Monthly Archives: March 2014

Government global grain reserves

Despite arguments of liberal market economists, many governments, especially in Asia and the Middle East, continue to buy and stockpile wheat and rice.

Government involvement in grain markets probably goes back to the beginnings of settled agriculture. Egyptian and Chinese records document the role of dynastic administrations in collecting and storing grain thousands of years ago.

Nowadays governments worldwide may buy 10% to 20% of all the rice and wheat produced in a given year, so up to 240 million tonnes out of about 1.2 billion tonnes for the combined crops of the two cereals, but the variation in procurement from country to country is huge. Not just domestic purchases figure into the tally. State wheat importers in Japan, the Middle East and North Africa, and elsewhere may account for around 35 million tonnes.

Global reserves of cereals in government hands at any given time could be in the range of 200 to 250 million tonnes. The International Grains Council (IGC) forecasts 2013-14 ending wheat stocks at 188 million tonnes and rice at 108 million tonnes. China and India traditionally account for the lion’s share, but Thailand stockpiled a peak of 18 million tonnes of rice over the last two years before selling at a loss. Governments of Middle Eastern and North African nations may hold 15 to 25 million tonnes of wheat at any time.

Problems of government grain

In every country the issues surrounding government grain procurement are economically complex and highly political. And, of course, they are fraught with potential problems of poor governance.

There is a standard set of arguments against strategic grain reserves. First of all they require large investments to build the storage facilities, and even more to fill them. Grain markets are volatile and risky but state agencies must constantly decide how much to buy and when, and how to rotate the stocks through sales or other distribution.

Case against strategic grain reserves

  • Expensive and risky to operate
  • Without profit motive,inefficient management practices and waste
  • Creates market distortions
  • Guesswork in estimating need and setting prices - Market does a better job
  • Requires transparency and good governance

Efficient management of public grain stocks is extremely difficult. Most government grain facilities have at least two or three times the personnel of similar private operations. Often they are vehicles for political patronage through jobs. Operational costs can be high. Storage losses from infestation, moisture and pilferage can be an even greater cost.

Let’s go on a quick world tour and see what goes on with governments when it comes to grain reserves. This will be a very high level view.

East Asia

East Asia is a region where governments are very involved in buying and storing grain from the poorest country (North Korea) to the richest (Japan).

China has the world’s largest production of both wheat at 122 million tonnes and rice at 142 million tonnes on a milled basis based on IGC forecasts for 2013-14. Maize production is 218 million tonnes and is mainly for feed use, but some is also held in the government grain reserve.

Data about public grain stocks are treated as a state secret in China, but IGC projects total ending stocks of wheat in China at 57 million tonnes and rice at 50 million tonnes for 2013-14. It is probably safe to say that 90% is held by state grain companies. Grain traders sell mainly to these state companies and large millers depend on them for supply.

In China, two main policy goals have been at play: self-sufficiency in the two staple cereals and higher incomes for farmers. In February 2014, China officially announced the target of domestic production of 95% of the country’s grain consumption would be abandoned.

It is likely that state grain agencies will still buy a significant portion of both wheat and rice - from one third to one half. The government sets prices significantly higher than the international market price to ensure production targets are met. The grain is auctioned off to private millers and traders through central government auctions.

The public grain stocks are not used for food safety nets or for retail market intervention. The idea is to pay prices high enough to help close the income gap between poor farmers and the average city dweller. This in turn promotes social stability by slowing the massive migration of rural poor to cities.

Elsewhere in East Asia, governments buy large parts of the rice crop to keep prices high enough to sustain farm households, even while per capita rice consumption has gone down substantially with economic prosperity. Japan’s Ministry of Agriculture, Forestry and Fisheries maintains a monopoly over wheat imports, and often doubles the price when reselling to domestic mills, thus generating funds to subsidize domestic wheat production.

South Asia

India ranks number two in the world in production of both wheat, at 93 million tonnes, and rice at 103 million tonnes, according to an IGC estimate. State governments buy much of the surplus and public grain stocks at times may be as large as China’s.

In 2013-14 government procurement of rice will be about 32 million tonnes. For wheat it was 25 million tonnes, down one third from 38 million tonnes the year before.

Government ending rice stocks are forecast to be 20 million tonnes for 2013-14. The target stock level is 11.8 million tonnes. Wheat stocks were estimated at 22 million tonnes, down 10% from a year ago but still much higher than the official target level. This is one hazard of intervention. Once started it is difficult to limit.

India’s government frequently experiences well-publicized problems with management of these excessive stocks including tremendous losses from insects, moisture and pilferage, much of which results from traditional bagged storage practices.

India’s grain policy goals are quite different from China’s. The main purpose of state grain purchases is for distribution of food rations to the poor. This is done through state level Pubic Distribution Systems that supply cereals to Fair Price shops in every village and city district. Poor households holding ration cards pay just a fraction of the market price for several kg of wheat and rice per month. The Food Corporation of India coordinates the movement of both rice and wheat from surplus to deficit states. This scheme is estimated to cost the Indian government $20 billion per year. Most economists would argue this money could be better spent on infrastructure.

Bangladesh (population — 160 million) and Pakistan (population — 200 million) are large countries whose governments buy only limited amounts of grain. Nevertheless, despite still high levels of poverty, both have attained a satisfactory degree of food security.

Why governments hold grain?

  1. Emergency reserves
    • Sudden onset disaster
    • Slow onset disaster
    • Food safety nets
    • Public distribution system - India
    • Subsidized bread – Egypt, Tunisia, Turkey
  2. Market intervention
    • Buying to support farm prices
    • Sales to dampen price spikes

Bangladesh’s government buys 1 to 1.5 million tonnes of the annual rice crop that is now close to 35 million tonnes. The country no longer needs to import rice. Rather it may soon have to start exporting large quantities. The government does buy from abroad up to 1 million tonnes of wheat per year, mostly from India. The private sector imports in an average year another 2 to 3 million tonnes of wheat. The government stocks are rotated via distribution to the poor through a myriad of programs and as well as through open market sales if prices rise.

Southeast Asia and Australia

In Thailand, Vietnam and Myanmar governments procure surplus rice that eventually gets exported. In most other Southeast Asian countries, government grain agencies import rice. In the case of Indonesia, rice importation is a monopoly of Bulog, but the country is now on the verge of self-sufficiency with imports at just 1 million tonnes equivalent to around 3% of consumption. In the Philippines, the National Food Agency (NFA) imports some rice and gives licenses to private companies to also buy.

The Thai government has a long history of buying some surplus rice from farmers that it has then sold for export. In 2011, an election year, the Shinawatra government greatly expanded rice purchases at prices 30% to 50% above international prices. Forty percent of Thai households grow rice and the government was re-elected, but controversy, scandal and massprotests have ensued. The Thai government has owned up to a record 18 million tonnes of rice due to its “rice pledging scheme.” Thailand produces about 21 million tonnes but consumes only 10 million tonnes. Peak exports were 12 million tonnes but fell to 6.7 million tonnes two years ago due to the misguided policy. Many observers expect the government to fall as a result of the scandal surrounding its rice buying.

Since Australian Wheat Board’s loss of its single desk status, direct local government intervention in the wheat sector is minimal, though Australian wheat is purchased by many state-trading enterprises.

Middle East and North Africa

The Middle East and North Africa is the world’s most important wheat importing region. It is also the region where governments are most dominant in procuring and holding food grains. These countries are the ones that have been the most aggressive in recent years in expanding their strategic grain reserves.

The region’s imports account for 48 million tonnes of the international wheat trade of 142 million tonnes. These imports are split evenly between the North African countries and those in the Middle East.

The bulk of imports are handled by state-owned grain import monopolies. The largest government wheat importers are Egypt, Iraq, Saudi Arabia and Algeria. Government agencies in each country are major owners and operators of grain storage facilities, though there is some reliance on the private sector, too, especially in Egypt. Smaller countries in the region whose governments operate wheat import monopolies are Tunisia, Kuwait and Qatar.

Western Hemisphere

The United States has no public grain procurement or government stocks. Grain reserves were halted in the U.S. in 1996. The Canadian government gave up its wheat buying monopoly through the Canadian Wheat Board in the western provinces just two years ago.

The U.S. government still subsidizes farmers through federal crop insurance programs and direct payments costing taxpayers several billion dollars per year. And it provides food assistance via debit cards to 45 million low-income people. But this is done without government grain buying.

The only Latin American countries where governments are heavily involved in grain purchasing are Cuba and Venezuela. In effect, the huge stocks of high quality grain always available in the U.S. from Gulf ports serve as a de-facto strategic reserve for these two countries and others in the region.

European Union and Turkey

The 28 countries of the European Union produced 143 million tonnes of wheat and 301 million tonnes of total cereals (IGC 2013-14 estimates). The net wheat surplus is 20 to 25 million tonnes in most years.

The E.U. protects its markets with import quotas and tariffs and still has a system of minimum support prices for certain cereals. This means governments may buy grain from farmers when market prices are below a fixed level, which is the officially set as the E.U. intervention price of €101.

Because of high international grain prices, there has been no basis for intervention purchases by the E.U. in recent years. Surpluses could be exported profitability outside the E.U. Therefore E.U. grain holdings have been at a minimum.

Each E.U. country has a so-called paying agency that is funded directly from the European Union budget when intervention is done. However, E.U. rules do not allow governments to own and operate their own grain storage facilities. All E.U. grain is kept in leased private storages.

Turkey has a well-organized grain market where the government through the Turkish Grain Board (TMO) plays an important role. TMO is a state enterprise whose role is to hold emergency reserves and to intervene in the market to stabilize prices. It buys from farmers when the crop is large and prices are low. It may import when the crop is small to replenish its reserves. TMO has about 4 million tonnes in storage capacity at its own facilities.

Turkey is a candidate for accession to the European Union. It therefore must take some steps to harmonize its grain market policies with those of the E.U. TMO will have to be split into a paying agency on the one hand and a grain storage operator on the other once it is granted E.U. membership.

Sub-Saharan Africa

Among the 50 or so countries of sub-Saharan Africa, there are just a handful where there is public ownership of grain stocks. Eritrea, a closed country with a centrally planned economy, is the only one where the government completely monopolizes procurement of surplus grain and imports.

Zambia’s Food Reserve Agency buys most of the surplus maize to support incomes of small farmers but at a huge cost to the national budget when the maize eventually must be exported at a loss. Annual purchases have been up to 1 million tonnes.

Ethiopia has limited holdings. The government has privatized all grain processing companies but maintains a wheat import monopoly and cooperates with international food aid donors to operate a grain reserve holding 400,000 tonnes in a country that consumes about 20 million tonnes of food grains per year. Sudan’s government holds reserves of millet and sorghum purchased from farmers through the Agricultural Bank.

South Africa’s government abandoned its wheat marketing board in the early 1990s. There are no more public grain stocks in the country. The country is the major exporter of white maize to other countries in Africa and even to Mexico in some years. Large carry-over stocks held by private traders in the country serve as a reserve for the region.

Conclusion

Despite the arguments of liberal market economists, many governments, especially in Asia and the Middle East, continue to buy and stockpile wheat and rice. With the exception of Japan, most rich countries avoid the practice, and few of the poorest countries of Africa can afford to hold reserves either. Some nations may cut their stocks, but others are just as likely to create a new reserve or expand their holdings. Thus state reserves will continue to be an important factor in global grain markets for the foreseeable future.