Grain Markets are types of futures exchange characterized by participants trading futures contracts where they essentially establish a contract with the seller to buy a given quantity of a commodity at a specified price. The commodity is agreed to be delivered at some given time in the future. The earliest record of futures exchange is found in Aristotle’s book Politics, where the philosopher Thales, predicting an exceptional harvest, paid local farmers in advance for the use of their olive presses. Since then, the futures exchange has advanced substantially, and Agricultural Futures Trading, or grain markets, have become an enormous part of the commodities exchange and futures all over the world. Some current research initiatives aim to investigate the role of grain markets in potentially securing food access to nations where chronic hunger and starvation have become commonplace. These organizations indentify poor food markets as one of the principal causes of food insecurity in nations with perpetual hunger problems. One such program is the Ethiopia Grain Market Research Project (1998), one of whose core premises is stated as follows:
“The functioning of food markets can be impeded by high price uncertainty. Lack of timely and accurate information for market participants contributes to poorly functioning food markets and leads many farm households to rely on relatively low-productivity subsistence production for most of their food needs. Access to timely and accurate market information is thus one important element for transforming Ethiopia from a subsistence-oriented, low-productivity, agriculturally-based economy into a modern, exchange-oriented, high-productivity economy (1998).”
The initiative sought to reduce price insecurity and promote production by providing incentives to generally smallholding farmers by purchasing futures in their crop, and guaranteeing demand by purchasing a portion of their supply. This solution combines that goal with a change in the fundamental nature of aid which is provided to these nations. The principal modes of aid (direct food aid and financial so-called cash aid) were investigated to establish basic guidelines for which type of aid should be received in which particular situation. This solution combines the presented aid with market policies to promote price stabilization, market liberalization, increased production and spatial redistribution of produce from surplus to deficit areas.
The principal mode of aid to poor nations, especially those with chronic hunger or famine, is the direct provision of food. Many times, this food aid is given by “dumping” agricultural surplus into areas affected by hunger, war or disaster in the developing world, by wealthy nations, which may in reality hinder the development of the recipient nations except in the case of natural disaster or emergency situations (IATP 2004). Although the dumping of agricultural surplus is against international law due to its detrimental effects to the development of third world countries, providing free, and often non-obligatory food aid often falls in the category of charity rather than dumping, and is generally encouraged. Nonetheless, the detrimental effects of this policy can often outweigh the obvious benefits. In essence, the provision of direct food aid in many cases can hinder the development of poorer countries. Shah claims that “Dumping food on to poorer nations (i.e. free, subsidized, or cheap food, below market prices) undercuts local farmers, who cannot compete and are driven out of jobs and into poverty, further slanting the market share of the larger producers such as those from the US and Europe” (2007).” Many researchers now characterize food aid as dumping. Economist J.W. Smith, who founded the Institute for Economic Democracy argues that
"Highly mechanized farms on large acreages can produce units of food cheaper than even the poorest paid farmers of the Third World. When this cheap food is sold, or given, to the Third World, the local farm economy is destroyed. (Smith 1994, from Shah 2005)".
In this solution, the partial and strategic replacement of food aid with cash aid is considered, in an effort to aid the development of food-insecure nations. It is proposed that this cash aid be provided via some public/private agency which transfers it to local farmers by buying futures in the grain market, which similar to the stock market (by ensuring that they have a market for their production) rewards well-performing farms, hence providing local farmers an incentive to maintain production. This investment is directed towards the purchase of capital in the farming regions, and will foster technological and economic development as well as provide a hedge, or insurance against possible poor harvests. The agency would also guarantee the purchase of a fraction of the produced crop, which would be distributed to regions in emergency situations, or put into a reserve. In the event of a crop failure, the farmer would only receive a portion of the guaranteed purchase as insurance, in order to protect farmers. To incentivize production and promote increased supply however, the agency would purchase a a proportional part of each crop (i.e. a larger crop would have a higer guaranteed purchase).
We essentially propose that the total aid should be divided into certain proportions of food aid and cash aid based on each region's particular situation (Here the regions are mainly sections of each nation). Regions in conflict, suffering from natural disaster, or famine will naturally be given aid more weighted towards food, in order to ameliorate their crisis in the short-term. Regions in which food insecurity is caused not by nonexistence of production but a poor market, depressed or inflated prices or other “market” problems, will be given aid which is more heavily slanted towards cash investment.
The primary difference of this solution from existing plans relate to the fact that this aid is not provided directly to the government which often does little to improve the market in terms of prices and incentives for producers to grow crops, and is often uncooperative or corrupt. The public/private agencies tasked specifically with investment of cash aid is key in the implementation of the solution. The agency will thus help invest in the developing world by increasing demand, providing insurance against potential crop failure, and allowing the farmers to access money for economic investment. The agencies will naturally need transparent structures and affairs, due to their enormous responsibility with disaster relief food. They should alsoo report to the aid giving countries, as well as the UN.
These programs can also help stabilize local grain prices by increasing the demand for grain, and reduce transaction costs via reduction of opportunity costs of finding transaction partners (Gabre-Madhin 2001).
One nation in which a similar program of investment via futures exchange was initiated is Ethiopia, which is one of the poorest nations of the world, and has continued to have food production problems. Recently however, grain production has steadily increased, while hunger remains a major problem (Negassa 1997). The main reason for this inconsistency is that there are fundamental problems in the market and in the trade of grain, because producers, facing depressed and conflicting prices, cannot find buyers to profitably purchase their supply, and the variable distribution in deficit and surplus cannot be “smoothed over.” In essence, a nation itself which could potentially provide at least a portion of the food aid currently provided by wealthier nations. This is impossible, however, in the face of chronic hunger, a disincentive for production, and an unstable agricultural market. These factors combine to make future technological and economic development a distant vision.
The EU local purchase program, a program whereby the EU and WFP (World Food Program) “agreed to provide cash instead of food aid to facilitate the local purchase of cereals” (Amha 1996). Its main purpose was to replace imported food aid by redistributing food which was produced in surplus within the nation itself. The program fulfilled its purpose and even had the unintended consequence of stabilizing prices by reducing the surplus “volume of grain circulating in local markets,” and “contribute directly to new entry and increased investment in the grain marketing system, thereby promoting long-termmarket development objectives” (Amha 1996). This again, is in direct opposition to previous policies, where food aid was provided from the surplus of donating nations.
This solution will implement a similar purchase program by the means of a joint privately and publicly owned agency whose sole task is to perform these purchases and invest in the developing world . After assessing how aid will be proportioned for a particular region, this agency would handle the “cash" ensuring that it is directly used for reinvestment in agricultural production by local farmers. The proportions would be reassed regularly in 2-3 year intervals, with the exception of natural disaster or similar emergeny, when food aid would be resumed.
Regions Appropriate for this solution
This solution is most appropriate for regions where the main cause of hunger lies not in lack of production or the land being unsuitable for agriculture, but poor markets, inflation, and mainly economic problems. This is appropriate for many nations in sub-Saharan Africa, which in reality have high capacities for production, such as Ethiopia, and Zimbabwe; and primarily agricultural nations which nevertheless have problems with chronic hunger, such as India. Since this solution entails the purchase of crops from these developing nations with grain market problems, it would be possible to redistribute the crop locally (within the nation, or in neighboring nations) and as a result, reduce the dependence of these nations on the donations of wealthy nations' subsidized surpluses.
Since this solution is primarily based on investment, it is a long term solution. If the local purchase of crop futures can be maintained, then the program can go on indefinitely. It must however, break even in terms of cost and revenue from investment and purchases. This may need to be subsidized initially by government organizations such as the UN, but once markets in individual regions begin to stabilize, the program will be largely self- sustaining, and can last indefinitely. As mentioned earlier, the initial source of money will be the cash aid that is donated by wealthier nations through governmental organizations such as USAID.
Initially, this program will require funds to actually provide the investment and purchases as discussed. This money will come from the cash aid that the UN and developed countries donate to the third world. The exact amount in terms of the proportion of food aid and cash aid as a fraction of total aid will be determined by a respected global organization, which will independently assess each region’s situation, in order to prevent dumping of subsidized agricultural surpluses (again with the exception of emergency situations). After the initial funding, the purchase of grains from local farmers will be sustained through the sale of these crops in regions which are not part of the grain market due to market inefficiency and price inconsistency. But since its very implementation contributes to price stabilization, and over time, the technological advancements fostered by investments and economic growth resulting from increased per capita GDP make the grain market more efficient, the purchased crops may be sold at better prices within the nation or to neighboring nations in similar situations. Any deficits will continue to be financed by the United Nations, and aid from developed nations, but such a deficit, in the face of improved market structure should not be substantial.
Collaboration with other Agencies
In order to be successfully implemented, this program will, at least initially, require support from the UN and developed nations providing aid to the developing world. Partnering with the US, the EU, and other nations will significantly increase its impact. Since the World Food Program has implemented a similar purchasing program in the past, it too could play a role in this solution.
Ethiopia Grain Market Research Project. Project Overview. (1998). Grain Market Research Project Ethiopia. MSU Agricultural, Food, and Resource Economics. Retrieved November 24, 2010, from