Food markets have been recognised as distinct. Food is required daily by everyone while production patterns are seasonal. Thus, food stocks are important in maintaining price stability. Available stocks can help cushion output shortfalls and contain price rises. So, for markets to function effectively, a virtually irreducible minimum amount of grain must be held in the system. Despite the crucial role of food stocks in explaining price stability and volatility, this factor has remained ignored. Even during the 2007-08 food crisis, it was thought that structural and cyclical factors such as strong income growth in emerging economies, accompanied by diet diversification; urbanisation; diversion of agricultural land for commercial purposes; neglect of investment in agricultural technology, infrastructure, processing facilities; and agriculture research and development all contributed to food price surge. Also, extreme weather disturbances caused supply shortfalls in a range of commodities. The depreciation of the dollar and protectionist policies adopted by many countries added pressure to the already rising food prices. However, recent literature negates most of these factors and concludes that the mandate related to biofuels and the low grain stock-to-use ratios (SURs) has been the major factor behind food price spikes.

Traditionally, the volatility in food prices has been explained by means of shocks to demand and supply, ignoring stocks. Food stocks are important with respect to access and distribution of food as they support the ability of governments and markets to limit excessive volatility in prices by offsetting supply shocks or sudden surges in demand. Analyses of grain reserves reveal that the bulk of the grain stocks are held in the US and China, although Chinese stocks are effectively irrelevant to global markets as China prefers to maintain reserves to insure against domestic shortages. It is revealed that periods of low SURs (below 15-20% of world consumption) tend to coincide with price spikes and a breakdown of functioning of agricultural markets. It is believed that an additional 105 million tonnes of cereals stored around the world would have been sufficient to avoid the global food market disruption of 2007-08.

In our recent paper Determinants of Food Security in Sub-Saharan Africa, South Asia and Latin America: Implications for Policy, we analyse the relationship between global SURs and prices. Our data indicates that, in general, SURs have been falling over the years. For instance, SURs for wheat, rice and corn stood at an average of 32%, 34% and 29%, respectively, in the 1990s, and declined to 27%, 22% and 19% in the following decade. Thus, SURs for wheat, rice and corn were all lower in the first decade of the new millennium as compared to the decade of the 1990s by a whopping 5%, 12% and 10%! While prices and stocks may not be perfectly correlated, periods of low SURs always coexist with periods of ?price spikes?. For instance, the peak of cereals price index (232.1 in 2007-08 and 241 in 2010-11) coincided with very low levels of SURs of cereals, wheat and coarse grains. Thus, policymakers must account for SURs as indicators of vulnerability to spikes in global cereal markets.

Given that access to food is a basic human right, steps need to be taken to build resilience of the poor. It is also important for the world community to understand that many of the shocks and stresses to which the hungry are exposed are caused by their actions. Their policies, in addition to focusing on enhancing production, information and mechanisms to cope with price volatility in the developing countries, should focus on the economic and regulatory measures that affect food security. Adopting an appropriate biofuel policy and desirability of maintaining an adequate SUR are two such measures in which the developed countries can take policy actions. It is unfortunate that the developed world and the international organisations have shied away from tackling the broader structural economic dimensions of the food crisis with bold regulatory reforms, and instead have pressed for initiatives that smoothen markets by increasing food production and encouraging information flows, and that create mechanisms to cope with volatility such as assistance and risk management. Certainly good, but not good enough.

To the extent diversion of corn away from consumption towards fuel production has led to declining SURs, and adopting an appropriate biofuel policy remains paramount. Also, the Agricultural Market Information System (AMIS) needs to enhance market information and transparency on the working of the grain markets. Unfortunately, there is no clarity on how the AMIS would work with the private sector, particularly the four big global cereal grain traders?the ABCD (ADM, Bunge, Cargill and Louise Dreyfus)?which trade in over 75% of world cereal trade. Setting new regulatory framework regarding stock disclosure norms for these large private corporations is important if information asymmetries are to be addressed. Also, several initiatives such as ASEAN?s Emergency Rice Reserve Agreement, SAARC?s Regional Food Bank and RESOGEST in drought-prone West African and Sahelian States have been undertaken at regional levels to provide food security.

India, too, has a popular grain reserve policy operated under its food subsidy programme?the public distribution system (PDS). Revamped in 1997 as the Targeted PDS, data shows that on an average the PDS procurement as a percentage of total foodgrain production went up from 12% during the pre-TPDS period to about 19% for the post-TPDS period. However, despite the noble intention of targeting subsidised foodgrains, the PDS is plagued with ineffective targeting, substantial exclusion and low off-take. Nevertheless, to the extent PDS has provided basic foodgrains to India?s poor and vulnerable at low and stable prices in the face of rising and volatile domestic and global prices, India?s grain reserve policy remains commendable. Undoubtedly, the assurance of food supplies as maintained by the FCI has the potential to reduce price spikes, general food price volatility and improve food security. In fact, in a recent policy decision, the current government decided to offload about 5 million tonnes of rice from central reserves at subsidised rates to check rising inflation. Such measures are possible only when adequate SURs are maintained. Thus, to end the anguish of food inflation, efforts to develop such food reserve programmes deserve support.

Simrit Kaur & Harpreet Kaur

Simrit Kaur is professor, Faculty of Management Studies, University of Delhi. Harpreet Kaur is assistant professor, Sri Guru Gobind Singh College of Commerce, University of Delhi