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A simple solution for correcting WTO rules on public stockholding

by Franck Galtier, 
November 2017

The World Trade Organization (WTO) rules on public stockholding programmes have been under discussion among member countries for quite some time and are likely to be at the heart of the WTO Ministerial Conference in Buenos Aires in December 2017. In this article, the author identifies various biases in current WTO rules for estimating the support provided to farmers through public stockholding programmes and puts forward a proposal to correct them.

I will always remember the day I discovered the WTO rules on public food stockholding. I could not believe it: the way support is calculated at the WTO (SWTO) has hardly anything to do with how much support is actually provided (S). For instance, for grains, SWTO usually accounts for several times S. As there is a maximum allowed level of support this is likely to constrain significantly the building of public grain stocks, with potentially adverse consequences for developing countries’ food security. Moreover, WTO rules are not only biased, they are also unfair. For reasons explained below, the biases in the rules are likely to generate greater constraints for poor countries.

Here, I explain why WTO rules are biased and propose a simple solution to correct them. My hope is that this could help member countries to reach a permanent solution on public stockholding next month during the WTO Ministerial Conference in Buenos Aires.

Support Provided by Public Stockholding Programmes

Under public stockholding programmes, governments purchase food (on their domestic market or abroad) and resell or distribute it for free. Their objectives may be to provide support to farmers (or specific categories of farmers), to supply markets in case of shortages, or to provide subsidised or free food to poor households.

These programmes may provide support to farmers i) directly (by paying a high price to their suppliers) or ii) indirectly (when public purchases result in higher prices on the domestic market). Neither of these two effects are systematic. Many public stockholding programmes do not buy at above market prices, even when they use an administered price, and their interventions may sometimes not affect the domestic price, or even decrease it. This is especially the case when the quantity released by the government in the form of sales or free distribution is higher than that removed from the domestic market through public stock procurement.

Let us illustrate the support provided by public stockholding programmes, by considering the case of a grain importing country. If we take the international grain price to be 80, and the import tax to be 20, without any interventions by a public stockholding programme, the domestic price in the country (equal to the import price cost) would be 100.

The public stockholding programme purchases grain from local farmers at 125, an intervention which results in the domestic price increasing from 100 to 110. Therefore the price support provided to each quantity supplied to the public stockholding programme is 25, whereas the price support provided to each quantity sold on the domestic market is 10. Figure 1 shows the support provided when, from a production equal to 100, 10 is sold to the public stockholding programme, 40 is sold on the domestic market and 50 is self-consumed by farmers.

Figure 1: An illustration of the support provided to farmers through public stockholding programmes*

Fig1

*In Figure 1, PS stands for public stockholding.

Source: Author

However, WTO rules define a very different way to calculate support provided by public stockholding  programmes: a uniform price support is applied to all eligible national production, without distinguishing between the share sold to the public stockholding programme, that sold on the domestic market, and that self-consumed by farmers.

Moreover, this price support is calculated using a fixed external reference price, rather than the current import price cost. This reference price is equal to the country unit value of imports during a fixed historical period (1986-88 for most countries, a time when international grain prices were much lower than now). For instance, the international maize price over the period 1986-88 only accounts for 30 percent of its 2012 value, 47 percent of its 2014 value and 57 percent of its 2016 value.

Figure 2 below illustrates the gap between support calculated according to WTO rules and that which is actually provided. In line with the maize data presented above, we assumed that the fixed external reference price is equal to 50 percent of the current import price cost. In this numerical example, SWTO accounts for more than 11 times S!

Figure 2: An illustration of the gap between the support actually provided and the support calculated according to WTO rules.*

figure 2

*In Figure 2, PS stands for public stockholding; FERP stands for fixed external reference price.

Source: Author

Poor Countries Face Disadvantages

WTO rules are not only biased, they are also unfair, as the biases are likely to asymmetrically affect poor countries. This is because part of the bias in SWTO stems from wrongly attributing a price support to the share of production self-consumed by farmers. But this share differs greatly depending on the country: it is close to zero in developed countries and around 80 percent for maize in Eastern and Southern African countries. Therefore, for the same amount of support actually provided to maize farmers, SWTO is likely to be about four times higher in Eastern and Southern African countries than in developed countries.

Secondly, poor countries are likely to be more affected by exchange rate changes. If countries have to express the fixed external reference price in their own currency — a point on which WTO rules are unclear — the gap between the reference price and the current international price stems not only from changes in the latter, but also from changes in the country’s exchange rate with the US dollar. As this exchange rate often decreased over time for poor countries, the fixed external reference price expressed in local currency units is likely to be lower for them than for rich countries. For maize, we estimated that the reference price expressed in local currency units is about 50 percent of the current price for high-income countries, but only about 20 percent for low-income countries.

Removing Biases in WTO Rules

WTO rules should therefore be corrected in order to remove the biases in the estimate of support provided by public stockholding programmes. This is quite easy to do by considering that the price support is:

  • zero for the quantity self-consumed by farmers;
  • the procurement price minus a reference price related to the current international price for the quantity sold to the public stockholding programme;
  • the price prevailing on the domestic market minus a reference price related to the current international price for the quantity sold on the domestic market.

This article is derived from the paper Looking for a Permanent Solution on Public Stockholding Programmes at the WTO: Getting the Right Metrics on the Support Provided.

Franck Galtier is a Senior Research Economist at CIRAD, UMR MOISA, Univ Montpellier (Montpellier, France).

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