Agriculture Reference
In-Depth Information
other restrictions) should attract more private traders and increase competition,
which in turn can drive prices down. But what criteria can a country follow to
devise such a band? They will depend on several factors, such as exchange rate
policies and comparative advantages of various commodities, but the rule of
thumb is to use f.o.b. (free-on-board) costs as the lower bound and c.i.f. (cost,
insurance, and freight) costs (including trade margins) as the upper bound.
5
PROMOTING ALTERNATIVE INSTITUTIONS
. There are alternative market-
based risk-mitigating institutions, such as futures markets and warehouse re-
ceipts, which have either been deliberately prohibited or could not evolve be-
cause of the presence of parastatals and regulations that supported the latter's
operations. Consider the case of agricultural commodity exchanges, which, in
combination with warehouse receipts, has historically been shown to improve
market efficiency and alleviate credit and insurance constraints. Very little pol-
icy emphasis has been given to developing such institutions. In fact, quite the
opposite has happened. India banned establishment commodity exchanges and
insurance in the private sectors for decades, preventing the country from real-
izing the potential benefits from such agents. After an age-old ban was lifted in
2003, private sector-led agricultural commodity exchanges flourished in India,
to such an extent that three of its exchanges quickly grew to be among the 20
largest exchanges in the world (UNCTAD 2006). However, no other countries
reviewed in this topic have experimented with such institutions. As the private
sector grows and the roles of parastatals diminish, there will be a need to pro-
mote these mechanisms, which have proven track records to mitigate price
risks, reduce public expenditure on price stabilization, and minimize the size of
buffer stocks.
The implications for the size of buffer stocks, a very sensitive and con-
tentious issue, are particularly important. As pointed out in the Philippines case
study, the world markets can serve as warehouses for the country if international
futures markets are effectively used. The forward import contract can be a cheaper
alternative to holding large foodgrain stocks in humid and poorly equipped ware-
houses within the country. Promoting seasonally cascading public distribution
prices, removing restrictions on private stockholding, and encouraging commer-
cial banks to provide credit to private traders would encourage private holdings.
In effect, the international market can serve as a partial buffer stock and release
scarce public funds that are now used to maintain domestic reserves. Successful
5. It is very easy to move from “protecting against risk” to “supporting incomes,” as illus-
trated by the experience in India, where, over time, the minimum support price was enlarged from
a concept based on the paid-out or variable cost of production to the full cost of production, even
including a return to landholding. If income support is a desired objective, we suggest that letting
prices settle to market levels and supplementing payments to bring returns in line with what would
be obtained at target levels may be preferable to full-income price supports, because this practice
is less price distorting, and costs are recorded as explicit budgeted amounts. This practice is gen-
erally followed in the United States, for example, to support smallholder dairy farmers.
