Physical stocks
Combination of physical stock with a cash component
The composition of the reserve is usually considered to refer to the physical composition of the reserve; e.g. the proportion, or quantity, of the different types of grain held. This was probably satisfactory when strategic grain reserves were a fixed size. However, taking a broader view of a strategic grain reserve, the composition should be extended to include other resources available to the reserve, i.e. cash which can be used for domestic and/or international purchases. Thus, it should be legitimate to consider a reserve as comprising a certain proportion in physical stocks, which themselves may contain different types of grain, and the remainder being in the form of cash, or, alternatively, a combination of cash and other instruments1 which is readily available to the agency responsible for the management and operation of the reserve.
1 For example options and futures.
In an ideal world a strategic grain reserve would comprise a range of cereals reflecting the preferred staple of the potentially vulnerable population. However, such a benevolent approach can cause problems, albeit inadvertently, which not only increase the cost of establishing and maintaining the reserve, but could also increase the vulnerability of some rural population groups to food insecurity. For example this could occur if they were to become accustomed, through releases from a reserve, to a grain type which is agronomically unsuited to the area, e.g. white maize in drought prone areas or whose normal market price is beyond the normal purchasing power of the population group, e.g. rice.
As a basic principle a strategic grain reserve should comprise cereals which are widely consumed, normally readily available in the domestic market and preferably locally produced. In selecting the grain type, or types, for the reserve there will always be a trade off between which grains are preferred by the potential beneficiaries and their cost relative to an acceptable alternative. For example while, for social reasons, consideration may be given to holding some quantities of rice in the reserve, with a cost per tonne at least double that of white maize, sorghum and millet, and a nutritional value which is not markedly higher, it is difficult to justify a rice component for the reserve. The cost of establishing and maintaining the reserve is also likely to be higher when it contains several grain types, as the need to maintain different stock combinations in different areas will increase demands on transport, handling and administration. Thus, from a purely cost and operational stand-point, it would be advantageous to have only one type of grain in the reserve, e.g. white maize, as has been the case for most African countries to date, rice in Far East countries and wheat in the Near East.
Options for composition of strategic grain reserve
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Reserve Composition |
Advantages |
Disadvantages |
Comments |
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Single type of grain |
a) Procurement, storage recycling and releasing operations simple. |
a) Can encourage a change in eating habits. This can lead to greater production instability if grain type not suited to particular area, e.g. if the reserve comprises white maize, it could encourage the production of maize in drier areas where sorghum, millet or cassava are more appropriate crops. |
a) Grain type must be acceptable to the potentially vulnerable population. |
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b) Managerial and operational costs reduced as need to redistribute stocks, minimised. |
b) Grain must be normally readily available in the market. |
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c) Grain should be as low priced as is consistent with (a) above. |
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Several types of grain |
a) Provides opportunity for the agronomically most suitable grain to be provided, thereby reducing the risk of changing eating habits and encouraging the production of an unsuited grain. |
a) Complexity of management and operational activities increases substantially with increases in the number of grain types, e.g. to ensure that the right amount of the right grain type is in the right location at the right time |
a) Government has to assess the cost benefit of maintaining more than one type of grain, and be prepared to make the additional resources available. |
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b) As prices vary between grades average cost of grain purchases likely to increase, thereby increasing the cost of the reserve to government. |
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c) Management and operational costs are increased as the quantities of grain to be relocated is increased |
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Combination of Physical stock and Cash |
a) Physical size of the reserve can be adjusted to meet the expected reserve needs |
a)
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b) Cash resources of the reserve should remain under the control of the responsible agency or there could be a danger that the cash is not available when required. |
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b) Overall cost of maintaining reserve reduced as average stock level reduced. |
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c) Opportunity to invest cash in interest bearing account. |
c) The total real value of the physical stock and the cash components would remain constant. With an increase in one being balanced by a decrease in the other. |
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Cash |
a) Cost of maintaining the reserve reduced. |
a) Possibility that grain will not be available when required, due to slow response or ordering delays. |
a) Cash resources of the reserve should remain under the control of the responsible agency or there could be a danger that the cash is not available when required |
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b) Possibility that white maize, the preferred grain will not be available in the event of a regional drought. |
There may, however, be sound reasons for considering holding more than one type of' grain in the reserve. This could be particularly the case in areas that depend predominantly on subsistence farming, where it would be undesirable to create a demand for a grain which is unsuited agronomically to the area through periodic releases from the reserve. In these instances it would be preferable to make available a grain type which can be produced in the area, e.g. millet and sorghum in drought prone areas. Under such circumstances there may therefore be an advantage in having limited amounts of a second or third grain type in the reserve. In deciding on which grains to hold, it should be remembered that, from a practical perspective, the purpose of the reserve is: to provide an acceptable wholesome basic food until such time as additional supplies can be mobilised at the minimum affordable cost to government and which does not adversely distort normal consumption patterns. Following this course it should not be the responsibility of government to make available a preferred but more expensive food when there is a cheaper, and acceptable, alternative available.
Over the years there has been much discussion in academic and certain donor circles of the benefit of holding the strategic grain reserve in the form of cash rather than physical stock. It is argued that with a "cash reserve", grain would only be purchased for reserve purposes in the event of a possible food emergency arising and that such an approach would be more cost effective than continuously maintaining a physical reserve. This approach assumes that grain will always be available on the international market at an affordable price, that the "cash reserve" will be available when required. These are both sweeping assumptions.
For most Sahelian and Sub-Saharan countries the grain which will need to be imported to combat a food emergency is white maize, a crop which is not normally readily available outside the region, and for which there is a relatively small international trade. As droughts are the main cause of food shortages for all countries in the region and as they tend to extend over several countries at a time, it is likely that several countries will be facing shortages of white maize at the same time. There is thus a strong possibility that prices for white maize will be high and/or that countries may put on export bans in an attempt to protect their own limited stocks. As the closest alternative to white maize, i.e. yellow maize, faces considerable consumer resistance a strong argument can be made for holding-over some stocks of white maize, in a reserve, from surplus production years until such time that it becomes clear that the country is unlikely to face a food shortage before the next harvest. Such a move, however, has cost implications for the reserve, particularly if interest rates are high.
Although grain is a relatively low value commodity, as the quantities required to combat a food shortage are relatively large, usually several tens of thousands of tonnes, the size of the "cash reserve" required to arrange for purchases either on the domestic market or through imports will amount to several million US dollars. With most governments facing serious financial difficulties, neither their treasuries nor their politicians, while being prepared to accept the need to hold physical stocks of grain to a similar value, will willingly accept that substantial sums of money are being held by the reserve agency in a deposit account, against the possibility of a food emergency arising. There would therefore always be pressure to use the cash for other causes, particularly in years when there is no or little danger of a food emergency, only to find that when the cash is required the Treasury is unable to make it available when required for making purchases.
In an attempt to gain the best of both worlds consideration should be given to holding the reserve partially as a physical stock and partially as cash. The proportions of each could be adjusted each marketing year depending upon the likelihood of a food emergency arising in the coming marketing year. The greater the risk the higher would be the physical stock and vice versa. The total value, in dollar terms, of the reserve's physical stock and cash resources should not be affected by the relative proportions of each component, i.e. apart from transaction gains and losses, the real value, in US dollar terms, of the "grain account" should remain constant.
