Commodity Storage, Price Stabilization, and Food Security

Abstract

The debate over the role of commodity storage in reducing price instability to the net benefit to society continues. Most of the early literature deals with stocks and price instability under price certainty. Little attention is given to the effects of stockholding on food security. Some of the earlier works based on welfare economics (Just, Hueth, and Schmitz 2004) include Waugh (1944), Oi (1961), Massell (1970), and Hueth and Schmitz (1972). Waugh concludes that consumers prefer price instability. As a result, there are costs from commodity storage used to generate price stability. Likewise, Oi concludes that producers prefer price instability; hence, storage is costly for producers. Massell demonstrates that in a market setting that included producers and consumers, society prefers price stability over instability. However, Schmitz (forthcoming) argues that this need not be the case given that both consumers and producers prefer price instability. His arguments are based on an explanation of why stocks are not achievable (Schmitz 2018a) and that producers prefer price instability regardless of the source of the instability (Schmitz 2018b). Later literature expanded the analyses to multi-products. For example, Turnovsky, Shalit, and Schmitz (1980) and Schmitz, Shalit, and Turnovsky (1981) using utility maximization models demonstrated that in the case of multi-products, producers, for example, prefer stability for a subset of the commodities produced but not for the entire set. Tisdell (1972) analyzed stock policy under uncertainty and concluded that the welfare gains from stabilization are highly dependent on the degree of market uncertainty. Feder, Just, and Schmitz (1980) presented a theory of the firm model where, under uncertainty, producers have several risk management tools, including storage. (References to additional papers can be found in Wright and Williams (1984)).