During the Global Food Price Crisis of 2007-2011, millions of people suffered hunger because food had become too expensive. To cope with this problem, the governments of several countries implemented policies to decouple the food prices in their domestic markets from prices in the international market or, at least, to provide assistance to the most vulnerable. Two of the most usual tools employed by governments trying to control prices were the restriction of food exports and the establishment and operation of food reserves, both of them seeking to increase the domestic supply of food in times of crisis. The three essays in this dissertation investigate the potential benefits and shortcoming of these policies.
I start by considering the role of food policies themselves as causes of food price volatility. In the first essay, I examine several drivers of the Global Food Price Crisis, including: i) low grain stock levels, ii) trade restrictions imposed by wheat exporters, and iii) diversion of corn production to biofuel. To quantify their effects on grain prices, I develop a stochastic spatial-temporal equilibrium model of global wheat and corn markets, featuring six interdependent markets, random yields, endogenous acreage, speculative storage, and government policies on trade and stockpiling. I find that wheat export bans and increased wheat stockpiling explain significant rises in wheat prices and modest increases in corn prices in the short-run, but that the effects of these policies on wheat and corn prices are negligible in the long run. In the long run, sustained increases in wheat and corn prices are best explained by surging demand for biofuels, through its effect on permanently diverting acreage from wheat to corn.
I then turn attention to whether food reserves are an effective tool to cope with price volatility. In the second essay, I develop a model to evaluate the optimal grain storage policy for a poor grain-importing country. Households are heterogeneous in their income endowment, and those who cannot afford enough food suffer from hunger. The international price of grain follows a Markov process with two states (tranquil periods and food crises), and households are unable to self-insure against changes in this price. The objective of the reserve operation is to reduce hunger rates. The model captures the trade-off in implementing the policy: raising a stock to prevent hunger tomorrow requires resources that could be used to reduce hunger today. Parameters are calibrated to reflect food supply and demand in Haiti. My results suggest that rather than storing food, a better approach for a poor country is to focus on fighting poverty directly, since the modest social protection provided by a storage policy could also be obtained through relatively small improvements in income per capita and income distribution.
Currently, countries in Africa and in Asia are implementing regional multi-country food reserves to jointly combat the threat of volatile food markets. One question that arises is whether such agreements are stable, given the possibility of default. In the last essay, I address this question and evaluate how the stability of a joint reserve differs under two alternative organizational forms: a joint reserve operated as a credit union or operated as an insurance union. I analyze a joint food reserve in which two countries commit a fraction of their available food to a communal pool that may be used in case of emergencies in one or both countries. The agreement is vulnerable to default by one or the other country, subject to a penalty. For the resulting game, I look for a Nash-Markov perfect equilibrium to investigate the viability of the agreement. I find that the regional reserve is more sustainable when production shocks are positively correlated, although risk sharing is more effective when the correlation is negative. I also find that an “insurance” game can be more sustainable than a “credit” game.