The G-20’s opportunity on food reserves

Sophia Murphy, Guest Blogger

G-20 development ministers meet on Friday in Washington, D.C. One of the items on their agenda is a proposal developed in June for the G-20 agriculture ministers to allow the World Food Program to develop a pilot proposal for an emergency food reserve. The decision was possibly the most important outcome in an otherwise thin summit communiqué: however circumscribed, we know that food price volatility correlates with low stocks, and that providing stocks is a proven way to curb excessive volatility. We also know that in emergencies, in most of the poorest countries, it takes an average of 90 days to bring food into food-deficit areas. 90 days is too long. The costs of working in emergency conditions are also too high, in both resources and human life. There are cheaper, better ways to ensure food is available when it’s needed: a reserve in the food-vulnerable regions is one of them.

The pilot is to be part of the G-20 Action Plan on Food Price Volatility. Preparation of the proposal included extensive consultation with the Economic Community of West African States (ECOWAS), which accepted an invitation to host the pilot project.

Between the last days of June and just last week, an astonishingly short period of time, the WFP coordinated a process among a number of intergovernmental and national agencies; coordinated the drafting of a report, which is both a feasibility study and pilot project proposal; found a willing partner region (ECOWAS); worked with an ad hoc group of interested G-20 governments who provided oversight; and managed some outreach to NGOs with experience in humanitarian emergencies and stocks policies. It is an impressive achievement. Bravo.

The resulting WFP proposal covers all aspects of the creation, operation and governance of the reserve as well as a comparative analysis including other measures to respond to humanitarian needs under conditions of high and volatile food prices. Yet the G-20 governments placed a number of constraints on the design of the pilot, including the requirement that releases from the reserve only be distributed through safety net programs so as to not affect local food prices (required for WTO compliance), that the size of the physical reserve be kept to a bare minimum (no more than a 30-day supply), that any physical reserve be complemented by some form of “virtual reserve” (something of a catch-all category for alternatives to holding physical stocks directly), and that releases would only be triggered when certain criteria were satisfied, related to global market shocks and local or regional food insecurity indicators. The constraints reflect the preoccupation of many governments (not least the U.S. government) that nothing interfere with commerce—only the poorest should be helped (as they are too poor to voice any demand anyway), and with only limited supplies (in case known supplies should dampen prices and thereby discourage production in the long run).

These constraints could jeopardize the whole exercise, but they could still be changed before the summit of G-20 heads of state in November.

Three concerns top the list:

  1. The trigger: The proposed indicator that would be used to decide whether to release stocks from the emergency reserve, a measure of international price volatility proposed by IFPRI, is called the NEXQ (Non-parametric Extreme Quantile). While providing the required objective measure, and respecting the G-20 insistence that this stock is only for responding to international market shocks, not domestic shortfalls, the NEXQ requires analysis of the previous 60 days of international prices, resulting in a serious time lag before any food can be released. Furthermore, it is possible that problematic high prices could occur without significant price volatility (e.g., sustained high maize prices related to mandated biofuel demand) preventing effective use of the reserve. As the High-level Panel report on price volatility makes clear, it is high and volatile prices that are the issue for many countries, not volatility alone. An alternative indicator, such as global stock-to-use ratio, may offer a more responsive yet still objective indicator of whether an international market shock has occurred.
  2. The size of the physical reserve: The proposed reserve is in danger of being too small to be effective. In an attempt to keep the physical reserve modest, the 30-day maximum size requirement stipulated for the reserve is calculated on the basis of historical consumption that includes periods of reduced consumption during the recent food crises. If strictly non-crisis periods were used to determine the nominal requirements, the minimum physical reserve size would be substantially largely than the proposed 67,000 metric tons. Furthermore, the difficulties of targeting people made newly vulnerable by a sudden price rise will likely require additional quantities of grain to account for inclusion errors.
  3. The virtual reserve options: The preferred “virtual reserve” options rely on drawing from either national food stocks or stocks held by local or regional grain traders. The difficulty of relying on these reserves is that during a period of high and volatile food prices, both of these types of stocks will be under intense pressure to satisfy national needs, or RESOGEST, a regional network of national food stocks that coordinates emergency contributions to countries in the network that face food shortfalls. Moreover, commercial traders will be keen to realize the profits that higher market prices offer and perhaps less willing to be drawn into supplying the reserve. The proponents acknowledge this risk but do not provide a satisfactory alternative.

If the G-20 really wants an emergency reserve to work, it will be important for development ministers to push for a pilot project that dares a little more than the current proposal. It is only a pilot after all: a relatively low-risk opportunity for learning. Nothing ventured, nothing gained; the commercial market has already proved itself inadequate. Whatever the explanation for the failings, it is clear that much of the demand for food in poorer countries has a hard time making itself heard in the international marketplace. If the G-20 wants markets to dominate the exchange of food, safety nets are essential, as G-20 ministers know. Here is a chance to work with something more effective and less expensive that the existing system of humanitarian assistance. Let’s hope development ministers are willing not just to adopt the proposal coming their way (that would be a start), but to strengthen it, too. It is an opportunity to send a strong signal to the G-20 heads of state, who will meet in early November, that reserves are a practical tool to counter market failures that jeopardize people’s lives and livelihoods. It is great to have a proposal on the table, but reserves deserve a better hearing than the G-20 agriculture ministers’ mandate allows. Let’s hope other ministries can take the idea to a higher level.

This post was also featured on the IATP’s Think Forward Blog.

Sophia Murphy is a senior advisor at the Institute for Agriculture and Trade Policy, IATP works locally and globally at the intersection of policy and practice to ensure fair and sustainable food, farm and trade systems.