FOOD SECURITYConcepts, Basic

Facts,and Measurement

Issues

June 26 to July 7, 2006Dhaka, Bangladesh

Rao 5c:Policies for

Ameliorating Instability in Food

SecurityLearning: The goal is to learn a comprehensive range of policy tools and management programs for dealing with the several distinct dimensions of the instability of FS. Develop knowledge of specific options to deploy for different spatial and temporal contexts of instability.

Brief Contents• alleviating seasonal and cyclical FIS• 2 types of shocks & related stress: time &

spatial dimensions• household coping strategies under stress• a multi-pronged approach for stability of FS• production policies for stabilization• stabilization through food pricing & storage• price policy instruments and price

stabilization policies• stock management: working vs. buffer vs.

emergency stocks• using trade (food imports and exports) for

stabilization• early warning, rapid intervention & other

emergency management tools

Chronic FIS • Individuals, HHs, regions and countries who

suffer from chronic FIS have inadequate access to food on a day to day basis, regardless of the season or time of year.

• The most common cause is lack of resources i.e., food purchasing power.

• Chronic FIS is not the same as excess demand for underpriced commodities.

• Adequate food supply as per food balance sheets can still mean uneven distribution.

• Chronic FIS is best identified by low calorie intake at HH level plus physical evidence of malnutrition.

• Injection of external resources is essential to tackle chronic FIS.

Seasonal and Cyclical FIS

• Seasonal FIS is outcome of regular patterns usually in weather related activity, most obviously crop production cycle which affects output, prices and AG employment.

• Seasonal variations in income, production and food prices need not cause FIS, if people have means of storing or saving. But for poor, seasonal FIS can be real - this being due to inadequate entitlement for year as whole: chronic FIS manifesting itself as seasonal FIS.

• Indebtedness compounds problem of AG HHs who build up debts during growing season to repay them immediately after harvest, when output prices are lowest.

• Interlinking of credit and output markets: farmer borrows from a merchant and is required to pay back in grain valued at the merchant's prices.

Alleviating Season FIS

• At HH level, alleviation can be through encouragement of better storage, crop diversification to stagger harvest periods and mixed farming.

• Governments can support off-season employment and non-farm activities.

• Price stabilisation boards and buffer stocks can be effective in reducing seasonal price variation.

• Provision of alternative sources of credit can help break the cycle of indebtedness.

Cyclical FIS • Cyclical FIS is due to year to year

variations in the level of output, specifically in the AG sector and usually climatically induced.

• Cyclical and transitory FIS may be difficult to separate out since it is frequently difficult to identify what is normal annual variation in rainfall or temperature.

• Figure 3.3 shows the levels of crop production over an eleven year period for Kenya.

• Some years may see farmers growing insufficient food for their own consumption. In others they may have insufficient surplus to sell to meet their non-food needs.

Crop Production Variation in Kenya

Cyclical Variations• Some crops are more susceptible to differing

weather conditions and cyclical variation can be reduced by careful choice of crop and diversification.

• But some countries have much more variable climate, resulting in differing variability for the same crop in different countries.

• Output variation may result not just from weather but also policy changes or technology changes.

• Time series can be decomposed into trend, cyclical, seasonal, and random elements.

• While most HHs neither can nor will store against annual variations in output, governments often can and do. They can store grain to cover average shortfall in poor years. Another way is to cover the time lag between ordering grain imports and their arrival.

Two Types of Shocks • Temporary or transitory FIS arises from sudden

shocks. They are temporary because in the period when normalcy returns, this source of FIS vanishes.

• Provided HH can survive shock, return to normalcy is possible. But this is not inevitable. Classic shocks are drought, flooding and pest attacks causing crop failure. At individual HH level, loss of employment or illness could also fall into this category.

• Shocks such as asset loss, or the onset of AIDS, may have initial effects as for a drought but then, the situation does not revert to normal. Then, the HH rapidly descends into chronic FIS.

• The impact of a sudden shock will also vary according to the context within which the shock takes place. A single year famine which occurs after a bumper crop year will have a very different effect on FIS from a famine which occurs after a few years of rather poor harvests.

HH Coping Strategies Under Stress

• There has been considerable analysis of response to famines and food shocks. Famines affect a large fraction of population in a locality; shocks can be much more confined, even to single HHs.

• Coping strategies (or short-term responses) to famine were thought initially to involve a predictable general sequence of actions. But it is now acknowledged that coping responses are more complex and include insurance mechanisms, the disposal of productive assets and destitution.

• Figure below shows a stylised representation of a sequence of responses to a food shock, based on a study undertaken amongst the Hausa in Nigeria. The first six responses are categorised as insurance responses. The next four are various forms of disposal of productive asset and the final response, outmigration, is indicative of destitution.

• "Coping" responses does not necessarily mean "sustainable" responses for transitory FIS may turn chronic.

Strategies for Coping w Shocks

A Multi-Pronged Approach

• Figure presents a concise view of impacts of the food policy interventions.

• Meso-economic elements here (markets for products, inputs, credit, labor, and economic and social infrastructure) refer to particular markets, institutions and services serving particularly the target groups.

• The aggregate food market is introduced as an additional element into picture of which the segregated food markets (e.g. local fair price shops) are one component.

• Picture shows main linkages of food system with main lines of impact of policies on HH food entitlements.

Meso-micro links of Food Policies

Major Lines of Impact 1) Supply measures impact aggregate food

supplies (production, stocks, imports) which determine market supplies as well as FFW and transfers to target groups.

2) Effective HH food demand and institutional demand are important prerequisite for maintaining a certain level of domestic market production.

3) Targeted production supports work through individual output/input/credit markets to determine HH income, aggregate food supplies. Increased HH income leads to increased HH food demand and so increased market access.

4) Public works programmes directly influence labour market. They contribute to higher cash income or (as with FFW) food supplies. PWP-created assets may also help increase production.

5) Targeted food subsidies lower prices which increase real HH income, hence food demand, of target groups.

Stabilising Food Supplies: Production Policies

Supply-raising measures e.g., irrigation, research, storage, marketing, can also help stabilize supplies. Consider

• irrigation which will reduce susceptibility to rainfall variations

• research into drought/pest resistant varieties

• investments in storage on farm, local, regional and national levels

• technical improvements to reduce storage losses

• construction and maintenance of rural roads

• improvements in marketing to promote transfers from surplus to deficit areas

Stabilization through Food Pricing & Storage

Food pricing and storage policies are particularly important. Yet, it tends to be inconsistent with the typical requirements of liberalization or structural adjustment

• Price stabilisation can undermine the objective of market price liberalisation

• Government market interventions related to price stabilisation and stockpiling go against aim to reduce its role in economy

• Added marketing and storage cost can worsen a fragile government budget

On other hand, market instability depresses private AG investment. Lack of crop insurance and futures markets require offsets by government stabilization.

Price Instability & Stabilization

This indicates supply instability. There are 2 approaches to price stabilization

1) Direct: by setting official market prices, e.g. price guarantees (floors & ceilings); exceptionally by pan-seasonal pricing

2) Indirect: through public sector market interventions.

2nd approach allows more flexibility but basic principle is the same:

• government purchases (often thru parastatal marketing agency) and builds up stocks when supplies are abundant and prices fall below a target desired level;

• government sells (from stocks or imports) when supplies are limited and prices rise above a target desired level

Fig. 4.3: Floor and ceiling prices and ideal price movements

Preconditions for Effective Price Stabilization

1) Good institutional-physical market infrastructure so buffer-stocks can be build up and released as required

2) A realistic price band (see Figure, next) • Outside the band, then either ineffective prices,

or very distorted, unsustainable prices • A very high floor leads to accumulating excess,

so wasted, stocks• Very low floors and very high ceilings would be

ineffective • A very low ceiling would soon exhaust stocks

unless met by cheap imports 3) Sufficient funds purchasing, storage, release

operations, financing (interest) costs, and storage losses

Price Stabilization: Bands of Effectiveness

Types & Purposes of Public Food Stocks

Type of stock Purposes Important features Working stock Smoothing regular intra-seasonal /

intra-annual supply variations, in order to ensure continuous market supplies and/or to stabilise prices

Short-term intra-seasonal and/or intra-annual stocks established by public food marketing enterprises

Buffer stock Offsetting irregular/unexpected variations in market supplies, price stabilisation

Inter-seasonal / inter-annual stocks built-up or drawn down, depending on the market situation

Emergency food reserve/food security stock

Ensuring food requirements are met in cases of natural or man-made disasters, to bridge the period until food (aid) supplies arrive from external sources

Inter-annual stocks, provisions for unpredictable emergencies, stocks released for emergency relief purposes

Optimum Stocks• Need for compromise between benefits of

stability and food security VS costs (economic and budgetary)

• Factors to be considered in identifying optimum stocks

Production and supply risks External supply routes Internal transport infrastructure Private stocks: more private stocks

reduces public stocks, the interaction depending on the

Marketing system Vulnerable groups Emergency-relief needs

• Early-warning-systems effectiveness

Price Policy Instruments & Effects

Policy type Major instrument Principal economic effect Trade subsidy/tax on imports/exports prices of traded goods change; indirect effect on

potential tradables

import/export quota indirect effect on prices of tradables

Exchange rate nominal exchange rate prices of traded goods change; may lead to pressures on prices of non-tradables, e.g. labour

Markets subsidies/taxes prices of affected goods change

administered prices rationing; black-market transactions; or budgetary costs

Inputs minimum wage; land tax; interest rate or other import subsidies

changes allocation of domestic resources; affect labour/capital mix of production

Administered Prices

Systems of administered prices include

1) pan-territorial pricing2) pan-seasonal pricing3) floor and ceiling prices

1) Pan-territorial pricing

Purpose: To integrate remote areas into national economy and/or increase overall supplies by encouraging food production in remote and low potential areas

Instrument: A system of nation-wide equal producer prices.

Problems 1 the pattern of regional specialization can

become distorted and "inefficient“2 excessive haulage costs incurred from

remote production areas

Case of Sub-Saharan Africa

• Poulton, Kydd and Harvey (PKH) find internal liberalization, including dismantling of pan-territorial pricing, has improved geographical specialization. They also pinpoint problems of the poorest of the poor - those with few assets, living in remote areas, women, the socially excluded, the displaced and the disabled.

• The geographical redistribution would worsen the conditions of many among the hard-core poor. The poor benefit in cases where there has been growth following liberalization only if they have the capability to participate in the opportunities provided by liberalized markets.

2) Pan-seasonal pricing Purpose To afford reliable prices to producers and/or same to

consumersInstrument (see Figure) Without intervention, prices would

fluctuate as shown.Seasonal P-variation due to S-D; and costs/risks of storage.

Pan-seasonal stabilization can reduce incentives to store, lead to overstocking and incur high storage costs at public hand.

3) Floor and ceiling prices

• This is a system of price guarantees on either side of the equilibrium price. It has the advantage of greater flexibility as compared to a fixed price system and of greater price stability than a free market.

• To be effective, it requires an institutional and physical marketing infrastructure for purchases, releases & buffer stocks