The Economic Effects of Public Stockholding Policies for Rice in Asia

Executive summary

Public stockholding programmes, whereby governments purchase, stockpile and distribute food staples, have regained popularity as a policy tool since the 2007-08 food price crisis. Governments deploy these programmes with a view to shielding consumers from food price spikes and providing more stable domestic prices for both consumers and producers. However, these programmes may also have additional and unintentional impacts on domestic and international markets, depending on how they function and the scale of intervention.

This report focuses on the specific case of public stockholding programmes for rice in Asia and analyses how different public stockholding strategies may influence domestic and international markets over the medium term (2018 to 2030). It examines, in particular, what would happen if several countries were at the same time to either expand or reduce their levels of public rice stocks, thereby placing some bounds on the potential global impacts of these policies.

Since the impacts of these programmes differ according to how they are implemented, the report first provides an in-depth review of the functioning of public stockholding programmes in eight Asian countries (Bangladesh, the People’s Republic of China, India, Indonesia, Japan, Korea, the Philippines, and Thailand). To allow comparisons across countries and facilitate the economic modelling of stockholding programmes, the report distinguishes three distinct ways in which countries can procure rice for public stocks and three distinct ways in which they can release those stocks. Specifically, governments may procure rice for stockholding programmes from: (1) the international market at the import price; (2) the domestic market at the market price; or (3) the domestic market at a procurement price. Governments can release rice from their public stocks by selling rice to: (1) the international market at the export price; (2) domestic consumers at the market price; or (3) domestic consumers at a below-market subsidised price.

Using the OECD-FAO’s partial equilibrium model of world agriculture, Aglink-Cosimo, the present analysis examines the market impacts over the medium term (i.e. from 2018 to 2030) if the eight abovementioned Asian countries collectively adopt either higher or lower public stocks of rice than current norms. The level of public stock norms is set at three months of national domestic rice consumption under the high-level scenario, and at two weeks under the low-level scenario. These levels are based on historic levels for public stocks of rice in these countries.

The analysis shows that while the impacts on domestic markets are projected to vary by country, there are several common trends which indicate how a collective change in public stockholding policies could influence markets in the short- and medium-term.

Main findings

• The effects on domestic and international markets of changing public stocks to either higher or lower levels are expected to be most pronounced during the period in which governments adjust their public stocks to new levels.

Under the high-level scenario, procurement is assumed to increase during a three-year transition period in order to build public stocks equivalent to three months of domestic consumption. This will reduce availability on domestic and international markets, and lead to higher domestic and international rice prices. Conversely, under the low-level scenario, domestic and international rice prices would be relatively lower in the short term as destocking would increase rice availability on the market.

• However, changes to public stockholding policies could also have structural impacts on domestic and international markets that persist over the medium term.

Although the effects are more pronounced during the initial three years, the analysis shows a persistent impact over the medium term on overall procurement patterns, domestic and international prices, rice availability, private stock levels, and public expenditure. Under the high-level scenario, larger public stockholding would involve higher procurement levels, thereby raising domestic and international prices and increasing public expenditures. At the same time, rice availability would decline and private stocks would be reduced. Under the low-level scenario the opposite would apply: lower procurement levels, lower domestic and international rice prices, lower public expenditure, and higher private stocks and availability.

• If countries hold larger public stocks then the immediate effects of a global production shock would be lower. However, recovery from the shock would be slower too.

As larger amounts of rice can be released from public stocks under the high-level scenario as compared to the low-level scenario, the immediate impacts of a sudden supply shock on prices and availability would be lower. However, rebuilding stocks to their original level would take more time under the high-level scenario, leading to a slower recovery from the shock.

Policy implications and future work

From a policy perspective, this analysis suggests that when governments consider raising or lowering the levels of their public stocks, they should carefully evaluate both the short-term impacts and the medium-term structural effects these changes might have on domestic and international markets.

A principal motivation that governments claim for keeping large public stocks is that they can act as a safeguard against sudden supply shocks. The analysis shows that maintaining higher levels of public stocks might lessen the initial impact on price and availability from a global production shock. However, the rate of recovery towards the no-shock situation is faster if countries hold small stocks than if they hold larger ones. Furthermore, keeping low levels of public stocks significantly reduces the public expenditure bill, which frees up funds that can be used for other mitigation strategies to deal with (emergency) food shortages.

Looking ahead, the framework developed for this analysis can be used to examine and model public stocks in other countries and for other commodities. With important policy variables related to public stocks now incorporated into Aglink-Cosimo, this agricultural model can be used to examine the market impacts of other scenarios whereby countries individually or collectively change specific parameters of their public stockholding policies.