Food Insecurity: Magnitude and Remedies

Abstract

World Bank Staff Working Paper No. 267

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The views and interpretations in this document are those of the author andshould not be attributed to the World Bank, to its affiliated organizations,or to any individuaL acting in their behalf.

THE 'WORLD 'BANK

Bank Staff Working Paper No. 2o7

July 1977

FOOD INSECURITY: MAGNITUDE AND REMEDIES

ABSTRACT

Food insecurity is given an operational definition: theprobability of food grain consumption in developing countries fallingbelow a desired level due to a fixed upper limit on the food import billthey can afford and an unfavorable combination of poor harvests and worldfood grain prices. Quantitative assessments suggest that there is a 7 to10 percent chance of a consumption shortfall in excess of 15 million tons.Over the years, the expected shortfall is 4 to 5 million tons.

The paper does not explore the whole range of economic andpolitical benefits and costs of food grain buffer stocks, world wide orfor individual countries and therefore makes no recommendations aboutdesirable stock levels. However, it is argued that food security shouldnot be made contingent upon arrangements for world wide food grain supplystabilization.

It is suggested that food security could be attained through afood import bill insurance (FIBI) scheme. It is estimated that foodsecurity could be provided by a scheme with a standby financial capacityof 3 to 4 billion dollars, with expected payments over the years in therange of 200 to 300 million dollars.

Alternatively, food security could be attained by a combinationof a financial scheme and a grain buffer stock in or on behalf of thedeveloping countries. While a stock operated to stabilize import require-ments is shown to be very cost ineffective, a stock operated to stabilizethe import bill (storing when import prices as well as harvests in thecountries are favorable) can be reasonably cost effective for a modestsize stock operation. It is suggested that a 10 million ton buffer stockoperation of this kind could be obtained with an initial investment ofabout 2 billion dollars (including the construction of storage facilitiesand the cost of the initial stock). The expected annual cost (amortization+ variable storage costs - import cost savings) woulld be on the order of50 million dollars. . smaller FIBI scheme with a standby financial capacityof 2-3 billion dollars (needed only in rare instances) and with expectedpayments over the years of 100 to 200 million dollars in conjunction withsuch a buffer stock could then provide reasonable food security.

The ideas and analytical findings presented in this paper areof a very tentative and provisional nature. The subject of costs andbenefits from stabilizing food grain supplies and prices, world wide andin individual countries, are currently more fully explored in. an ongoingresearch undertaking Jn the World Bank by the author in collaborationwith David Bigman (RPO 671-24). The reason for presenting intermediateresults at this time is the current wide-ranging public policy interestin the issue of food security.

The author is grateful to D. Avramovic, A. Berg, D. Bigman,D. Dapice, P. Konandreas, P. Samuielson, A. Stoutjesdijk for reviewing anearlier draft. The computer programs and simulation results were preparedby David Eaton, David Blum and Bruce Arndtzen. The author gratefullyacknowledges their contributions. He is solely responsible for thecontents of this paper.

Prepared by: Shlormio ReutlingerOffice of the DirectorDevelopment Economics DepartmentDevelopment Policy Staff, RPO 671-24

Copyright ( 1977The World Bank18i8 H. Street, N.W.Washington, D. C. 20433 U.S.A.

t. The next time crops fail around theglobe, what is needed for the humanitarianpurpose of keeping people alive who wouldotherwise starve is a cormmand over money tobuy them their desperately needed share ofthe limited global supply of grains. Thebest I can find to say for stockpilingschemes is that they might get us to budgetnow against the unk.nown date of our futureneed. To expect more is to courtdissillusionment."

Paul A. SamuelsonNewsweek, June 6, 1977

TABLE OF CONTENTS

Page No.

ABSTRACT

I. Introduction . . . . . . . . . . . . . . .. .....

II. Grain Stocks and Food Security . 3

III. What Could be a Realistic Scheme to ProvideFood Security? . . . . . . . . . . . . . . . . . 4

IV. How Much Food Insecurity is There? . . . . . ...... 7

V. What Would It Cost to Eliminate Food InsecurityThrough a Food Import Bill Insurance (FIBI): . . 13

VI. Food Grain Buffer Stocks in ConjunctLon with aFood Import Bill Insurance Scheme . . . . . . . . 17

VII. Outstanding Issues . . . . . . . . . . . . . . . . . 3G

I. INTRODUCTION

In several current international fora, food security has been1/

the dominant theme. World food security is generally understood to imply

arrangements whereby the population of the developing countries would be

assured a minimum adequate level of foodgrain supply in years of normal as

well as of poor harvests. There is general agreement that to achieve food

security it is essential to accelerate foodgrain production in the most

seriously affected low income countries. For the near term future, i.e.,

the next ten years, however, most realistic assessments conclude that many

countries will continue to require even larger amounts of food imports than2/

in the past.

Beyond these common perceptions, littie positive agreement has

been reached on how to further the cause of food security. Much energy

has gone into debating the desirability of investing in large buffer stocks,

world wide, on a sufficient scale to stabilize the world price of grains,

and in the affected countries, to make them independent of fluctuating3/

import requirements.

1/ That is, the World Food Congress of 1974, the FAO Committee on WorldFood Security and the World Food Council.

2/ For instance, recent projection by FAO, USDA, The World Bank and IFPRIall predict a growing gap between foodgrain consumption and productionin developing countries.

3/ Some of the frustrations exuded by these debates through 1976 are reviewedin "Cereal Stocks, Food Aid and Food Scarcity for the Poor," A. Sarrisand L. Taylor, World Development, 1976, vol. 4, no. 12, pp. 967-976.

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The thrust of this paper is to suggest that food security is

not necessarily linked to international agreements on stock levels. Food

security could be achieved realistically and at a reasonable cost through

a scheme which would assure the developing countries that any temporary

shortfall in production would be made up by larger imports and that a food

security funding facility would insure their food import bill from rising

above a normal level, whether the increase results from volume or price

changes.

Such a financial scheme might be backed up with a relatively small

bufLer stock operation in or on behalf of the developing countries. A reason-

ably small buffer stock which is operated so as to take advantage of inter-

national price fluctuations could have a low cost and could substantially

reduce the size of the needed financial insurance scheme. The existence of

such a stock would also assure greater reliability of obtaining grain supplies

in times of worldwide scarcity.

The required size and cost of a financial insurarce scheme depends

of course on the extent and effectiveness of stabilization measures affecting

the world price and the affected countries' grain supply. The more stable

the world price and the more stable the countries' own supplies, the lower

will be the cost of the insurance scheme. Once the insurance scheme is in

place, it could be left to the governments of the underwriting countries and

their private sectors to decide to what extent they wish to hold additional

stocks for the contingency of large shipments under the food security arrange-

ment. Governments of the developing countries on their part could decide on

the extent to which they wish to place reliance on the international security

arrangements.

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II. Grain Stocks and Food Security

As noted already, realistic assessments of projected trends suggest

that the food gap between developing countries' consumption and production is

likely to widen before it will be closed. Consequently there will be a conti-

nuous need to import foodgrains and food security will require insurance

against high food grain import prices as well as excessive quantity imports

due to shortfalls caused by poor harvests in affected countries. This pro-

jection is implicit in the recommendation calling for stabilization of world

food grain prices in addition to supply stabilization through buffer stock

operations in each country.

Food grain supply and price stabilization on a worldwide scale is

an exDensive undertaking relative to the social gains likely to be perceived.

While the benefit from price stabilization for grain imported by developing

countries whose populations live at the margin of minimum subsistence and who

can not cope with a rise in their import bill need not be questioned, it is

not at all clear that stabilization of food consumption by the population of

the rich countries has social benefits beyond satisfying their consumers'

whims and preferences. In fact there is now a lot of discussion whether it

would not be physically and socially healthier, if people in the rich countries

were to eat less than what they are eating now. Moreover, since major food

exporting and importing countries, their governments, farmers and consumers

are likely to gain or lose to very different extents, decisions about the

levels of buffer stock operations and extent of supply and price stabilization

are likely to be primarily determined by trading off interests of these groups

in negotiations between the major trading partners and not by food security

consideration of the developing countries.

How reasonable is it to suggest that developing countries should

engage in sufficiently extensive storage operations to even out consumption

in the face of unstable year to year production?

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It is a well known fact that shortfalls or excesses relative to

the average or normal level of production are much higher in single

ecological regions than over a wide range of such regions. Hence the

total cost of stabilizing grain in each single country separately is much

higher than what it would cost to stabilize the supply of many countries

simultaneously. To put this in another way, to the extent possible, trade

between countries not experiencing shortages and surpluses in the same

year could and should be. substituted for each country generating expensive

stock operation to achieve stabilization. Moreover, it is unlikely that

the massive external resources needed for each country stabilizing its

own grain supply are likely to become available when it is known that this

is the most cost-ineffective method for achieving stabilization and it is

generally agreed that higher priority should be assigned to increasing the

rate of agricultural development.

In short, I am not advocating that for the sake of food

security, countries should not hold larger stocks than they do currently.

But I do not think it advisable nor likely that they would engage in

storage operations to an extent which would be sufficient to stabilize

supply and import requirements.

III. What Could be a Realistic Scheme to Provide Food Security?

In a recent article Professor D. Gale Johnson made a proposal

to achieve greater stability of grain supplies in developing countries1/

throuigh an internationally underwritten insurance scheme. The proposal

calls for the United States and other industrial countries to assure

1/ D. Gale Johnson "Increased Stability of Grain Supplies in DevelopingCountries: Optimal Carryovers and Insurance," World Development, 1976,Vol. 4, No. 12, pp. 977-987.

5

developing countries that any shortfall in grain production larger than a

given percentage of their trend level of production would be made available.

The Johnson proposal is in my view i-n the t-ight direction but does not go

far enough. The suggested scheme here proviries for an extension of his

proposal which if adopted, would achieve the aim of food security.

The objective of my proposal is to prevent a reduction in

developing countries' food consumption beyond a minimum agreed level for

either one of two or both reasons: a poor harvest or a rise in international

food grain prices. The proposal would possibly consist of three parts:

(a) a convention given by the food exporting countries assuring any quantity

of imports needed by the developing countries to maintain an agreed level of

consumption and that such exports would take priority over any attempt to

stabilize consumption in t1?e developed countries; (b) a food import bill

insurance (FIBI) scheme wihich would provide financing of the cost of importing

the required amount of food grains to maintain an agreed level of consumption

in excess of the normal food import bill of developing countries, and (e) a

relatively small buffer stock for stabilizing available supplies needed by the

developing countries. In order to hold down costs and to minimize disruptive

effects on grain markets, such a buffer stock would need to store up grain when

supplies are plentiful and the price is depressed and release grain wben supplies

are scarce and the price is unusually high. The FIBI scheme could be paid for

by contributions in the form of annual "premiums," or could be maintained as

a kind of monetary buffer stock operation. In the former case the scheme

could be viewed as a particular kind of international resource transfer, which

is disbursed with the explicit aim of preventing food insecurity. When harvests

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in the developing countries or international grain prices are more favorable

than usual, the savings on the food import bill could be left to accrue to1/

the countries for furthering their development.

The proposed FIBI scheme presumes that food security could be

obtained when the developing countries can obtain their required imports

at a cost which does not exceed the size of their normal food import bill.

It could be argued that there is no intrinsic food security in a particular

size of the food import bill. When export earnings are high, for instance,

the food importing country might find it easier to pay for a higher food

import bill than in normal years. If export earnings are depressed even

normal food import bill might be excessive. While this is true, the major

rationale-of a separate measure is to enable the affected country to pursue

its food security objective in isolation of other developments. Surely

developments affecting other commodities or sectors have a bearing on food

security, but these are not pursued in this paper, nor are they pursued by

the usual recommendations which we have rejected in the earlier discussion.

1/ In a recent paper entitled "International Food Security," Raj Krishnareaches remarkably similar conclusions, namely, that one approach forachieving food security "is to deal with the foreign exchange aspect."Up ruggests that "for this purpose the institution needed is a FoodFacility, just like the Oil Facility created by the InternationalMonetary Fund.'"

2/ It can be shown, though, that if the food import bill constraint is alsoa random variable, distributed independently of the import requirementsand import price, food insecurity is larger than if the food import billis constant.

7

IV. How Much Food Insecurity is There?

The first prerequisite for estimating benefits from stabilization

measures is to identify the extent of food insecurity in the absence of

intervention. In this context, we define food security in developing

countries as a condition whereby food grain consumption equals or exceeds

a desired level (C ). This level could be the market demand, at an accept-

*able price. Alternatively, C could be market demand plus an additional

amount of food distributed under special arrangements to uphold minimal

levels of consumption for every living person to achieve adequate nutrition.

Similarly, we define food insecurity as the condition whereby

consumption of food grains is less than the desired level C. Moreover, we

assume that food insecurity results exclu,ively from an inability of the

developing countries to import a sufficient quantity of food grains,

because their economic and financial capacity does not permit the food

import bill to exceed PI, where P is the average or normal world (or

import) price of food grains and I is the average quantity of imports,

defined as the gap between desired consumption C and domestic food grain

production in a normal. year Q.

To sum it up, food security would require imports to be:

I C- Q

or consumption to be:

C Q+ I (2)

Food insecurity arises when actual imports I are less than I,

where

8

C -Q (3)

subject to

p.-I

or actual consumption is:

C = Q + I (4)

The extent of food insecurity is measured by the probability

distribution of:

I-I (5)

which is equivalent to:

C C (6)

The major determinants of food insecurity are then:

(a) the normal import requirements of food grains by the developing

countries,I, which is the difference between desired consumptionC, and

average production, Q,

(b) the average world price of food grains, P,

(c) the extent of instability in developing countries' production

i.e., the probability distribution of domestic production, Q, and

(d) the extent of instability in world price of food grains, i.e.,

the probability distribution of world price,P.

The normal import requirements of developing countries are

currently estimated at roughly 30 million tons. Reasonable estimates of

instability of total food grain production in the developing countries

based on historical evidence suggests that production is distributed

normally with a standard deviation of 3 to 4 percent of mean production.

Since mean production of food grains is about 300 million tons, the

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standard deviation is approximately 11 million tons. Since the standard

deviation of imports is the same as the standard deviation of production

(if consumption is to remain constant), the estimated distribution of

imports is a normal probability distribution with a mean of 30 million

tons and a standard deviation of 11 million tons.

The most difficult to estimate determinant of food insecurity is

the instability of the world price of food grains and hence the import

price. The most likely projection is that the world price will be a skewed

distribution with prices occasionally rising far above the median price

when world grain supplies are scarce. In the presentation here we will

consider two distributions of price, a normal distribution with a mean of

$150 and a standard deviation of $30 and a skewed distribution with a1/

median of $150 and a standard deviation of $30.

Table 1 describes five scenarios used subsequently in the

paper to estimate the extent of food insecurity and the financial

cost of alternative schemes to eliminate that insecurity. Scenarios

I and II are two alternative assessments of the instability in

the international price, provided no extraordinary, new

1/ The skewed distribution is derived by simulating a probability distributionof price, assuming that world wheat production (Q) is distributed normallywith a mean of 350 million tons and a standard deviation of 14 milliontons and transforming this distribution to price through a kinked demandfunction: P = 650 - 1.43Q when Q > 350 and

P = 1112 - 2.75Q when Q < 350.The expected price is approximately $157. The approx'imate probabilitiesof different pricds with this skeved distribution and the normal distribu-tion (mearn = 150 and s.d. is 30) are as follows:

Price ($/ton): <180 175-210 >210Prob. with skewed distr. (%) 77.0 15.6 7.4

" normal " (%) 84.1 13.6 2.3

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provisions are made for holding physical buffer stocks of food grains.

Scenario III assumes large enough buffer stock operations to completely

stabilize the world price of food grains. Scenario IV assumes that buffer

stocks operations are initiated exclusively for the benefit of the devel-

oping countries of sufficient magnitude to even out their aggregate annual

supply variations in food grains. Scenario V assumes a 50 percent reduction

in both the standard deviation of available food supplies in the developing

countries and in the world price.

Table 1: DESCRIPTION OF ALTERNATIVE SCENARIOS USED INESTIMATING FOOD INSECURITY

Import Requirement (I) Import Price (P)Scenario ' Standard ' ' Standard

Mean ' Deviation ' Median ' Deviation 'Distributionmillion ton $/ton

I 30 11 150 30 normal

II 30 11 150 30 skewed

III 30 11 150 0

IV 30 0 150 30 normal

V 30 5.5 150 15 normal

Table 2 provides estimates of food insecurity, as measured by

import (consumption) shortfalls, which are likely to prevail if the food

import bill of developing countries is constraiined not to exceed its normal

size (i.e., PI). These results were obtained by simulating 9000 production

and price events drawn randomly fronm respective probability distributions.

For these calculation we assumed zero correlation between import requirements

and price. Appendix Table 1 provides estimates of food insecurity, when

import requirements and price are partially correlated.

Table 2: FOOD INSECURITY UNDER ALTERNATIVE SCENARIOS(Assuming zero correlation between import

requirements and price)

Scenari,oImport S_enar_o

(consumption)Shortfall I II III IV V

million ton probability (%)

0 52.6 48.4 50.1 49.6 51.1

0- 4 13.1 13.6 14.4 28.2 24.1

4- 8 10.6 11.6 1245 18.8 16.1

8-12 9.2 10.0 9.5 3.4 6.4

12-16 6.3 7.1 6.6 0 1.9

16-20 4.0 4.2 3.5 0 0.4

20-30 3.2 4.1 3.1 0 0

>30 1.0 1.0 0.3 0 0

Expected Importshortfall (million ton) 4.5 5,O 4.3 2.0 2.3

The numbers in Table 2 illustrate that the combination of

instability in the developing countries' harvests and import prices and a

fixed upper limit on the food import bill produces a sizeable food

insecurity. An expected shortfall of 4 million tons may not seem all that

impressive when compared with an expected consumption of 330 million tons.

Yet a reduction in the effective import demand for fo.od grains of the

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developing countries by 13% could be of more than casual interest to

food grains exporters. Much more disconcerting, of course, from a food

security point of view are the sizeable probabilities of very sizeable

shortfalls. A shortfall of 20 million tons, amounting to 7% of normal

supplies (production plus imports) is likely to translate into an average

increase in prices paid by consumers in the developing countries by 20%

to 30% with the consequence of widespread hunger among the lower income

groups who even in normal years consume less than An adequate diet.

The other important inference ( Scenario III ) is that world

wide price stabilization has remarkably little benefit fcr the food

security of the developing countries, whereas special arrangements to

stabilize supplies (i.e., reducing the need for excess imports requirements

resulting from poor harvests - scenario IV) improves food security very1/

considerably.

Will food insecurity change over time in the absence of drastic

intervention? The answer is fairly obvious--no. We have no reason to

suspect that the basic force underlying instability of food grain production

in the developing countries or of the world food price--the weather--will

be any less or more stable. Therefore, we should not expect a change in

1/ The reason is, of course, the relative variability of the food importbill arising from instability in import requirements and price. Notethat the standard deviation of the import bill (P~I) is P.O1 when

price is constant and I.ap when import requirements are constant. The

relative variability of the import bill is CI/Cp, where C, is U-/I and

Cp is CFp/P. By our estimation CI = .37 and Cp = .20. Therefore, thevariability of the import bill with import requirements unstable isabout double the variability than with price unstable.

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relative magnitude of food insecurity, unless the ratio of average imports

to average production will change. If we assume for instance that within

ten years, both production and consumption will have grown by 50 percent,

the average and the standard deviation of food import requirements will

have also grown by 50 percent to 45 and 16.5 million tons, respectively.

It can be shown then that the average consumption shortfall, under

conditions analogous to those described by scenario I will have also grown

by approximately 50 percent. If production will grow at a faster rate than

production, so as to leave, for instance, average import requirements at

the present level, we can predict that the average shortfall will grow by

less than 50 percent, but will be a larger proportion of average imports1/

and a smaller proportion of average consumption than today.

V. What Would it Cost to Eliminate Food InsecurijThrough a Food Import Bill Insurance (FIBI)?

We now present some rough estimates of the food import bill

overruns which would need to be eliminated in order to eliminate the

estimated import (or consumption) shortages in developing countries. To

put this in another way, Table 3 presents the estimated frequency at which

payments of specified magnitudes would need to be made by a food import

bill insurance scheme.

Whether viewed in terms of global resource transfers or

even in terms of the total trade bill of the developing countries

or its fluctuations from year to year, the numbers in Table 3

do not appear to be very large. Food security is attainable at

a reasonable cost. We should note, however, that the size of the

1/ The reason that the absolute shortfall increases is that the absolutesize of the standard deviation of imports is a function of the size ofaverage production.

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additional imports made possible by the operation of an insurance scheme

could be at times quite large and could destabilize the world price more1/

than we have anticipated. In the absence of arrangements to increase

food grain buffer stock operations, this could increase the cost of the

FIBI scheme and could lead to political pressures on governments in the

developed countries: in grain exporting countries to tax exports and in

food importing countries to subsidize imports and thereby to put further

pressure on the price of grain moving in foreign trade. For this reason,

a combination of buffer stock operations, specifically aimed at stabilizing

supply in developing countries in combination with a FIBI might offer the

best solution for food security.

Table 3: ESTIMATED PAYMENTS FROM A FOOD IMPORT BILLINSURANCE SCHEME TO ELIMINATE IMPORT

(CONSUMPTION) SHORTFALLS

Payments Needed ScenarioI II III IV V

$ billion Probability(%)

0 52.7 48.0 50.2 49.5 51.2

0 - 1 19.7 20.6 22.9 36.7 35.0

1 - 2 13.7 15.3 16.3 12.5 11.6

2 - 3 7.5 8.1 7.3 1.3 2.0

3 - 4 3.9 4.2 2.7 0 0.2

4 - 5 1.5 2.1 0.5 0 0

> 5 1.0 1.7 0.1 0 0

Expected payments($ millions): 742 860 645 360 370

1/ A better estimate of this feedback effect could be obtained by a moredisaggregated world price model.

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It might be asked how sensitive are these calculations to the

size of the average import requirements (food gap). The answer is not very

much. Assuming Scenario I, if the food gap were 0 instead of 30 milliont

tons, i.e., if production in normal years would equal the target level of

consumption in the developing countries, the standard deviation of the

import bill would decrease from 1910 to 1880 million dollars. The expected

payments from a FIBI scheme would be reduced by approximately 15 million

dollars.

Similarly it might be asked what would be the effect of insuring

only the lowest income countries against excess food import bill require-

ments. Assuming that average consumption and production in these

countries is 165 million tons and that the standard deviation of their

production is 5% of the mean, the standard deviation of their import require-

ments would be approximately 8 million tons, In this case, the standard

deviation of their food import bill would be approximately 1225 million

dollars and the expected payments from an FIBI scheme to prevent import

shortfalls would be further reduced by approximately 260 million dollars.

To reduce the cost of a FIBI scheme it could be operated with a

deductibility clause, i.e., payments would be made only for overruns in

excess of X amount above the normal food import bill. It would be presumed

that countries could cope with moderate increases in the food import bill,

either by allocating more of their own financial resources or through

relatively minor reductions in consumption. Table 4 shows that the expected

cost of the scheme could be drastically reduced by introducing a deductibi-

lity clause, whereby only overruns in excess of one billion dollars (or 22%)

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above the average food import bill would be covered by the FIBI. With a

combination of a realistic level of stabilization achievable through buffer

stocks in the developing countries, food security could be achieved by a

FIBI with a standby capa'city of 3 to 4 billion dollars for assisting devel-

oping countries' in the rare event of unfavorable harvests and import prices.

Given the probabilities of payments required from such a fund, the expected

annual "premium" would need to be on the order of 200 to 300 million dollars.

Table 4: ESTIMATED PAYMENTS FROM A FOOD IMPORT BILLINSURANCE SCHEME TO ELIMINATE OVERRUNS INEXCESS OF ONE BILLION DOLLARS ABOVE THE

AVERAGE FOOD IMPORT BILL

ScenarioPayments Needed I II MI IV V

$ billion Probability()

0 72.4 68.6 73.1 86.2 86.2

O - 1 13.7 15.3 16.3 12.5 11.6

1 -2 7.5 8.1 7.3 1.3 2.0

2 - 3 3.9 4.2 2.7, 0 0.2

3 -4 1.5 2.1 0.5 0 0

_ 4 ___1.0 ___1.7 0.1 ___0____0_

Expected payments($ million) 380 440 280 80 95

VI. Food Grain Buffer Stocks in conjunction with aFood Import Bill 'Insurance Scheme

We have already noted that stabilizing import requirements by

means of food grain buffer stock operations by, or on behalf of, the

developing countries could reduce food insecurity very considerably. We

will examine now more closely how much stabilization could be obtained

from a given size stock; what it would cost and by how much it would

reduce needed payments from a FIBI scheme.

We will consider here only two buffer stock policies. One, is

to use stocks to stabilize import requirements by means of storing up

grain whenever the developing countries have good harvests and withdrawing

grain from storage when their harvest is poor. The other is to stabilize

the food import bill by means of storing up grain whenever the food import

bill is low and withdrawing grain from storage whenever the food import bill

is high. In the latter case, the storage activity is triggered by changes

in the import price (i.e., charnges in worldwide food grain supplies) as

well as by changes in the production in the developing c-'untries.

Buffer Stocks to Stabilize Import Requirements

In this section we analyze the impact of the operation of a buffer

stock, whereby stocks would be accumulated from any amount of grain in excess

of 1 million tons of normal production and would be withdrawn in an amount

equal to the shortage of grain in excess of 1 million tons of normal

production. The amount of grain stored can of course never exceed the

available unoccupied storage capacity and withdrawals from storage can not

exceed the amount of grain in storage.

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Table 5 gives estimates of food insecurity for different sizes

of storage capacity and initial stock levels. The extent to which a buffer1/

stock reduces food insecurity, say over a 30-year periodT depends on the

size and sequence of year to year production fluctuations, the initial

storage capacity and the size of the initial stock. As expected, succes-

sively larger storage capacities used to store up grain when production is

above average and to augment supply when production is below average,

increase food security. But note that incremental additions to t'ood security

decline for successive equal additions to storage capacity. The reason is

obvious. The opportunities for utilizing the full storage capacity become

more infrequent with increasingly larger capacities.

We have seen earlier that complete stabilization of import

requirements (Scenario IV in Table 2) would still leave an expected import

shortfall of 2 million tons(due to import price fluctuation in the face of

a constrairnt on the import bill). But to capture the last bit of production

in excess of mean production would require an extremely large storage capacity.

Also, as could be expected, food security is slightly enhanced

when there is an initial stock. Without such a stock, there is a good chance

that a production shortfall might occur before stocks had a chance to accumulate.

The overall conclusion must be, however, that buffer stock operations designed

to stabilize import requirements are not likely to become of a sufficient

magnitude to assure food security. This conclusion is reinforced when we

observe the costs of such buffer stocks,

l/ All buffer stock calculations are average values obtained over 300 runs,each of 30 year duration. Initial stock levels were set to equal thefull size of the storage capacity.

- 19

Table 5: FOOD INSECURITY UNDER ALTERNATIVE SCENARIOS OF FOOD GRAINBUFFER STOCK OPERATIONS TO STABILIZE IMPORT REQUIREMENTS

Storage Capacity without (WO)Import and with (W) initial stock 1/

(CoA8umption) No (million tons)Shortfall Stocks 5 10 20wo w wo w wo w

million ton probability (%)

0 52.6 51.6 52.0 51.1 52.1 50.0 52.30 - 4 13.1 16.6 16.8 19.2 19.2 22.1 21.94 - 8 10.6 13.0 12.9 14.0 13.9 14.8 14.88 - 12 9.2 8.0 7.9 7.1 6.8 6.5 5.8

12 - 16 6.3 5.0 4.7 4.0 3.7 3.1 2.516 - 20 4.0 2.7 2.7 2.2 2.1 1.6 1.220 - 30 3.2 2.5 2.5 2.0 1.8 1.6 1.2

> 30 1.0 0.6 0.5 0.4 o.4 0.3 0.3

To calculate costs, we assumed that the interest rate is 8%, the

cost of construction of storage facilities is $100 per ton of capacity and

loading and unloading costs are $5 per ton, respectively. We further assumed

that the average price of grain is the same whether going into or coming out

of storage, i.e., $150. In all cases, instability in the import price is as1/

assumed under Scenario I.

1/ The expected storage cost is calculated as follows: In each year whengrain is stored, the cost of that grain plus the loading charge isrecorded. Similarly, when grain is withdrawn, the storage activity iscredited with the value of the grain minus the cost of unloading. Inthe final year, the storage activity is credited with the value of theunused inventory. Each sequence of 30 years of these "losses" and"gains" is discounted to yield the present value of the variable costsThe same procedure is repeated for 300 runs of 30 year sequences toyield an average value. The cost of constructing storage facilities inyear 1 and the cost of the initial stock is then added to the averagepresent value of the variable costs. Finally, the total present valueof the costs is amortized over 30 years. This is the expected annualstorage cost.

- 20 -

In Table 6 we observe that the buffer stock diminishes the

expected payments from a FIBI scheme. But note again that the "savings"

are not very large and the marginal "savings" decline with additional

equal increments to storage capacity.

Most noteworthy are the expected annual costs of the buffer

stock. While the marginal cost to equal increments in the size of the

buffer stock operation slightly declines, the cost per ton of grain held k

in storage increases. This is the consequence of declining utilization

of the storage capacity and hence increasing amortization costs per ton of

grains actually stored and a lengthening of the average time period grain is

held in storage and hence higher interest charges for tying up capital in

storage. With a storage capacity of 20 million tons, the expected cost of

a ton of grains by the time it is taken out of storage would be nearly

double its original cost.

While for low levels of stock operations, the cost of storage

could be offset by "savings" from a FIBI scheme, it should be noted that

the former are real resource costs whereas the latter are transfer payments.

The FIBI payments pay for additional grain consumption in the developing

countries. Aid which goes towards covering the cost of buffer stock

operations just reimburses the countries for costs of constructing storage

facilities and tying up capital in the form of grain for long periods of

time.

- 21 -

Table 6: ESTIMATED PAYMENTS FROM A FOOD IMPORT BILL INSURANCESCHEME AND EXPECTED ANNUAL STORAGE COSTS WITH VARYINGLEVELS OF BUFFER STOCK OPERATIONS TO STABILIZE IMPORT

REQUIREMENTS

Value of Storage Capacity without (WO)Import and with (W) initial stock

(Consumption) No (million tons)Shortfall Stocks 5 10 20

WO W WO X WO W$ billion probability (%)

0 52.7 51.7 52.0 50.5 52.1 -50.0 52.30 - 1 19.7 23.9 24.0 26.8 26.6 29.7 29.41 - 2 13.7 13.6 13.5 13.2 12.9 13.3 12.62 - 3 7.5 6.0 5.8 5.2 4.9 4.2 3.53 - 4 3.9 2.9 2.8 2.3 2.1 1.6 1.24 - 5 1.5 1.1 14.1 0.9 0.8 0.7 0.6

> 5 1.0 0.8 .08 1.1 0.6 0.5 0.4- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

Expected payments($ million): 742 648 635 590 565 538 487

Expected FIBI"Savings"($ million) - 94 107 152 177 204 255

Expected cost ofStorage ($ million) - 83 85 162 169 307 337

Expected Grain stored(Million tons) - 1.0 1.1 1.6 1.8 2.4 2.7

Expected Cost per tonof grain stored ($) - 83 77 101 94 128 125

22 -

1/Crop shortages and surpluses may be serially correlated. Serial

correlation would indeed affect the amount of grain storable and available

from storage from any given size storage capacity. Serial correlation would

not increase the expected cost of a financial insurance scheme, except if

account is taken of the difference between lending and borrowing rates of

interest. We have repeated the simulation of Scenario I with a buffer stock

storage capacity of 10 million tons without initial stocks under the assump-

tion that serial correlation in the importing countries' production is 0.5

and serial correlation in the import price is also 0.5. As a consequence

of the reduction of the amount of grain stored in the presence of serial

correlation, the expected import requirements would rise from 3.4 to 3.9

million tons and expected payments from the FIBI scheme would rise from

590 to 665 million dollars. Expected annual storage costs would be reduced

from 162 to 155 million dollars, but the expected cost of each ton of grain

held in storage would increase from $101 to $150. The conclusion is clearly

that in the presence of serial correlation, physical grain buffer stocks

will tend to be an even more costly proposition as an alternative to a

financial buffer stock. Long chains of good and poor harvests< cause capital

to be tied up in the form of idle storage houses and grain in storage for

longer periods.

1/ Professor P. Samuelson drew this problem to the attention of the authorin the context of an earlier draft,

- 23 -

Buffer-Stock to Stabilize th'e mport Bill

Alternatively, food grain buffer stocks could be used to explicitly

stabilize the food import bill rather than food import requirements, In this

case, favorable import prices as well as favorable production conditions (low

import requirements) in the developing countries would trigger the storing of

grain. Similarly, grain would be withdrawn from the stock when either the

import price is unusually high or food grain production in the developing

countries is unfavorable. The advantages of such a food grain buffer stock

strategy might be twofold: a reduction in supplementary financing require-

ments for maintaining a desired level of consumption and a lowering of storage

costs, since the stock operation would chalk up a profit arising from

purchasing grain when the import price is low and selling to the domestic

market when the import price is high.

Specifically, the storage rules are as follows:

(a) Grain is stored whenever the food import bill (required to achieve

current food grain consumption targets) is less than the average food import

bill. The quantity imported for storage will be the lesser of two; the

additional amount of grain which can be imported without exceeding the average

food import bill or the vacant storage capacity.

(b) Grain is released from storage whenever the food import bill (required

to achieve current food grain consumption targets) exceeds the average food

import bill. The quantity released from storage will be the lesser of the

two: the shortfall of consumption which would occur as a consequence of the

food import bill constraint or the amount of grain available from prior stock

accumulation.

- 24-

Comparison of the results reported in Table 7 and Table 5 shows

that a buffer stock which is operated to stabilize the import bill reduces

food insecurity much more than a stock which is operated to stabilize import

requirements. By importing grain directly for storage when the import bill

is not exhausted for meeting current consumption requirements, grain is more

likely to be available when the food import bill becomes a b'inding constraint

on meeting the consumption target. A 20 million ton stcrage capacity utilized

in this way would enable the countries to meet their consumption target within

the constraints of the average food grains import bill in 8 out of 10 years

and the probability of large consumption shortfall would be also substantially

reduced. Average Imports would increase by 2.8 million tons as a consequence

of a 20 million storage operation. The overall annual expected shortfall

would decline from 4.4 to 1.6 million tons.

Table 7: FOOD INSECURITY WITH FOOD GRAIN BUFFER STOCKS OPERATIONSDESIGNED TO STABILIZE THE FOOD IM4PORT BILL

Storage Capacity without (Vo) and with (w)Initial Stock

Consumption No (million ton's)Shortfall Stocks 5 10 20

wo w wo w wo w(million tons) (probability (%.)

0 52,6 60.5 61.1 67.8 69.3 77.2 80.3O - 4 13.1 12.0 12.1 10.0 9.8 7.3 6.64 - 8 10.6 9.7 9.5 8.1 7.7 5.7 4.88 - 12 9.2 7.2 7.1 5.8 5.5 3.9 3.3

12 - 16 6.3 5.0 4.8 4.0 3.7 2.8 2.416 - 20 4.0 2.7 2.6 2.0 1.9 1.5 1.220 - 28 3.2 2.2 2.2 1.8 1.6 1.2 1.0

> 28 1.0 0,7 0. 0.5 0.5 0. 0.

Expected short-16fall (mil. tons) 4.4 3.4 3.4 2.7 2.6 1.91.

- 25 -

'Table 8: ESTI.MA.TED PAYMENTS FROM A FOOD IMPORT BILL INSURANCESCHEME-AND.EXR.kC.TED,ANNLA,,STQRAGE..CQSTS,,WITli A BUFFER

STOCK DESIGNED TO STABILIZE, THE FOOD.IMPORT-B3ILL

Storage Capacity'w~ithout (WO)Value of and with (W) initial stockimpot-t No (million tons)Shortfall Stocks 5 10 20

WO W WO W WO W$ billion probability()

0 52.6 60.5 61.1 67.8 69.3 77.2 80.30 - 1 19.7 17.6 17.5 14.7 14.3 10.7 9.51 - 2 13.6 11.4 11.2 9.3 8.8 6.3 5.42 - 3 7,6 6.0 5.9 4.6 4.3 3.4 2.83 - 4 3.9 2.6 2.5 2.2 2.0 1.4 1.04 - 5' 1.5 1.1 1.1 .8 .7 .6 .6

51.1 .8 .7 .6 .6 .4 .4

Expected payments($ million) 743 577 563 461 435 325 274

Expected FIBI"Savings"($ million) - 166 180 282 308 418 469

Expected cost ofstorage 1/($ million) -46 21 95 50 205 L29

Expected grainstorage(million tons) -1.1 1.2 1.9 2.0 2.9 3.2

Expected cost perton of grain stored

()-42 17 50 25 71 40

1/ Initial stock is priced at $100 per ton.

As can be seen from Table 8, payments from a food import bill

insurance required to achieve food security would be very substantially

reduced in the presence of a buffer stock designed to stabilize the food

import bill. Such a buffer stock policy results in higher utilization

- 26 -

rates of storage capacity and a substantially lower storage costs than a

policy which simply stabilizes import requirements. Particularly noteworthy

is the decided advantage of starting up the storage program with an initial

stock equivalent to the size of the storage capacity, at a time of when the

import price is depressed. While the initial investment cost is higher, if

large amounts of grain need to be purchased coincidentally with constructing

the storage facilities, the full storage facility is a better investment.

Moreover, the political climate for obtaining aid to build buffer stocks is

likely to be more favorable when stocks are accumulated at a time when grain

prices are depressed.

We have noted earlier that the cost of a FIBI scheme could be

substantially reduced when the developing countries could be expected to

absorp an overrun of 1 billion dollar (or 22%) in excess of their normal

food import bill without special arrangements. Table 9 compares the

estimated food insecurity without and with stocks, for two levels of food

import bill constraints: the normal food import bill (4.5 billion dollars)

and 1 billion dollars in excess of the normal food import bill (4.5 billion

dollars). The buffer stock is assumed to be operated with the aim of

stabilizing the food import bill around the designated constraining value.

Without a buffer stock the expected consumption shortfall would be reduced

by more than half by increasing the food import bill constraint by 1 billion

dollars. With a 20 million ton buffer stock, food insecurity would be

practically eliminated.

- 27

Table 9: FOOD INSECURITY WITH BUFFER STOCKS UNDER ALTER-NATIVE CONSTRAINTS ON FOOD IMPORT BILL 1/

FodbImport 'Bill Coit tAint ($ billion)4.5 5.5

Storage Capacity Storage CapacityConsumption (million tons) (million tons)Shortfall 0 5 10 20 0 5 10 20(Million tons) probability (%)

0 52.6 60.5 69.3 80.3 72.3 81.1 87.9 95.6

0 - 4 13.1 11.9 9.8 6.6 9.8 7.4 5.0 1.8

4 - 8 10.6 9.7 7.7 4.8 7.2 5.1 3.4 1.4

8 - 12 9.2 7.3 5.5 3.3 4.8 3.1 1.8 .7

12 - 16 6.3 5.0 3.7 2.4 2.9 1.7 1.0 .3

16 - 20 4.0 2.7 1.9 1.2 1.5 .8 .5 .1

20- 28 3.2 2.3 1.6 1.0 1.3 .7 .3 .1

28 1.0 .6 .5 .4 .2 .1 .1 -- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - --

Expected value 4.4 3.4 2.6 1.6 2.1 1.3 .8 .3

1/ With initial stock.

Table 10 compares the payments of an FIBI scheme required to achieve

food security with the two constraints on the maximum food import bill

affordable by the developing countries. Without stocks the "deductibility"

clause reduces the expected payments to about one half. A buffer stock is

extremely effective in reducing required payments, when the stock is operated

to stabilize imports around 5.5 billion dollars. The reason is of course

that the storage houses are more likely to be full when a shortage occurs and

the shortages are likely to be smaller and to occur more infrequently. At

the same time grain is likely to be purchased for storage at a higher price

and the turnover is less frequent. This increases the storage cost.

- 28 -

Table 10: PAYMENTS FOR A FOOD IMPORT BILL INSURANCE SCHEMEAND COST OF BUFFER STOCKS UNDER ALTERNATIVE

CONSTRAINTS OF FOOD IMPORT BILL

Food Import Bill Constraint ($ billion)Value of 4.5 5.5Import Storage Capacity Storage Capacity

Shortfall (million tons) (million tons)0 5 10 20 0 5 10 20

$ billion probability (%)

0 52.6 61.1 69.3 80.3 72.3 81.1 87.9 95.6

0 - 1 19.7 17.5 14.3 9.5 13.6 10.1 6.8 2.5

1 - 2 13.6 11.2 8.8 5.4 7.6 5.1 3.2 1.3

2 - 3 7.6 5.9 4.3 2.8 3.9 2.2 -1.2 .3

3 - 4 3,9 2.5 2.0 1.0 1.5 .9 .6 .2

4 - 5 1.5 1.1 .7 6 .8 .4 .2 .1

>5 1.1 .7 .6 .4 .3 .2 .1- -- - - - - - - - - - - - - - - - - - - - - - - -

Expected Pay-ments ($ mil.) 743 563 435 274 372 231 141 50

Expected FIBI"ISavings"($ millions) - 180 308 469 - 141 231 322

Expected cost ofstorage ($ mil.) - 21 50 129 - 41 91 216

Expected grainstored (mil. ton) - 1.2 2.0 3.2 - .9 1.6 2.4

Expected cost perton of grainstored 17 25 40 - 46 57 90

The decision whether to rely exclusively on a FIBI scheme or to

supplement such a scheme with buffer stock arrangements turns then primarily

on the question of availability of financial resources and political

reliability. The most economical remedy is probably the FIBI scheme without

any physical buffer stocks. But as illustrated by the figures in Table 10,

the expected financing required would be substantially reduced by some

combination of a FIBI scheme and a buffer stock operated with the objective

of stabilizing the food import bill. Finally, we might note that achieving

food security partially by means of a buffer stock may be preferred because

it stabilizes the exports of food grain shipments to the developing countries.

For instance, while food security by means of a FIBI scheme increases the

probability of food exports to the developing countries in excess of

40 million ton to 18% from 2% in the absence of food security arrangements,

a combination of a FIBI scheme and a 10 million ton buffer stock would result

in only a 12% probability of exports in excess of 40 million tons. Similarly

a combination of the same stock level with a FIBI scheme would result in a

probability of 11% of exports being less than 20 million tons, whereas with

a FIBI scheme alone, the probability of exports being less than 20 million

tons would be 18%.

- 30 -

VII. OUt6tat1dirig 'Issues

A food import bill insurance (FIB3) scheme could be implemented

in a variety of ways, once the principle of its suitability for eliminating

or reducing food insecurity has been accepted. There are obviously

different funding possibilities and there are various ways of determining

eligibility for payments from the fund.

One way of funding the scheme is to set it up as a buffer stock

fund, meaning that payments into the fund would be made in years of abundant

food supplies. Another way is to set up the fund like any insurance scheme

with equal annual premium payments into the fund. Anotlher issue is whether

tne scheme should be ftunded by the benefitting countries or by the well-off

countries as part of their commitment to aid for developing countries.

The easier to implement scheme would be an insurance fund financed

through annual premium payments by aid donor countries. The fund would then

need to be given authority to invest surpluses in years when accummulated

paid in premiums are in excess of required payments and to borrow funds when

required payments exceed paid in premiums. Premium payments would need to

cover also the differential interest between lended and borrowed funds.

The exact added premium would require actuary calculations, which could be

fairly easily made.

If the insurance scheme were to be funded by the countries

themselves, it miglht be extremely difficult to determine fair and equitable

contributions by each country in proportion to its anticipated benefits.

Moreover, equal annual premium payments may be burdensome and reduce the

benefits to countries in years in which they require food import bill

- 31 -

payments assistance. On the other hand it would be difficult to determine

food import bill surpluses in each country, if the scheme were to operate

like a buffer stock fund.

The most difficult problem to solve is the annual determination

of eligibility for food bill payments assistance. How could it be ascer-

tained that a country's food import bill exceeding its normal level is due

to conditions beyond its control? To the extent that food import bill

overruns are the consequence of a country falling behind in production

performance, the disincentive effect can be largely overcome by frequent

readjustments of its average import bill. But how to recalculate expected

import requirements frequently without reflecting the impact of favorable

or unfavorable climatic conditions in a recent year? Obviously fine tuning

the scheme to make it exclusively an instrument to promote food security

while avoiding all undesirable side effects is not possible.

If it were decided to initiate a food grain buffer stock in

order to reduce the size of a FIBI scheme and to reduce the instability

in the demand for grain by developing countries caused by a FIBI scheme,

several issues need to be resolved. A major issue is the location of

the stocks and the conditions under which they would be released. It

might be least costly to have the stocks located in the grain exporting

countries, because of existing underutilized storage capacity and

because this might reduce the chance of having to re-ship grain since it

is not possible to predict in which country added supplies. will be needed.

On the other hand, cost savings on shipping and handling of grain may be

incurred from stabilizing shipments when grain is stored in the developing

- 32 -

countries. Moreover, there is .the.po.litical dimension of. the location of

the stocks. Developing countries may feel that reliance on. stocks located

in the grain exporting countries on their behalf may involve unacceptable

political risks just the same as reliance on accellerated imports financed

out of a FIBI scheme. An altogether different approach is to locate

buffer stocks in each country. But if this were done, larger stocks would

be needed and higher costs would be incurred for attaining a given degree

of food security.

Then there are many open questions about the policy instrument,s

needed for internal allocation of the additional food imports and the

financial gains accruing to the countries from food import bill payments

assistance. Larger imports and hence larger supplies will reduce the

internal price over what it would have been without assistance. Farmers

will then have less to sell in years of poor harvests and the reductien

in quantity will not be wholly or partly compensated by a higher price.

T'hey might need income compensation. Moreover, in an economy in which to

a considerable extent income is generated by agriculture, a good portion of

the food bill payments assistance will have to be passed on in some way to

consumers to enable them to purchase the desired level of consumption.

All these questions need to be explored before initiating a FIBI1/

scheme. All we could do in this first cut of analysis is to attempt to

give an operational definition and evaluation of the magnitude of food

insecurity and to show that remedies are well within the resources capacity

of the international community. -- -

1/ David Bigman and the author are currently developing behavioral simulationmodels which will have the capability to analyze the effects of differentpolicies on clifferent groups within the country and on the government'sfiscal budget.

- 33 -

ApperidiS Tabdbe 1: FOOD INSECURITY UNDER ALTERNATIVE SCENARIOS(Assuming the correlation between import

requirement and price is 0.5)

Import Consumption Scenario -

ShortfallI II III

(million ton) Probability (%)

0 50.8 48.5 50.3

0- 4 10.8 11.0 20.7

4- 8 10.0 10.6 16- 0

8-12 9.3 9.2 8.5

12-16 7.0 7.1 3.2

16-20 4.9 5.3 1.1

20-30 5.4 6.0 2.Q

>30 1.8 2.3 0

Expected importshortfall 5.5 5.9 2.8

- 34

Appenfdia Table 2: ESTIMATED PAYMENTS FROM A FOOD IMPORTBILL INSURANCE SCHE

(Assuming the correlation between importrequirement and price is 0.5)

ScenarioPayments Needed

I II V$ billion Probability (%)

0 50.8 48.6 50.2

0 - 1 16.6 16.9 31.1

1 - 2 13.1 13.0 14.1

2 - 3 8.3 8.6 3.7

3 - 4 5.8 5.5 0.8

4 - 5 2.6 3.5 0.1

>5 2.8 3.9 0

Expected payments($ million) 970 1095 464