Introduction; Price stabilization issues; Fluctuation in rice prices; Causes of luctuations in annual and seasonal prices; Intermarket links and regional prices; An approach to price stabilization.

Price instability is a fact of life. In a market economy, domestic prices change in response to changes in supply, consumer preferences, policy, world prices, and other factors. Crop prices tend to be particularly volatile because harvests occur only once or a few times per year and because the size of the harvest varies due to weather, prices, and other factors. For internationally-traded commodities, volatility in world prices can be another source of instability in domestic prices.

Rice plays a central role in the diet in Bangladesh and as a source of income for farmers. Although Bangladesh has largely liberalized international trade in rice, it maintains a public food distribution system to stablize prices, distributing an average of 2 million tons of rice per year at a cost of almost US$ 800 million per year. This study explores whether alternative policies could achieve similar stabilization at a lower cost. It uses a stochastic spatial-equilibrium model of rice markets to simulate monthly prices in eight regions of the country. Stochastic shocks are used to simulate fluctuations in regional production, replicating historical patterns at the region-season level, as well as inter-regional correlation in production shocks. It also simulates fluctuation in world rice prices, mimicking the mean, variance, and serial correlation of historical wholesale prices of rice in Delhi. Public procurement and distribution follow historic averages by month and region. Private storage is represented by a simplified version of rational expectations models, in which net storage is a non-linear function of availability in the previous month. One set of simulations tests alternative levels of distribution, finding that cutting distribution to 1 million tons would have minimal effects on the level of rice price stability. Another set of simulations tested different import tariff levels, including the baseline rate of 25%1. We find that lower tariffs result in both lower rice prices and less price instability, as world rice prices tend to be more stable than local prices. Simulating a buffer stock with different price bands shows that a narrow band can achieve high price stability but at a high fiscal cost. A 20 T/kg (USD 0.26/kg) price band generates similar price stabilization at a lower cost compared to current policy. However, it is difficult to set the “right” purchase and sale price, and many simulations result in exhausting reserves or reaching warehouse capacity. An adaptive buffer stock, in which the price is adjusted as the stock runs too low or too high, solves some of these problems. In general, the study finds that current procurement and distribution patterns do not match well with the regional and monthly patterns of surplus and deficit, possibly reflecting multiple and conflicting goals of the public food distribution system.

A brief summary of the analytics of price stabilization; Some operational aspects of food price stabilization policies; Alternatives to price stabilization: crop insurance and futures markets; Price stabilization policy: rationale and objectives; Design and implementation of stabilization policy; Impact of stabilization policy on price variability over time and across countries; Some quantitative estimates of the benefits of stabilization; Rethinking price stabilization policy.

This book provides fresh insights into concepts, methods and new research findings on the causes of excessive food price volatility. It also discusses the implications for food security and policy responses to mitigate excessive volatility. The approaches applied by the contributors range from on-the-ground surveys, to panel econometrics and innovative high-frequency time series analysis as well as computational economics methods. It offers policy analysts and decision-makers guidance on dealing with extreme volatility.

The recent escalation of world food prices – particularly for cereals - prompted mass public indignation and demonstrations in many countries, from the price of tortilla flour in Mexico to that of rice in the Philippines and pasta in Italy. The crisis has important implications for future government trade and food security policies, as countries re-evaluate their reliance on potentially more volatile world markets to augment domestic supplies of staple foods. This book examines how government policies caused and responded to soaring world prices in the particular case of rice, which is the world's most important source of calories for the poor. Comparable case studies of policy reactions in different countries, principally across Asia, but also including the USA, provide the understanding necessary to evaluate the impact of trade policy on the food security of poor farmers and consumers. They also provide important insights into the concerns of developing countries that are relevant for future international trade negotiations in key agricultural commodities. As a result, more appropriate policies can be put in place to ensure more stable food supplies in the future. Published with the Food and Agriculture (FAO) Organization of the United Nations

This book describes how Bangladesh transformed its food markets and food policies to free the country from the constant threat of famine. Since 1990, the Bangladeshi government has dismantled its food rationing system, privatized grain distribution, eased restrictions on international trade, and reduced its own presence in grain markets. The foundation for these developments was laid in the preceding decades. Improvements in agricultural science in the 1970s roughly doubled farm yields, while in the 1980s liberalization of irrigation restrictions, the lifting of import barriers to irrigation technology, and the privatization of fertilizer distribution rapidly increased rice cultivation. These increases in production, coupled with improvements in infrastructure and a more slowly growing and increasingly urban population, have substantially changed the structure of food grain markets, leading to increased marketing volumes, lower prices, and significantly larger private grain stocks. The book sets the Bangladeshi case in the larger context of the South Asian subcontinent and other developing countries in Asia. The authors examine the shifting structure of supply and demand in the grain markets, the history of government intervention in those markets, and the more recent changes that altered the arguments for such intervention and led to policy changes. The case of Bangladesh also has more general relevance as a study of the outcomes of a market-oriented reform program.