International trade and world food security : The role of developed countries since the World Food...

No mechanism is in place for the international coordination of grain stocks. World market stability Is largely dependent upon the actions of major grain trading countries. These countries have avoided the exportation of their domestic supply variations onto world markets over the past decade, but have been reluctant to allow domestic consumption to respond to world shortages and surpluses. Improvement in the sensitivity of domestic storage and consumption to world conditions could Increase their contribution to world food security.

Keywords: Food security; international trade; Grain stocks

Tim Josling is with the Food Research Institute, Stanford University, Stanford, CA 94305, USA (Tel: 415 497-3438). Richard Barichello is with the Department of Agri- cultural Economics, University of British Columbia, Vancouver, BC, Canada V6T 1 W5 (Tel: 604 228-3634).

Data used in this article were assembled while one of the authors was engaged as a consultant to the FAO. The authors, however, bear sole responsibility for the use and interpretation of these data.

‘Of the 14 specific resolutions passed at the World Food Conference, nine dealt with production issues, one with nutrition and four with trade and aid. See UN, Report of the World Food Conference, EXonW65.20, New York, NY, 1975.

International trade and world food security

The role of developed countries since the World Food Conference

Tim Josling and Richard Barichello

At the time of the World Food Conference (1974), it was recognized that international trade has a significant role to play in the quest for world food security. The emphasis of the conference was naturally on the need to increase food production in developing countries, and upon the place of international policy in assisting developing countries in the pursuit of such an objective. Nutritional policies and programmes were also discussed in an attempt to place these aspects of development higher on national and international agendas. But a considerable amount of discussion at the conference centred on questions of trade and food aid.’ It was seen that agricultural trade conditions influenced both the level of export earnings available to developing countries with which to purchase food and the price and availability of the temperate- zone food commodities themselves.

Specifically, the conference called for a steady expansion of agricultural trade, through freer market access; an increase in export earnings of developing countries; a greater degree of stability of prices in world agricultural markets; the establishment of an early warning system for crop failures; an expansion of food aid to 10 million tons of grain; and the implementation of national grain reserve policies.

Since that time, agricultural trade has expanded rapidly, although less through improved access to markets as a result of policy changes than through higher demand by developing and centrally-planned developed countries which have found production increases inadequate to cover consumption growth, and through the insatiable appetite of the world’s growing livestock population. Developing country export earnings in agriculture are still as dependent as ever upon the coffee, cocoa and sugar prices which in turn have hardly been controlled at all by the existing international commodity agreements. Exports of non- agricultural goods are now seen as a more dynamic source of foreign exchange earnings, although subject to the swings of world economic activity.

0306-9192/84/040317-11$3.00 0 1984 Butterworth & Co (Publishers) Ltd 317

international trade and world food security

2For a more detailed examination of the impact of national grain policies, including those of India, China, Argentina, Australia and Japan, see FAO, /n&~cr of National Grain Policies of Selected Countries on World Grain Supplies and Prices, CCP: GR 8413, Rome, 1984. 3FA0 statistics are used throughout this article. Split years refer to the marketing year of the country concerned or to the standardized marketing year for the world as a whole.

The early warning system is in place and usefully complements the information available to Third World governments on crop prospects. More recently, the place of skilled purchasing policies and the use of established marketing institutions such as futures trading have been recognized as necessary to translate crop information into sensible importing decisions. Food aid has neared its target, and is now in the main committed in volume rather than expenditure terms. In addition,

led by India, many developing countries have accepted the importance of at least adequate working stocks of basic grains, even if the enthusiasm for more costly longer term reserves has waned since 1974. The extension of the IMF compensatory financing facility to include problems associated with high cereal import costs has provided an additional safety net for developing countries dependent upon food imports for food security.

At the moment, the one missing piece in the food trade and food security mosaic is that of an agreement among countries on measures to stabilize the world market price for wheat and other grains. Discussions on a new international wheat agreement, including a wheat trade convention covering the management of stocks, were given the blessing of the World Food Conference. After several years of negotiation, the talks finally broke down in 1979 and have not been seriously reopened since that time. The place of wheat market stability in the gamut of international policy is as crucial as ever. The role of the major developed trading countries in stabilizing this market remains central to this issue.

This article looks at developments in world markets for wheat over the past decade since the conference, to see whether there is evidence of behaviour which, if not codified in an agreement, at least gives developing countries the hope that food security is not being jeopar- dized by the actions of the industrial world. Specifically examined are the policies and performance of the USA, Canada and the EEC, as being the major wheat exporting countries, with some discussion included as to how the other exporter, Australia, has performed and how the largest central-plan importer, the USSR, has influenced the market over the decade.2

Changes in grain markets

Over the decade from 1972/73 to 1982/83 world production of both wheat and coarse grains has grown, but the more striking feature of these markets has been the expansion in trade. In the case of wheat, total production has increased at a compound annual rate of 2.8% per year, yet exports have grown at almost double (5.3% per year) this rate. In coarse grains, exports grew at three times the rate of production growth, 6.1 and 2.0%, respectively. As a consequence, the proportion of production which is traded grew from 0.17 to 0.21% in wheat and from 0.09 to 0.13% in coarse grains.3

The three major exporters, USA, the EEC and Canada, increased their share of this growing trade volume during the decade. Their collective share of world trade rose from 68 to 75% in wheat and from 50 to 66% in coarse grains. These aggregates hide rather different patterns by country.

Canada’s wheat production has grown from a 4% share of world wheat output in 1972/73 to 5% a decade later. Although its export share

318 FOOD POLICY November 1984


has fallen slightly over this period, it remains the second largest exporter after the USA. In coarse grains, its production share has stayed constant at 3%, while exports have increased from a 5 to a 6% share.

The share of the EEC in world grain production has remained approximately constant at 12 and 9% (60 and 70 million metric tons, respectively, in 1982/83) for wheat and coarse grains, respectively, but their trade situation has changed rather dramatically. From importing 2% of the world wheat trade in 1972/73, the EEC became the third largest net exporter by 1982/83, accounting for 11% of traded wheat. The Community reduced coarse grain imports equally dramatically, from 22 to only 5% of world imports.

The US production share of wheat has grown significantly, from 12 to 16% (76 m.m.t. in 1982/83), and its share of world coarse grain production has stayed about 30%) making the USA the largest producer in the world (255 m.m.t., 1982/83). The USA is also the largest exporter of wheat and maintained its export share (45%) over the decade. In coarse grains, the USA is the dominant exporter by a wide margin and increased its export share slightly to 62%.

The world markets for both grain groups experienced fluctuating supply-demand balances, hence price patterns, over the decade. Four distinct periods can be identified, two with prices rising and two falling. The first period is from 1971/72 to 1974/75 and featured the most dramatic increase in farm commodity prices in many years. Wheat and coarse grain prices both increased during this period, differing slightly in the timing of price peaks. Production increased only marginally, which forced consumption growth to run down stocks and increase world prices by $100 and $80 per ton for wheat and coarse grains, respectively. The four years from 1977/78 to 1980/81 was another period of tight supplies and rising prices. This time, although production increased in a rather modest manner, it was the strong growth in consumption which was unusual. Nominal prices rose strongly, wheat prices more than coarse grain prices, but neither increasing as much as during the 1971/72-1974/75 price boom.

The first period of falling prices covered the years 1975/76 and 1976177. Production grew particularly rapidly, resulting in stock accumulation and price falls. The wheat market was again the more erratic; it featured double the increase in stocks and fall in price compared with coarse grains. The two years, 1981/82 and 1982/83, were also years of abundant supplies, stock accumulation and price declines. The period might be noted for the particularly large growth in coarse grain production, disposed of equally between consumption and inventory growth, which forced the fall in coarse grain prices to exceed the fall in wheat prices.

These differences within the decade make clear the continued relevance of food security issues into the 1980s. Despite impressive growth in production and trade over the 12 years, two-thirds of the years were characterized by excess demand and prices which rose, sometimes dramatically. These aggregate figures do, however, conceal quite different behaviour and policies of the major producing countries. These policies and their impacts are examined in the next two sections.

Grain policies at the national level

It is a truism to state that trade policy in wheat and coarse grains is

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“It is often pointed out that stable domestic prices can add to stability of production. While this may be true and potentially useful (if the original instability were not in fact helpfully counter-cyclical in world terms), it does not alter the logic of the negative effect of domestic consumption and stock stability on other countries. Stabilizing domestic production is in itself a desirable goal for many countries, which could assist world market stability.

dominated by national rather than international considerations - in developed (as in developing) countries. Governments see it as a part of their legitimate responsibility to expand the market for their domestic producers, subject to constraints on expenditure, and to stabilize domestic prices to benefit both producers and consumers. In importing countries such policies often take the form of minimum import prices, where importing is done by private firms, or of purchasing and reselling by state agencies when such private trade is not allowed. Exporters also use a mix of state sales agencies and export incentives to private firms, combined with storage policies and production controls.

The implications of these policies on the international market has been the subject of much discussion since the rapid price rises of 1972-75. Two conclusions emerge from this analysis of the potential impacts of national policies. The first is that domestic stability policies can have destabilizing effects on world markets through the lack of consumption response to supply changes. If domestic prices do not rise in response. to a shortfall in either domestic or foreign supply, then consumers (including livestock feeders) will not adjust their use of grain. The domestic effect is quite deliberate, and represents a policy ‘success’: the world-market implications are a by-product no less significant for being unintended. Supply falls have to show up somewhere - as stock or consumption reductions - no matter what policy makers may wish. If one country does not adjust, others must adjust more. The concern is that if the rich industrial countries block such adjustments in their markets, then the poor developing countries must absorb these supply changes. The response of consumption to supply shocks is therefore one key variable in the food security equation .4

The lack of consumption response which might assist in absorbing supply changes would be of little importance if stocks varied enough to offset such production instability. The second conclusion to emerge from recent discussions of developed country price policy is that those countries which pursue resolutely a policy of domestic price stability also impair the function of stocks in responding to market fluctuations. Stock changes occur when private firms recognize the potential profit from buying at low prices and selling when prices rise. The price difference has to be substantial to pay for storage costs and the capital tied up in inventories. If domestic prices vary little, or notch up year by year with inflation, the profit in holding stocks is removed. Similarly, if public agencies hold stocks, as they do in many countries, they too must manage those stocks as ‘stabilizing speculators’ to assist in market adjustment. If, on the other hand, stocks in public care are seen as an embarrassment, to be disposed of when accounting time comes around, then these reserves are also of little stabilizing value. Thus, stock response to supply changes is another key variable in assessing food security.

Before examining whether the stock response and consumption response have indeed been inadequate, it might be useful to link such analytical constructs to actual policies and institutions. Since the emphasis in this article is on the three largest wheat exporters, we begin with a look at their policies, although some discussion of the developed importing countries is needed to complete the picture. NO attempt at a comprehensive survey of policy developments is intended, and no judgment of their domestic impacts is implied. The emphasis will be on

FOOD POLICY November 1984


the extent to which policies might be expected to contribute to or detract from international adjustment to supply changes.

The USA has had 50 years’ experience in attempting to manipulate domestic cereals markets to achieve satisfactory levels of prices to farmers.5 As exports rose in the post-war period - and in particular in the 1970s - the linkages between domestic and international market developments have been felt in farm policy. At the time of the World Food Conference, the USA had just completed a major shift in policy with respect to cereals. This shift started in the mid-1960s with the failure of politicians to secure agreement for mandatory quotas on production, and the shift to voluntary participation in acreage control schemes. Support prices (loan rates) were lowered in an attempt to clear surpluses, with additional payments to ‘cooperating’ farmers. By 1973, the policy had evolved into one of deficiency payments, allowing the market price to drop to where explicit export subsidies were no longer required. Government-held stocks were sold to willing buyers - including the USSR, which had entered world grain markets in an attempt to offset poor harvests. The price rises over the 1972-75 period helped to allow the new policy to settle in without undue budget cost.

By 1976, with prices moving downwards, further policy action was required. The introduction of the Farmer-Owned Reserve Scheme in 1978 added private storage aids to the loan rate mechanism. When prices rose again, US reserves could respond to the need for additional supplies. The emergence of surpluses in 1981 again led to the build-up of stocks and ultimately to the unusual combination of stock-rundown and acreage-control policies known as PIK (Payment-in-Kind), by which farmers received grain from storage to compensate them for that not grown on their farms.

In institutional terms, the USA has maintained a private trading system, with strong international links, and has developed a support system based on individual farmer choice. Farm gate prices move in a wide band, to the discomfort of livestock farmers who do not in general benefit from extensive government intervention6 Storage levels change markedly in response to price expectations. A limited number of bilateral trade agreements, mostly with socialist countries, have an importance in estimating future trade conditions. Although a full range of concessional export schemes are in operation, no formal export subsidy policy is in use. One would expect, a priori, significant reactions to world market conditions, in both stock levels and consumption, to be evident for the USA, and to be generally positive in their impact on stability. Since the USA - alone among the large grain producers - seems to enjoy large harvests when others are short of grain (and vice

versa), the total contribution of the United States is likely to be to stabilize world markets. The evidence of the past decade is discussed below.

Canadian policy differs from that in the USA in a number of respects.’ The grain export trade is dominated by a state agency, the Canadian Wheat Board, which sells all of the wheat and much of the coarse grains produced in the prairie provinces. Production control is less in evidence in Canada, and stocks are often backed-up at the farm and local market levels awaiting the issuance of delivery quotas from the Board. As a selling agency, the Board might be expected to move a higher proportion of extra supply in years of good harvests into world markets - if the demand is apparent. Consumption of wheat is relatively

5For a discussion of US farm policies, see Ronald D. Knutson, J.B. Penn and William T. Boehm, Agricultural and Food Policy, Prentice-Hall, Englewood Cliffs, NJ, USA, 1983. YZounter-cyclical control over meat imports is intended to stabilize the market price, but market forces play a bigger role in cattle, hog and poultry markets than in most developed countries. 7Canadian farm policy is discussed in J.D. Forbes, R.D. Hughes and T.K. Warley, Economic Intervention and Regulations in Canadian Agriculture, Canadian Govern- ment Publishing Centre, Supply and Ser- vices Canada, Ottawa, Canada, 1982.



‘The development of EEC farm policies is discussed in Simon Harris, Alan Swinbank and Guy Wilkinson, The Food and Farm Policies of fhe European Community, John Wiley, New York, 1983. gFor a brief period, when world market prices were at their peak, export taxes were levied in an attempt to keep domestic prices steady. “Price variations within the market have been increased by the widening of the band between the floor price (intervention price) and that at which imports enter (threshold price). Substitution among grains has been facilitated by harmonizing grain intervention prices. However, more wheat is being classed as bread-making quality (even if in surplus) which effectively prices it out of the feed market.

low by international market standards, but storage levels tend to be high relative to production.

Canada also has gone through a radical transformation of policy over the period under discussion. The Western Grains Stabilization Scheme, introduced in 1976, moved support policies towards the notion of providing an income (rather than a price) guarantee floor based on an average of past years. In addition, a two-price system developed during the period of high prices which subsidized the domestic use of wheat. Since that time two developments have moved policy further towards a market orientation. The Crow’s Nest Pass rate, a subsidized freight rate on grain moving to export ports, was changed in 1983, and the share of the coarse grain market which was not subject to Canadian Wheat Board control has been increased. Although the change in ‘the Crow’ affects the level of protection, rather than the sensitivity of the domestic market to world prices, the liberalization of the feed grain market (and of feed grain imports) has essentially led to a single, and price responsive, market in these products on both sides of the border with the USA.

Based upon these policies and policy changes, one might expect Canada to absorb less of its production variability in consumption than the USA, but more for coarse grains than for wheat. Stocks should be responsive to world market price developments, not so much through private stock speculation but as a result of the delivery quota system. When world markets are firm, Canada presumably takes advantage of the circumstances; when they are weak, the operation of Canadian policy might be expected to hold back at least a part of supply variations in stocks. Again, the evidence is discussed in the next section.

The EEC policy for cereals has shown few significant changes over the past decade.8 It comprises a set of variable levies on foreign grain which are calculated to bring landed prices to the top end of the internal price structure. In addition, variable export subsidies are granted, selectively by destination region, to allow surpluses to be exported in competition with other suppliers. 9 In terms of world trade, this would seem to represent an extreme form of domestic price isolation, which, as described above, could prevent any absorption of either domestic or foreign supply variations on the internal market. Extra production within the EEC would displace its own weight of imports, in the case of coarse grains, or add an equal amount to exports in the case of wheat. What would prevent such an extreme situation would be substitution among wheat and coarse grains in animal feed, as a result of policy measures such as the premium offered for the use of wheat in animal feed (denaturing premium) in operation until 1974, or of the residual relative price variability between grains allowed by the system.l” Alternatively, if surpluses were stored, in public intervention centres or through a system of aids to private storage, for a period beyond the marketing year, then the output fluctuations would not immediately be seen on world markets.

Although the Common Agricultural Policy (CAP) has shown a remarkable resistance to change over 20 years, attempts at modification have been made. The Commission, responsible for suggesting annual price levels, has announced its intention to try to bring grain price levels more into line with those in the USA. It is too early to tell if this will happen. In addition, the agriculture ministers, who make final decisions on prices, have agreed upon a policy of reducing prices if production



exceeds a ‘guarantee threshold’. l1 While these decisions could, in time, reduce protection levels, no modification is in sight for the policy of domestic price stability which in effect leaves EEC consumers (and grain stock holders) outside the orbit of world market adjustments. How important this has been to market stability is discussed in the next section.

Among the other developed countries which deserve mention as being of potential significance for world grain markets are Australia, Japan and the USSR. Australia is a regular if small exporter whose production, like that of Argentina, comes on the market in the middle of the northern hemisphere marketing year. Average stocks are rather low, in part because of this seasonal difference. Exports are sold by a state agency, the Australian Wheat Board, which pays to the farmers a blended price and operates a scheme to stabilize farm returns. Small exporters can move production onto world markets with relatively little effect on price. As with Canada, domestic consumption is low relative to production. As a consequence, no great degree of stability or instability is likely to emerge from Australian policy. Japan is a minor producer of wheat and coarse grains, but a major import market for the latter. The main domestic cereal is rice, and production of this crop dominates Japanese policy. For brevity, Japanese policy is not explored further in this paper.

No discussion of grains policy among developed countries can exclude the USSR, once a major exporter of wheat and still a supplier to other countries in Eastern Europe. Production in the USSR has fallen far short of domestic needs in recent years. Both the importation and domestic marketing of grains is strictly controlled by the government. Under such circumstances the notion of ‘policy’ becomes indistinguish- able from the observed outcome. If, for instance, domestic stocks rise when production is high, then one can ascribe this effect to policy. Stocks do in fact play a major role in Soviet grain markets. In an effort to maintain consumption, imports also respond to the state of the domestic harvest. The USSR, as a large and relatively unstable producer of grain, has a disproportionate impact on the world market as a whole. But one would still expect substantial variations in consumption and stocks as domestic supply varies, and also a response of imports to world market conditions as the USSR looks for ways to rebuild stocks.

“This decision is weakened by the fact that the price reductions apply not to present prices but to the prices which might have been agreed to in the absence of such a scheme - an arbitrary level which effectively preserves freedom of action on price decisions. “Although wheat is the most important grain for food security, developed country policy also has important impacts on coarse grain and rice markets. The situation for these other commodities is discussed in FAO, op tit, Ref 2.

Impact on trade and food security

To examine the actions of these developed countries on world grain markets, we now turn to data from the last 12 crop years (1971/72-1982/ 83) covering five variables pertaining to crop supplies and their disposition (production, opening and closing stocks, imports, exports and domestic consumption). This examination is kept in bounds by focusing on one grain - wheat - for the five major wheat trading countries mentioned above. l2

To determine the stabilizing effects of these countries’ actions on the world wheat market, we ask how each country has responded under six different situations of interest. Specifically, how does each country respond (change its disposition of supply) under conditions of a domestic wheat surplus, a domestic wheat shortage, a foreign (rest of the world) surplus, a foreign shortage, a falling world market price, and



rising world price, where a surplus is defined as an increase in production and shortage as a decrease.

With our limited number of observations we address this by partitioning our data by year into these different circumstances, first considering domestic production, then foreign production and finally world prices. This is a crude method of isolating each of these factors, similar to a series of simple regressions where we allow countries to respond differently to upward and downward movements of the variable in question: Additional years of data would allow more formal regression techniques such as are found elsewhere.‘”

Our results are indeed conditional upon the exogenous factors present in any one year (notably weather conditions) and should be interpreted accordingly. More to the point, we cannot conclude with confidence whether a particular pattern of response was induced by government policy (ie chosen) or by circumstances such as the weather. Nevertheless, general patterns of behaviour do emerge as they affect world market stability.

Looking first at changes in domestic production, Table l(a) shows the country responses to domestic surpluses. First, it is clear that no country disposes all of its surplus product onto the world market. Everyone stores a sizable part of the increased crop, keeping it available for later years, and only in the USSR is there any significant consumer response. The USA has insulated the world market completely from its surplus. By contrast, the EEC and Australia transmit 40% of their surplus onto world markets, doing the least of these countries to ensure world price stability under domestic surplus conditions.

Table l(b) shows country response to domestic shortages. This section of the table indicates the reliability of each country as a supplier, and once again the USA has contributed most to world market stability. They actually increase exports when domestic production falls off by running down stocks substantially. Canada has also aided stability by increasing exports in the face of production shortages, as has the EEC to a lesser extent. Under these conditions Australia and the USSR burden the world market with their own production shortfalls by cutting back on net exports. Although they do run down their stocks during these years, they do so only enough to cover one-half their production drop;

13David Blandford, ‘Instability in world the balance of this instability is transmitted to the world market. Once

grain markets’, Journal of Agricultural Eco- again, consumers in each country except the Soviet Union are insulated nom& Vol34, No 3,1983, PP 374-395; J. Sharples and C. Goodloe, Global Sfocks of

from their country’s production variations.

Grain: Implications for U.S. Policy, USDA/ Now we examine how each country has been influenced by quantity

ERSIIED, May 1984. and price developments in the rest of the world. Table 2 shows country

Table 1. Country response to changes in domestic production (million metric tons).

Country AS AST (a) Domestic s$s

AT

Australia 21 .o 13.3 -0.8 8.5 Canada 28.3 23.3 0.2 4.7 EEC 34.3 15.3 4.7 14.0 USA 51.6 48.8 2.9 -0.1 USSR 98.1 65.0 14.2 18.6

(b) Domesfic shortage Australia -20.0 -11.5 1.5 -10.0 Canada -10.5 -15.8 0.6 4.7 EEC -11.0 -12.1 -1.6 2.9

Note: “AS, change in production; AST, change USA -12.0 -34.0 1.2 20.9 in stocks; AC, change in consumption; AT, USSR -110.8 -57.0 -8.7 -44.9 change in net trade (imports negative).



Table 2. Country response to foreign surplus and failing world prices (million metric tons).

Country AS’ AST (a) Foreign .sur$Z

AT

Australia 7.3 5.9 -0.2 1.6 Canada 24.4 23.1 0.0 1.1 EEC 20.7 9.5 -0.5 11.9 USA 11.9 18.3 2.9 -9.1 USSR -8.0 25.0 -8.5 -24.7

(b) Falling world prices Australia -1.5 -0.1 -0.5 -0.9 Canada 17.9 9.6 0.6 7.6 EEC -0.8 -0.6 -1.0 -0.5 USA 21.6 17.6 6.2 -2.1

Note: aColumn headings are defined as in the USSR 1.8 21 .o -9.9 -9.1 footnote to Table 1.

responses in years when the rest of the world can be considered to be ‘long’ in wheat, with section (a) describing those years when countries foreign to the one considered experienced production increases. Under these circumstances, the USA and the USSR acted to stabilize the market by reducing exports or increasing imports. This was accom- plished by large stock accumulations. Australia and Canada had benign effects on the world market, although Canada remained trade-neutral only by particularly large stock accumulations to absorb unfortunately timed domestic surpluses. The EEC provided contrast by increasing exports when the rest of the world was in surplus. By transmitting more than half its domestic surplus during these years, the EEC contributed most to destabilizing the world wheat market. Surprisingly, no significant stabilizing consumption response was observed across our sample of countries.

Table 2(b) shows response to falling world prices. These data are drawn from those years where there was a continued aggregrate surplus relative to consumption; and the years are the same for all countries: 1975-77 and 1981-83. Stabilizing behaviour is indicated by a reduction in exports (increase in imports) and all countries except Canada contributed toward this end. The USSR and the USA reduced net exports the most, and although the US contribution was rather small absolutely, it occurred despite large domestic surpluses. Canada also had large domestic surpluses during these years, but absorbed only 60% of this production instability internally (in stocks). It transmitted the remaining 40% to the already soft world market, mostly in the 1981-83 years. Some consumption response is evident during this period. The USA increased domestic consumption moderately, while the USSR (and to a lesser extent the EEC and Australia) decreased consumption, a seemingly perverse response in a period of falling prices.

The reverse situation - periods when the rest of the world can be considered short of wheat - is described in Table 3. First, when the rest of the world is experiencing a production shortfall, section (a), stabilizing behaviour would be shown by an increase in net exports. The USA, Canada and the EEC all act as stabilizers during such periods, particularly the USA which does so largely out of fortunately timed domestic surpluses. Australia, Canada and the USSR all find themselves short of wheat production at the same time as the rest of the world, yet they each respond rather differently. Canada destocks substantially to offset the crop shortfall and increase exports. Australia also reduces stocks, but transmits one-half its crop shortfall to the world market by reducing exports when the rest of the world is short. The

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Table 3. Country response to foreign shortage and rising world prices (million metric tons).

Country AS’ AST (a) foreign shokie

AT

Australia -6.3 -4.1 0.9 -3.1 Canada -6.6 -15.6 0.8 6.3 EEC 2.6 -6.3 3.6 5.0 USA 27.7 -3.6 1.2 29.9 USSR -4.7 -17.0 14.0 -1.6

(b) Rising world prices Australia 1.0 0.1 1.1 0.6 Canada -5.5 -5.4 0.0 -0.1 EEC 18.9 1.6 5.0 12.4 USA 10.8 -11.7 -4.0 26.4

Note: %olumn headings are defined as in the USSR -13.6 -24.0 22.4 -12.5 footnote to Table 1.

USSR is largely neutral to the world market. Although it destocks heavily, the wheat stocks move to increase domestic consumption. All countries increase home consumption when foreign countries are short of wheat, most of all the USSR.

During those periods when world wheat prices were rising (1972-75 and 1977~Sl), the USA and EEC were the contributors to world market stability by increasing exports. Both had domestic surpluses at these times, but the USA cut back domestic consumption and lowered stocks to permit an even greater increase in exports. The EEC allowed domestic consumption to rise, added slightly to stocks, but was still able to increase exports. Australia and Canada are largely neutral to the world market, although Canada again found itself short of production simultaneously with the rest of the world. The USSR acted to destabilize the world market during these years by transmitting virtually all its production shortfall to the world market with increased imports. Although stocks were reduced, this largely supported increased domestic consumption.

Conclusion

Despite using data for the rather brief period of 12 crop years, we find that the major wheat-trading countries show systematic trade responses with important implications for world grain market stability. In general, one is mildly encouraged by their behaviour in stabilizing the wheat market. Their collective performance has been neither spectacular nor always consistent in this regard, but it cannot be said to be destabilizing.

On the positive side, these developed countries manage their stocks in virtually all situations in the appropriate (ie stabilizing) direction. Canada, the USA and the USSR can be commended most highly for their stabilizing stocks policies. Secondly, all countries appear to absorb a large proportion of their domestic surpluses, largely through storage. Only 20% of their collective surplus entered the world market. In times when domestic production fell, they insulated the world market even more successfully. Stocks were sufficiently reduced that only 16% of their total domestic shortfall reached the world market. Canada, the EEC and the USA were noteworthy here; these three increased exports in the face of domestic production shortfalls. Fourthly, when foreign countries were in surplus, the largest countries (USA, USSR) seemed to change their behaviour the most, reducing net exports. When foreign countries experienced production shortfalls, the collective export response was more significantly stabilizing, and came from Canada, the



EEC and the USA. Finally, under rising world prices, exporters did increase exports, effectively moderating the increase in wheat prices.

On the negative side, with the periodic exception of the USSR, there was very little stabilizing consumption response observed among these countries. This placed the burden of stabilizing world markets on the only remaining avenue of domestic absorption, the management of wheat stocks. Secondly, exporters responded poorly in general to price falls on the world market. Across these five countries and the four crop years, a total of only 5 million metric tons of reduced net exports was observed. Canada’s destabilizing behaviour largely offset the positive effects of the USSR and the remaining countries contributed almost nothing. Finally, during related periods when the rest of the world was in surplus, the smaller countries - Australia, Canada and particularly the EEC - acted perversely by exporting more.

When this performance is examined by country, the USA is always found to act to stabilize world markets. Whether due to public policy, stabilizing private speculation in stocks or timely weather conditions, the USA is far ahead of all other countries in the level and consistency of stabilizing behaviour. At the other extreme, although small, Australia has the worst record, acting in a destabilizing manner in one-half of the situations examined and innocuously in the other half.

The performance of the remaining countries is mixed. Their responses can be classed almost equally among the categories stabilizing, neutral and destabilizing. The EEC had the most destabilizing behaviour when either a domestic or a foreign surplus was encountered. It also had the good fortune to be long whenever the rest of the world or the world market was short, and conversely. Canada had the best stocks behaviour of the three, but for whatever reason has suffered from very pro-cyclical production variation. This made stabilizing behaviour more difficult (ie expensive), noticeably in its destabilizing actions on soft world markets. The USSR, like Canada, always had stabilizing stocks behaviour, but also highly variable and often pro-cyclical domestic production. The result was destabilizing trade behaviour when the world market was tight and a greater-than-average tendency to transmit domestic production variations.

In sum, despite the absence of any formal agreement among developed countries to stabilize world wheat markets, our evidence over the 1970s suggests that, given their domestic production variability, they generally acted to increase stability. How much of this is due to policy choice and how much due to circumstance is difficult to say with only 12 years of data. Furthermore, no general trend to more or less stabilizing behaviour was evident over the 12 years. Despite this mild optimism, there remain opportunities to improve on this record. National consumption remains too isolated from world markets. Although national stocks policies are typically stabilizing in direction, the magnitude of stock changes can be increased to better accommodate the extent of domestic production fluctuations. With more internationally sensitive stocks policies and responsive consumption, the world market could be Ynore useful as a place to put supply variations.


International trade and world food security : The role of developed countries since the World Food...

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Transcript of International trade and world food security : The role of developed countries since the World Food...