World Bank Backs Food Reserve Plan

World Bank backs proposal for an international food reserve to meet emergencies and curb runaway prices, as G8 nations pledge to study the plan.
By Michael Lelyveld
2008-07-10
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As poor countries struggle against soaring food prices, the World Bank is pushing a plan to keep speculators from taking advantage and getting rich.

The plan, which was recommended to the leaders of industrialized nations at the G8 summit in Toyako, Japan, would establish an international strategic food reserve to meet emergencies.

In a letter to Japanese Prime Minister Yasuo Fukuda, the summit host, the World Bank's president Robert Zoellick urged study of the plan for a "virtual" reserve to fight market speculation that can drive food prices to dangerous levels in futures trading.

"Absent such a step, the breakdown in international food markets is likely to prompt an ad-hoc building of stocks, perhaps further boosting prices, and the international community may not be able to access food for those in critical need," Zoellick said.

Officials believe that speculation played a part in just such an episode in March when rice prices doubled to over $600 per ton, threatening World Food Program (WFP) deliveries to 450,000 children at Cambodian schools. Rice prices kept climbing to over U.S. $1,000 per ton as at least 26 countries imposed export restrictions to preserve domestic supplies.

Prices have since subsided to U.S. $725 per ton for Thai B- grade white rice, but that is still far more than many of the world's poor can afford. The World Bank estimates that the combination of high fuel and food prices may force over 100 million people into "extreme poverty."

The bank is backing a series of direct aid and financing measures for the WFP's immediate needs, but in the longer term, it wants action "to ensure that this man-made disaster never happens again," Zoellick said.

Modest stockpile

The food reserve plan follows a proposal developed by the International Food Policy Research Institute (IFPRI) in Washington, calling for both a modest stockpile of grain to use in emergencies and a "virtual" system that could smooth out the spikes in commodity trade.

The two-pronged approach would assist the WFP by seeking commitments from major nations for a series of physical grain reserves totaling 300,000 tons, or about 5 percent of annual food aid flows, IFPRI said. These would be stationed in or near developing countries for rapid use in emergencies and would be replenished to avoid the spoilage problems of larger reserves.

The "virtual" system would call on countries to pledge funds on a "promissory" basis to intervene in grain futures markets as needed to discourage speculation when prices are driven to extremes. A fund of U.S. $12-20 billion could cover 30- 50 percent of normal world grain trade, sending a strong signal to the market, although the money might never be spent.

In an interview with Radio Free Asia, IFPRI division director Maximo Torero said the "virtual" fund would work by trading in the futures markets, much as speculators do. But instead of driving prices higher, the fund would invest in "short sales," offering to deliver grain in the future at a lower price. The low bids would raise the risk for speculators if they bet prices will keep going up.

An IFPRI study found a jump in futures activity by non- commercial traders over the past six months, suggesting that speculation has pushed prices beyond the normal effects of supply and demand.

"We have some indicators showing that there is a statistically significant causal relationship between ... speculation and the prices," Torero said. "The market is not working properly. There is a lot of pressure on it."

The "virtual" reserve system would increase its steadying effect over the futures market by operating "silently," so that speculators could not tell when the fund might move to sell at a lower price.

Although the food plan has been compared to strategic petroleum reserves that are coordinated by the Paris-based International Energy Agency (IEA), the oil stockpiles are supposed to be used only in case of supply disruptions rather than to influence prices.

'Real lives'

Torero said the food crisis is fundamentally different.

"The problem with food is that you're affecting real lives," he said.

Torero stressed that intervention in the markets would take place only in extreme instances after an international technical commission finds that prices have moved beyond a band that would be justified by supply and demand. The system is designed to counter market distortions created by forces such as excessive speculation and export restrictions, he said.

In their joint statement on global food security, the G8 leaders pledged to "explore options on a coordinated approach on stock management, including the pros and cons of building a 'virtual' internationally coordinated reserve system for humanitarian purposes."

World Bank spokeswoman Elisabeth Mealey told RFA that the food reserve plan has Zoellick's personal support, as well as that of the bank. "He's definitely taking it up," she said.

The G8 consists of Canada, France, Germany, Great Britain, Italy, Japan, Russia and the United States.

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