really help is if development banks established venture funds for 
this express purpose. Economic efficiency is also very important partly to 
ensure that the beneficiaries are the farmers. It is best to target farm gate 
intervention rather than manipulate wholesale market prices where the 
beneficiaries may end up being traders and consumers, which may be desirable in 
itself but is not the most needed intervention. Costs of procurement at farm 
gate are a fraction of those at markets. A sustainable public-private 
partnership system would of course be ideal if it is at all possible in 
individual circumstances.


Best wishes,

Vinay Chand,
<address removed><mailto:<address removed>>