The need for operational procedures
Management
Storage
Stock maintenance and quality control
Procurement
Recycling
Releases
Under the conditions prevailing in formerly regulated markets, two differing approaches were adopted for the operation of a strategic grain reserve. The first involved treating it as a buffer, or minimum level of stock, used for normal market operations of the parastatal grain agency. As such the reserve would be drawn upon automatically, once the operational stocks were exhausted, to maintain market operations. Subsequently, when purchases were made, the reserve was automatically replenished as the stocks were built-up. This approach tended to be favoured by those countries which could regularly expect to be in surplus and were therefore able to maintain the (flexible) reserve from their own resources, e.g. Kenya and Zimbabwe.
The second approach involved maintaining the reserve as a separately identifiable stock, which could only be drawn on if certain conditions were met, e.g. official recognition of an approaching food emergency and/or a formal sanctioning for the release of grain. This approach tended to be adopted by those countries which regularly faced crop shortfalls and were reliant on donor support for maintaining the reserve1 e.g. Ethiopia, and Tanzania. A specialist entity, e.g. a Food Security Unit, was normally established to administer the reserve. Although it was intended that the reserve should be kept separately identifiable, as it was normally held under a contractual arrangement with the parastatal grain agency in the same facilities as the operational stock, there was a strong temptation for the reserve to be considered by the parastatal management more as a buffer stock for supplementing shortfalls in the availability of operational stock. Thus, while there may have been specified formalities and procedures before grain could be released from the reserve, these tended to be overlooked with, in practice, the parastatal agency using some or all of the reserve for bolstering its normal marketing operations. As prices did not reflect costs incurred, and usually contained a high element of subsidy, the money generated from the sale of the grain from the reserve was insufficient to finance its replenishment. As a result the size of the reserve steadily diminished, eventually becoming exhausted. Such situations could have been avoided had clearly defined operational procedures been available for each operation and strictly adhered to.
1 By maintaining a separate identity for the reserve the donor community could be assured that the reserve was only being used for the intended purpose of relieving suffering during a food emergency.
The importance of standard operational procedures increases substantially with the introduction of market liberalisation. The existence of a large stock of grain under the ultimate control of a government, which has a history of market intervention and repressing private initiative, could be seen by private sector traders as a potential threat to their market activities and thus their willingness to make investments, other than short-term, in the market. To avert any residual apprehension that the reserve could be used as a tool of government to manipulate the market, there needs to be transparency in the manner in which operational decisions relating to the strategic grain reserve are taken and a general understanding, and acceptance, of the manner in which those decisions will be implemented. The greater the opacity of operational actions concerning the reserve and/or the greater any divergencies or inconsistencies in applying declared procedures, the more cautious and distrustful will private traders be of the government.
|
Ethiopia Operational Procedures The Ethiopian, food security reserve was established under the umbrella the Relief and Rehabilitation Commission rather than with the parastatal Agricultural Marketing Corporation, which had the monopoly for grain marketing. The reserve was administered en a day-to-day basis by a semi-autonomous Food Security Unit which was responsible for taking management and operational decisions relative to the maintenance or the reserve. Operational authorities and responsibilities were formally specific e.g. releases from the reserve, other than for normal stock rotation, required the declaration of a "food emergency" and the approval of the high level Food Security Committee, comprising representatives from the ministries of Domestic Trade, Finance and Agriculture, Once the release was sanctioned by the committee the Food Security Unit was responsible for releasing the grain in accordance with the authority received. |
Both government and private sector participants need to recognise that there are significant advantages to both sides from having clearly designated procedures which specify how, and under what conditions, operational decisions relating to the reserve will be taken and implemented. For example:
- the agency responsible for managing the reserve can be held more accountable for its actions. This is likely to result in less abuse in the use and operation of the reserve;- the private sector will be fully aware of the circumstances and manner in which the reserve will be used. This should encourage them to assume, with confidence, an increased role in the marketing of grain, particularly if they are to be involved in some of the reserve operations, e.g. purchasing and storing grain;
- aggrieved parties in the private sector have the opportunity of taking government to task if laid-down operational procedures are circumvented;
- government will find it more difficult to countermand operational procedures which have been established, for expediency or to gain political advantage;
- with greater private sector confidence and involvement the difference between market needs and the provision made by the private sector will be narrowed. This would, in turn, reduce the size of reserve the government needs to maintain to achieve a particular level of security.
To avoid any confusion or misunderstandings of what the established procedures are, it is useful to prepare, preferably in consultation with representatives of the private sector traders, an operational manual which provides a comprehensive set of procedures to be employed for undertaking the various actions concerned with the management and operation of the reserve. Such a manual would describe:
- the structure, authority and responsibilities of any committees or governing bodies of agencies associated with the operation and maintenance of the reserve;- the structure authority and responsibilities of the agency responsible for administering the reserve;
- general information relating to the ownership and purpose of the reserve, its size and location and financial arrangements;
- conditions for triggering releases of grain from the reserve for various activities;
- procedures for
- release of grain from the reserve
- procurement of grain for the reserve
- storage of grain in the reserve
- recycling grain in the reserve
- quality control
- financing strategic grain reserve operations.
Individual pages in the manual would describe the various responsibilities and authorities and provide details of the procedures to be followed. Appendix 3 provides examples from a procedural manual prepared by FAO for the Ethiopian Food Security Unit in 1990.
The manner in which the reserve is managed and operated varies depending on the organisational structure adopted. In practice the choice lies between a government department, a specialised institutional entity, e.g. a reserve agency, whose sole responsibility, with respect to grain handling, is the management of the reserve, and a public or private sector organisation which, inter alia, also engages in commercial grain marketing activities. While all these would be ultimately responsible to government for the management of the reserve, a government department and a specialised agency would normally be expected to enjoy greater autonomy and decision making authority, through their own governing boards or committees, over the management and operation of the reserve. This is because a parastatal, or private sector company, can be subject to conflicts of interest between its reserve responsibilities and its commercial activities. Whichever structure is adopted, however, there is a need to clearly specify, preferably in an Operational Procedures Manual, the responsibilities and authorities for each level of authority having responsibilities for supervising, managing and operating the reserve.
The following table suggests the type of decision authority which could be vested in the entity responsible for the reserve. As a general principle government departments and reserve agencies, because they are, or have close links to, the public sector, could be given responsibility for both managerial and operational decisions. The only exception should be those decisions resulting in additional costs to government. In these instances the decision should be taken in the responsible department of government, e.g. Office of the Prime Minister (Tanzania, for relief requirements), Office of the Vice President (Zambia, for relief requirements). The decision making authority for parastatal or private sector organisations responsible for the reserve should be restricted to purely operational activities with decisions outside this area being made by the government body responsible for policy matters related to the reserve. Examples of decision making authority which could or should not be vested in the different types of agency responsible for the reserve are shown below.
Examples of Authorities to be vested in Agency Responsible for the Reserve
|
Authority for: |
Gov't Dept. |
Reserve Agency |
Parastatal | |
|
Annual determination of appropriate size for physical reserve |
yes |
yes |
no | |
|
Determining physical composition of reserve |
yes |
yes |
no | |
|
Deciding location and distribution of stock held in the reserve |
yes |
yes |
no | |
|
Stock management, pest management and quality control |
yes |
yes |
yes | |
|
Determining procurement method |
yes |
yes |
no | |
|
Undertaking procurement process |
yes |
yes |
yes | |
|
Determining the need to import and quantities |
yes |
yes |
no | |
|
Importing authorised quantities of grain |
yes |
yes |
yes | |
|
Determining storage arrangement |
yes |
yes |
no | |
|
Appointing storage contractors |
yes |
yes |
yes | |
|
Authorising releases from the reserve |
|
|
| |
|
|
for market sales |
yes |
yes |
no |
|
|
for relief activities |
no |
no |
no |
|
Determining price band for price stabilisation |
yes |
no |
no | |
|
Undertaking price stabilisation activities |
yes |
yes |
yes | |
|
Authorising loans from the reserve |
yes |
yes |
no | |
|
Recycling reserve |
yes |
yes |
no | |
|
Management of financial resources of the reserve, including investing cash resources |
yes |
yes |
no | |
|
Accountability for the integrity of the reserve |
yes |
yes |
yes | |
The storage requirements for grain held in the reserve differ from those for operational stocks of grain. The main difference is the inherent requirement for reserve stocks to be held for prolonged periods, which sometimes may even extend into the following marketing year. Commercial grain stocks, however, tend to be turned-over rapidly on a continuing basis, and would normally be expected to be exhausted by the end of the marketing year. While, under a regulated market there may have been significant carryover stocks in public sector storage following a surplus crop year1 with market liberalisation there will be an increasing tendency for producers to hold grain on-farm for sale later in the season. This trend will be driven in part by their expectation of higher prices, but also by the reluctance of the private sector to invest in long-term stocks, particularly when interest rates are high. Private sector traders prefer instead to work on the basis of small margins and rapid stock turn-over which reduces the need for commercial storage. Only large-scale commercial mills will have an interest in maintaining stocks, or in having access to stocks, to ensure that their mills can continue to operate economically. As a result under liberalised market conditions the demand for commercial storage can be expected to be lower.
1 With pan-territorial and pan-temporal pricing systems in place there was no incentive for producers to retain surplus grain on-farm. Thus, most marketable grain was sold to the parastatal in the period following harvest. In a surplus year, and without adequate exports, the parastatal would be left with large carry-over stocks.
Because of its requirement for long-term storage the reserve will need to be housed in modern warehouse or silo type facilities which are suitable for holding grain for prolonged periods under the prevailing climatic conditions. In most countries of the Sahelian and Sub-Saharan regions such storage facilities were usually government owned and under the control of the parastatal grain agency and/or public sector milling companies. With market liberalisation the ownership and control of the facilities often remains within the public sector unless special action has been taken. For example in Zambia, following the demise of the parastatal Namboard, the grain storage facilities have been transferred to the newly created Food Reserve Agency which is responsible for renting, or leasing, them out to the private sector, rather than operating them directly. Similarly, in Tanzania storage facilities have been transferred to the Food Security Department for holding the reserve. In this instance, however, the facilities required for the reserve are being managed directly by the Department with the surplus stores being rented out to the private sector. When stores are rented out to the private sector, unless it is specified in the contractual arrangements, there is a strong likelihood that they will be used for the storage of other non-grain, and even non-agricultural, products. Available large-scale storage capacity for grain may therefore decline.
There are two basic options open to the agency responsible for the reserve for storing grain. The first involves the agency managing the stocks itself, using storage facilities it either owns or otherwise has access to. For a parastatal, or commercial enterprise, charged with managing the reserve the staffing and technical expertise should be readily available from its commercial activities and would not need to be expanded. However, for government department or an institutional reserve agency this would involve the appointment of staff to manage and operate the storage facilities purely for maintaining the reserve. The second option, which is applicable to both a government department and an institutional reserve agency, would involve contracting-out the storage of the reserve to either a public or private sector organisation with access to suitable storage facilities and expertise in grain storage. This option would remove the need for establishing the capacity for direct day-to-day management of the grain stocks. It is also likely to be the lower cost option as the agency would only be required to pay for the actual storage capacity used on a cost per tonne per month basis, rather than having to bear the total cost, whatever the capacity used, if it owned and operated the facilities itself. This would be particularly relevant in those countries which vary the size of the physical stock held in the reserve each year, depending on the perceived risk of a shortfall occurring, and therefore the annual storage capacity requirements. If the preferred option is to own and operate the storage facilities directly arrangements will need to be made for transferring ownership, or responsibility, for the required storage facilities to the reserve agency. As the private sector and parastatal grain organisations, once they start to operate commercially, are not likely to want to hold large stocks of grain over prolonged periods, the stock of potentially suitable and underutilised storage facilities owned by government is likely to be in excess of nominal storage requirements for the reserve. The reserve agency therefore has a degree of choice in deciding which facilities should be taken-over for holding the reserve. Preference should be given to those with good transport access and which are conveniently located, from the point of view of grain purchase and release. They should be in good structural condition and not subject to rainwater leaks or ingress to birds and rodent pests. While there should be adequate ventilation, the facilities need to be suitable for undertaking periodic fumigation to control insect pests. Unless facilities can meet with the standards required the reserve agency should be cautious about accepting responsibility for them, as there will be no recourse if grain is damaged during storage due to the poor condition of the storage facilities.
Storage Options for Institutional Reserve Agency
|
Option |
Advantages |
Disadvantages |
Comments |
|
Transfer ownership of suitable facilities to agency responsible for the reserve:
|
a) Reserve agency has direct control of the facilities it requires to hold reserve.
|
a) Reserve agency would be responsible for maintaining the facilities, many of which |
a) Only those facilities in appropriate locations should be transferred. |
|
would be in need a large capital expenditure to bring to an acceptable standard. |
b) Facilities need to be suitable for the long-term storage of grain. |
||
|
Operated directly by reserve agency
|
a) Reserve agency has direct control over stock management and maintenance. |
a) Need to maintain staff on a permanent basis to manage the stocks at each location irrespective of the quantity of grain held. |
|
|
b) Opportunities for illicit stock manipulations between reserve and operational stocks avoided.
|
b) High cost of maintaining facilities when not required for storing grain, e.g. in years when reserve requirements are lower. |
||
|
c) No opportunity to share costs with commercial activities. |
|||
|
d) No opportunity for undertaking stock rotation with operational stocks |
|||
|
Operated under rental or lease agreement by private sector.
|
a) Reserve agency would not have to maintain staff at the facilities. |
a) Direct control over stock management lost requiring closer supervision |
a) Private sector may use the facilities for storing products other than agricultural commodities. It may be necessary to specify in rental/lease agreement the type of products which can be stored in the facilities
|
|
b) Reserve agency would only need to rent facilities for the capacity and period required. |
b) Standards or storage management may decline, or be difficult to maintain. |
||
|
c) Opportunities for official rotating of stock with commercial stocks held in store by private sector
|
c) Possibilities for illicit manipulation of stock with commercial stocks increased. |
||
|
d) Storage facilities may be being used for storing commodities which are incompatible with grain, e.g. fertilisers. |
|||
|
Ownership retained by parastatal or held by other private/public sector organisation. |
As above |
As above |
a) Facilities may be used for storing products other than agricultural commodities. |
|
a) Increased flexibility in selecting storage locations |
a) Facilities in preferred locations may not be available when required. |
From a cost point of view it is normally advantageous to hold the reserve in relatively few key locations rather than spread thinly across many locations in an attempt to provide national coverage. The Food Security Department in Tanzania, which directly manages its own stores, initially had the reserve spread over 13 locations. Total storage capacity was some 193,000 tonnes, while the target size of the reserve was 100,000 tonnes. This has since been reduced to 7 locations with a total capacity of 163,000 tonnes. In addition to simplifying the operational management of the reserve it has led to significant cost savings.
A decision to operate storage facilities directly will involve the reserve agency in employing the staff necessary to look after and maintain the grain. As grain handling and maintenance activities only take place intermittently, for most of the time there will be little or no work for the staff to do. While manual labour, for bag handling etc., can be employed on a casual basis as required, there will be a need to maintain a small permanent staff at each facility, e.g. a manager and technical, administration and security staff. This will represent a continuing cost to the reserve, irrespective of whether any grain is held or not. In addition the agency will be directly responsible for the maintenance cost of the facilities. Contracting-out grain storage offers the reserve agency potentially more flexibility in selecting the location in which to hold the grain and to vary the capacity, both of which could change from year-to-year depending on market conditions. The agency would also only be liable to pay for the storage facilities used. While storage costs charged may appear to be relatively high it has to be remembered that the agency would not incur any direct costs with respect to storage. It would, however, be prudent to appoint inspectors to monitor, on a regular basis, the integrity of the stock, its quality and to supervise movements of stock into and out of the reserve. Particular attention will need to be given to ensuring that the grain for the reserve is separately identified from commercial stocks of grain, and during stock recycling to ensure that any exchanges between the reserve and the commercial stocks are undertaken correctly.
ADMARC Handling and Storage Costs 1996/97
(Costs in MK)
|
|
Commercial |
Relief Programme |
Own Products |
|
Storage |
16.04 per tonne per month |
10.26 per tonne per month |
6.42 per tonne per month |
|
Handling |
51.00 per tonne |
51.00 per tonne |
20.40 per tonne |
|
Cleaning |
85.41 per tonne |
85.41 per tonne |
34.00 per tonne |
|
Fumigation |
15.00 per tonne |
15.00 per tonne |
6.00 per tonne |
|
Weighbridge |
200.00 per double weighing |
|
|
Source: ADMARC
Whether the stocks are held in own operated or contracted facilities the operational procedures to be followed should be clearly specified in an Operational Procedures Manual, Appendix 3. Examples of procedures which should be incorporated in the manual include:
- authorisations required for various actions related to the reserve;- stockcards to be used for recording additions to, or deletions from, each stockpile, bin or silo with the resultant quantity stored and any treatments or other actions undertaken;
- grain procurement;
- receiving grain into the reserve and releasing grain from the reserve;
- rotating the reserve;
- quality monitoring, stock and pest management;
- disposal of sub-standard and/or damaged grain.
Whenever grain is stored for a prolonged period it will need to be inspected periodically to ensure that its condition remains within specification and that it is not subject to pest or rodent attack. The frequency with which such inspections need to be undertaken will depend on the climatic conditions and the method of storage employed; e.g. in bags, on-floor bulk, bins or silos. As in most countries the market is dominated by sales in bags, it is to be expected that the most common method of storage will be in bags. The scope of these periodic inspections should include an examination of the storage facilities to ensure that they are in a sound condition as well as of the stockpiles, storage bins or silo cells to ensure that the grain is correctly stored and identified, e.g. properly labelled with quantities and actions taken recorded on the stock cards. Representative samples of grain should also be taken periodically for analysis.
Responsibility for inspections, and undertaking the necessary corrective action, would, in the first instance rest with the agency responsible for the physical storage of the grain. That would be either the reserve agency itself, had it opted for the direct storage and management of the reserve or, the contracted storage organisation, in the case that responsibility for storing the reserve had been contracted out. In this instance the reserve agency should retain the right to undertake independent surprise inspections at each storage location to ensure that contractual obligations are being adhered to and that the integrity and quality of the grain is being satisfactorily maintained. These inspectors, in addition to undertaking a visual inspection of the storage facilities and grain will also need to take samples for testing to ensure that the quality remains at a satisfactory level. The reserve agency may need to establish an independent capability for testing grain quality itself rather than rely on laboratories situated in the storage facilities. Alternatively, independent testing laboratories could be used. In some countries there may be a general lack of technical expertise, or technical capacity, with respect to quality control and pest management amongst those organisations, including parastatal grain agencies, which operate suitable storage facilities. In these instances it may be necessary for the reserve agency to establish and operate mobile teams of technically competent staff to visit each location on a regular basis to inspect the grain held in the reserve and take any necessary corrective measures directly, e.g. fumigation of infested grain. This could also be made available as a service to other organisations on a contractual basis. Such a capacity was established within the Ethiopian Food Security Unit and their pest management services were frequently called upon by NGOs to treat grain held in their stores.
Should inspections reveal that the condition of the grain has deteriorated below an acceptable level, corrective action will need to be taken, e.g. improving ventilation for bagged grain, or aeration for grain stored in bulk to control moisture levels, and/or fumigation if the grain is found to be contaminated with insect pests. If it is uneconomic to recondition the grain, arrangements will need to be made for its disposal. This would normally be done by sale, using procedures similar to those used when stocks are recycled or sold into the market. As the reason for sale is quality loss the price realised would be below the prevailing market price, thereby resulting in a financial loss for the reserve. Responsibility for any losses incurred should be subject to a formal investigation and, if found to be due to the neglect of the organisation responsible for the storage and maintenance of the grain, consideration should be given to imposing a financial penalty on the organisation concerned, or entering into litigation.
The quantities which can be purchased for the reserve will depend on the funds available and the average price per tonne which has to be paid. To maximise the quantity purchased for a given level of funding, procurement efforts would normally be concentrated in the period immediately following harvest in the main surplus producing areas when market prices can be expected to be at their lowest. Purchases during this period could also have the beneficial effect of increasing demand, and thereby provide some support to producer prices at a time when market prices are low. However, depending on market availabilities and sensitivity to changes in demand, it may also be desirable to spread purchases out over a period of one to two months to avoid putting a large demand on the market for a short period of time, and thereby risk causing price instability.
While purchasing directly from farmers holds certain emotive attractions, it has substantial practical and operational problems. With the majority of farmers in most countries having relatively small holdings the quantities each would be able to offer for sale at a time would also be correspondingly low. As an extreme example, until the 1996 season ADMARC in Malawi was prepared to buy, for social reasons, quantities as small as a few kilograms from individual small farmers at each of its approximately 1,000 buying points. To avoid having several tens of thousands of individual transactions each for relatively small quantities consideration needs to be given to introducing a minimum quantity which would be bought at a buying point, or storage location. While in remote rural areas this could be as low as one tonne, larger depots should consider having a minimum quantity of at least ten tonnes. The advantages of introducing a minimum quantity include:
- a significant reduction in the number of individual transactions undertaken to purchase a given quantity of grain;- increased opportunity to monitor and control the quality of grain purchased for the reserve;
- reduced handling and other transaction costs;
- providing a market opportunity for small-scale private traders to assemble grain into acceptable sized lots for sale to the reserve.
While a parastatal having a commercial grain marketing activity as well as a responsibility for the strategic grain reserve might be able to maintain a network of buying points throughout the country, it is unlikely that a reserve agency without a commercial marketing arm would be able to justify the creation of a procurement network for replenishing the reserve. Even parastatal agencies, as they move, or are pushed, into adopting more commercial practices should undertake a review of the cost of maintaining each buying point against the revenue it generates. In many instances it will be found that, from a commercial standpoint, a significant proportion of the network built-up during days of regulation and monopoly cannot be supported commercially, and should be closed.
As an alternative to maintaining a network of buying points, purchases could be restricted to those storage facilities in which the reserve is to be held. Producers and/or traders would be required to bring their grain to the storage facility where, provided it met minimum quantity and quality requirements, would be purchased at the prevailing purchase price. It should be borne in mind that in buying grain for the reserve it is intended to hold it in store at least until the lean season begins, and maybe even carry it over to the following year. Under these circumstances, and unlike buying grain for the commercial market, grain which falls below the specified minimum quality should not be bought, even at a discounted price for the reserve. Purchase prices may be related to the prevailing market price, or some kind of floor price, e.g. export parity price.
If the reserve is also being used in a price stabilisation role due consideration needs to be given to the manner in which price stabilisation will operate as far as producers are concerned. In a free market it is not the intention of producer price support to ensure that all farmers receive at least the floor price for their grain. This would require that the agency responsible maintains a comprehensive network of purchasing points throughout the country to be able to support the floor price for every farmer in the event that the market price falls below the floor price. This is unrealistic. From a practical standpoint the floor price should be offered at a few key locations. The more locations there are the more likely it will be that the natural price differential between different locations, which is an essential feature of all free markets, will be distorted. This would send wrong signals to farmers on what to produce and, as the opportunities for arbitrage are reduced, deter traders from operating in the market. It can be expected, however, that there will be pressure put on the agency from political quarters when prices are low to increase the number of points at which the floor price is maintained. Such pressures need to be resisted as they will only serve to distort the natural market price, unless the floor price is lower than the export parity price. This is considered to be an unlikely situation. Care also needs to be taken to avoid producer price support being used as a euphemism for "buyer of last resort", where the reserve agency has an open ended commitment to purchase all quantities of grain offered at the floor price.
The agency should only be required to buy up to the quantity needed for the reserve. Quantities purchased in excess of this requirement could create problems in the future. For example the years in which the agency would be required to buy large quantities would be surplus years, i.e. when the market price is low. These are the very years when the reserve is least likely to be required. The agency would thus be left with stocks of grain which it is will probably have to sell at a loss in either the domestic or the export market or have to carry-over into the following season.
In theory the use of appointed agents to buy on behalf of the reserve offers the advantage that the reserve agency does not have to establish an infrastructure for purchasing grain but rather can receive it at nominated storage locations, where it would need to be checked in terms of quality and quantity before acceptance. Problems arise, however, from the natural tendency of the trader to keep the best quality for his own transactions, and from difficulties concerning the price to be paid for the grain. If a fixed price is agreed, e.g. floor price, it is possible that the agent will find more profitable outlets for the grain, while if a prevailing market price is used the agency has no control over the price actually paid by the agent. As the agents are generally relatively small business undertakings, they are usually short of working capital.
Advantages Disadvantages of Alternative Procurement Methods
|
Procurement Method |
Advantages |
Disadvantages |
|
|
Direct purchase |
General |
General |
|
|
Through own Buying Points
|
a) Suited to administering floor price. |
a) Number of buying points should be limited otherwise private sector traders may be discouraged from entering the market. |
|
|
Parastatal |
|||
|
a) Network of buying points and procurement system already established. |
b) If high number of buying points and floor price in operation spatial price differentials distorted. |
||
|
b) Parastatal experienced in buying grain.
|
c) Private sector participation limited to small-scale local traders. |
||
|
d) Individual transaction sizes likely to be small, thereby increasing staffing and control requirements. |
|||
|
e) Difficulty in maintaining quality control with many buying |
|||
|
points and small quantities purchased at a time. |
|||
|
f) Vulnerable to political pressure to open more buying points. |
|||
|
Parastatal |
|||
|
a) Lack of experience in operating with free market prices, may not be flexible enough to compete effectively with private sector traders. |
|||
|
b) Opportunities for conflicts of interest between commercial and reserve purchases |
|||
|
Institutional Reserve Agency |
|||
|
a) High cost of establishing and maintaining a network of buying points |
|||
|
b) Agency inexperienced in purchasing directly from producers or traders. |
|||
|
c) Agency unlikely to be able to react to market conditions as swiftly as the private sector, and therefore unable to compete effectively |
|||
|
At storage locations |
General |
General |
a) If floor price not being maintained purchases prices should reflect market price at each location, not a fixed national price. This may create opportunities for malpractices. |
|
a) With fewer buying points administration and procurement costs reduced. |
a) Individual transaction sizes likely to be small, thereby increasing demands on staffing and control. |
||
|
b) With fewer locations easier to adjust purchase prices in accordance with market prices movements. |
Parastatal |
||
|
a) Opportunities for conflicts of interest between commercial and reserve purchases. |
b) Suited to purchasing when floor prices is being supported, as parastatal/agency does not have to compete directly with private traders on the basis of price. However danger of distorting spatial market price differentials if floor price supported at too many locations |
||
|
Institutional Reserve Agency |
|||
|
a) Agency inexperienced in purchasing directly from producers or traders. |
|||
|
b) Agency unlikely to be able to react to market conditions as swiftly as the private sector, and therefore unable to compete effectively |
c) Number of buying points should be limited to a few key storage locations.
|
||
|
c) |
|||
|
Purchase using appointed |
General |
General |
|
|
agents
|
a) Private sector traders directly involved in purchasing grain for the reserve as agents. |
a) Agents likely to exploit market opportunities to their own advantage. |
|
|
b) Minimum purchase quantities and qualities can be introduced thereby reducing grain reception costs.
|
b) Uncertainty of agents reliability to supply grain |
||
|
c) Danger of price exploitation unless floor price adopted |
|||
|
Parastatal |
|||
|
a) Opportunities for conflicts of interest between commercial and reserve purchases. |
|||
|
Purchase under contract
|
General |
General |
a) As many of the traders contracting for the sale of grain may not have substantial resources stage payments may need to be made. |
|
a) Increased transparency and competition between private sector traders if contracts made under open public tender. |
a) Danger of contractual default |
||
|
b) If contracts not decided by open tendering system possibility of accusations of malpractice. |
|||
|
b) No market distortion introduced. |
Parastatal |
||
|
c) Purchasing staff requirements minimised |
a) May be conflict with in-house purchasing capacity. |
||
|
d) Price at which purchases to be made known in advance. |
|||
|
e) Contracts can be made up to the quantities required for the reserve. |
|||
|
f) Quality standards easily enforced. |
|||
|
g) Grain delivered to specific location required in acceptable batch quantities. |
|||
Requests for the advances of working capital from the reserve agency to enable them to purchase sizeable quantities should, however, be resisted as the likelihood of default is high. It would be preferable to pay in ash on acceptance of any grain into the reserve.
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Malawi Grain Purchase for the Reserve (Extract from newspaper advertisement) Invitation For Bids The Government of Malawi wishes to purchase white maize within Malawi for the Strategic Grain Reserve. The purpose of this procurement is to support the maize price floor of MK 1.55 per kg Up to 65,000 mt of maize will be purchased by Government for this purpose. Traders are invited to submit bids up to 65,000 mt of maize at this time Item: White maize; Up to 65,000 metric tonnes Delivery Specifications! Delivery in so kg bags Delivery Location Deliveries may be made to the following SGR Depot locations. Tender bids should specie locations to which maize would be delivered: Lilongwe, Salima, Balaka, Luchenza, Limbe, Mzuzu, Kazomba and Chilumba. Delivery Schedules: All deliveries are to be made by August 23, 1996 Tender bids should indicate is which time periods maize would be delivered: July 1-July 12; July 15-July 26 July 29-August 9; August la-August 23.... Opting of Bids: All bids will be opened in the presence of those bidders who choose to be present at 1500 hours on 21 June 1996 at tae offices of the Malawi Government Central tender Board, Kirkcaldy House, Livingstone Avenue, Limbe. The Malawi government reserves the right to reject or accept the lowest bids. |
Perhaps the most interesting of methods for purchasing grain is through contracts. These can either be contracts negotiated directly with a trader or contracts resulting from a successful bid in an open public tender. Both types of contract would be for the supply of an agreed quantity of grain of a specified quality to be delivered to a nominated location within a stated time-frame for an agreed price. Open public tender offers the advantage of transparency and avoids the risk of accusations of unfair competition and collusion between the reserve agency and the contractor as could be the case when direct contracts are negotiated. Open public tenders would normally be floated by the reserve agency through an advertisement in the press inviting bids. The advertisement should contain the basic information relating to the quantities and qualities required, the locations to which it should be delivered and the general conditions appertaining to the bid e.g. availability of bidding documents, submission dates, opening time of bids and any performance bond requirements. To avoid misunderstandings it is preferable if bidders are required to submit their bids on pre-printed forms available from the agency or its appointed agents.
Whether the agency responsible for the reserve is also responsible for the management and operation of the storage facilities in which the grain is to be held or not, the agency is responsible for ensuring that the grain purchased is of an acceptable quality and that the quantities are correct. Prior to acceptance, samples need to be taken for testing in the laboratories of the storage facility to ensure that the grain meets the required quality specification. The results of each test along with the seller's identity should be recorded and be available for inspection.
If storage of the grain has been contracted out the reserve agency will be responsible for ensuring that the operational procedures set-out in the contractual document, or in an operational procedures manual are being adhered to. As the agency is ultimately responsible for paying for the purchase of the grain, it would be advisable to have inspectors present on-site to supervise and authenticate each procurement transaction and accounts staff to maintain necessary records of the transaction and authorise payment. Once the grain has been accepted there will be a need to ensure that it is properly stored. When commercial stocks are also maintained at the same storage location there should be a physical separation and identification of the two classifications of grain.
In deficit production years there will be a need to supplement production either through imports or through a draw-down of stocks, either or both public or private. In the event that imports are required government, through the reserve, would normally be required to make good the difference between the total import requirements and import quantities arranged through the private sector, i.e. the import gap. In making arrangements for the import of grain the agency either purchases with the intention of crediting the stocks into the reserve or alternatively for sale, in total or in part, to private traders in acceptable lot sizes on arrival. The advantage of selling the grain on arrival is that the agency will not have to finance the cost of the import from the time of import until it is required in the market.
To maintain the reserve in good condition it will be necessary to periodically rotate the grain which has not been required to meet a market shortfall or for relief programmes, and is still held in the reserve. While, under the prevailing climatic conditions, it may be possible to hold grain satisfactorily for longer than a single marketing year, it will, even under the best storage conditions, have suffered some deterioration as compared with fresh grain, e.g. shrivelling, which will lower its acceptability, and thus its price relative to fresh grain, in the marketplace. Therefore, unless there are overriding reasons for retaining the grain for longer than a season, e.g. crop forecasts indicating that there will be a shortfall in production, it would normally be advisable to rotate the residual stocks held in the reserve each year.
The opportune time for rotating the grain would be towards the end of the marketing year when availabilities in the market tend to be at their lowest and when there should also be a good indication of the crop prospects for the following year and thus the likely reserve needs. The options open for recycling grain are to:
- release the grain to be recycled to the appropriate government agency, or an NGO, for use in targeted relief programmes. To protect the integrity of the reserve, any such releases should be paid for in full at the prevailing market price at the time of release. Experience has shown that failure to recover the value of the grain at this time, particularly from government, is fraught with the danger that when payment is due, or the cash is required to purchase replenishment stocks, government is unable, or unwilling, to reimburse the reserve agency to value of the grain;- release the grain for sale through the normal marketing channels at the prevailing market prices. To minimise any adverse impact that such releases could have on market prices the grain should be released progressively over a prolonged period, of say two-three months. The method of sale would normally follow that used for sales releases, i.e. either by open public tendering, by sale through a clearing house/commodity exchange or by direct sale from the storage facility at market prices. Appendix 4 provides an example of stock recycling through a commodity exchange. If it is to be sold at a price set by the reserve agency, the price should be in-line with the prevailing market prices and should also be high enough to at least cover the financial costs incurred in financing and maintaining the stock. If sales are to be made when market prices are below import parity levels, due consideration needs to be given to outstanding private sector import arrangements to assess the likely implications. It would be counterproductive to discourage future private sector imports by the inappropriate timing of sales from the reserve;
- exchanging grain with the commercial stocks of a large trader, e.g. parastatal company. The grain to be recycled would be transferred to the account of a commercial trader against a guarantee for the supply of an equivalent amount of grain either from better quality existing commercial stocks or from market purchases following the coming harvest. There would need to be some mechanism agreed for valuing the grain to be recycled to enable an equitable calculation to be made of the quantity of replacement grain to be supplied, i.e. to take account of quality differences between the recycled and replacement grain and market price differences at the time of sale (high end of season prices) and replacement (low after harvest prices).
- export the grain. This option would normally only be considered when there is little likelihood of it being required the following season to meet market shortfalls. Unless the grain was bought at, or close to, the export parity price, there is a strong possibility that exporting grain will involve the agency in financial loss. This would be particularly the case for landlocked countries such as Malawi, Zambia and Zimbabwe where the high costs of transport have a major influence on both import and export parity prices This option should therefore only be considered when the signs that the coming harvest will be in surplus and that there will thus probably be little demand on the reserve in the coming year.
If the reserve is to be maintained at its desired level it is in the government's interest to obtain the highest price possible for the grain to be released into the market, and thereby reduce the cost of maintaining the reserve. The temptation to release the grain at prices significantly lower than the prevailing prices for social purposes, not only reduces the revenue the reserve will generate for sustaining itself, but it is also likely to antagonise private sector traders or, if sales are made through them, provide traders with the opportunity to make a windfall profits.
Responsibility for authorising stock rotation should be vested in the governing body of the agency responsible for the reserve, e.g. Food Security Committee, Board of Directors or of Trustees. The decision to rotate stocks would be based on technical recommendations made by the management team responsible for the reserve.
Releases from the reserve will normally be made to counteract shortfalls in market availabilities, usually signalled by high and/or rapidly rising prices, and for relief operations. To enable the reserve to fulfil its function mechanisms need to be in place for signalling the need to release grain to cope with market shortfalls or for relief operations. While various triggers for releasing grain can be devised for coping with market shortfalls, releases for relief purposes are more difficult to determine and should, because they involve a direct cost on government, be sanctioned by the government department responsible for relief programmes.
Typical triggers which could be used to initiate the process for releasing grain into the market are:
- when the market price at a key location rises above a predetermined value. To have the minimum negative impact on the functioning of the market this price level should be at least equivalent to the prevailing import parity price for the particular location. (As the import parity price is dependent on the international market price and the cost of transport to the concerned location it is also fluctuating according to international market conditions).- when the market prices rise exceptionally rapidly over a two-three month period. The definition of exceptionally rapidly would depend on what is considered to be normal seasonal price pattern for a particular commodity and will vary between countries. For example, it might be considered normal for prices to increase at 10-20 per cent per month in the middle of the marketing season, however, price rises of 40-50 per cent per month over a period of two months would be considered abnormal and this could signify market shortages necessitating action by the reserve agency. Releases should be made progressively so that their impact on prices can be monitored. It should be noted that the objective is to bring the rate of price rise to normal levels rather than to try to push prices down. Once this state has been reached further releases should be stopped. Care also needs to be taken to ensure that releases do not undermine the import positions of the private sector by pushing prices below the import parity price threshold. This is essential, irrespective of the rate of price increase, if the private sector is to have confidence to undertake grain imports. It should be remembered that if the private sector is discouraged from importing grain government will have to assume responsibility including the financial cost.
- when the market price reaches the ceiling price under a price stabilisation policy. Again, if the ceiling price is below import parity, private sector imports will be discouraged.
Authority for deciding to release grain for sale in the market should be vested in the governing body of the agency responsible for the reserve, e.g. Food Security Committee in the case of the parastatal or commercial organisation and the Board of Directors or Trustees for an institutional reserve agency. The decision should be made in accordance with the laid down procedures and once made should be put into effect by the respective management teams.
Options for releasing grain from the reserve into the market include:
- direct sale by the agency from the storage location at either a fixed or prevailing market price. Prices should not necessarily be the same in different locations, but rather reflect the normal price differential between locations. Under this system the agency would offer to sell to all-comers at a stated price quantities of grain, up to the sanctioned limit. This should be released as a fixed daily, or weekly, amount for a set period. To avoid a multitude of small sales a minimum lot size could be applied, say 10 tonnes, i.e. equivalent to a lorry load;- sale by open public tender. Following an open invitation to bid for quantities of grain through open public tender, contracts would be awarded to successful bidders on the basis of the highest bids and any reserve price the agency may wish to apply. This would help avoid grain being sold at prices significantly below the prevailing market price. Typically such a reserve price would be equivalent to the prevailing import parity price. This process offers the opportunity for traders to compete for the grain on offer in accordance with their perception of market conditions and without undermining the positions of those traders who have made arrangements to import grain. To provide opportunities for both large scale, e.g. modern mills, and small-scale market operators, e.g. local traders and hammermill operators, to bid, consideration could be given adopting a two tier system in which lots of say 500 tonnes would be offered for large-scale operators and 10 tonnes for small-scale operators.
- sale through a commodity exchange, Appendix 4. While in practice it is similar to sale by open public tender it is somewhat easier to organise provided that there is an effective functioning commodity exchange. Again different lot sizes can be offered to cater for differing needs.
- if the reserve is managed and operated by a parastatal or commercial organisation, consideration could be given to releasing the grain from the reserve through their commercial marketing network.
Whichever method, or combination of methods, is chosen for the release of grain the authorisations required and the procedures to be followed should be clearly specified in the Operational Procedures Manual.
