Who stores and why?

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Farmers, traders and governments all have reasons for storage other than the profitability of the storage enterprise itself. Storage is a component within a farming system, a trading enterprise, or a government policy, and may be undertaken because of its contribution to other activities or objectives within these broader contexts.


Farm Storage

For small farmers the main purpose in storing grains is to ensure household food supplies. Farm storage also provides a form of saving, to cover future cash need through sale, or for barter exchange or gift-giving. Grain is also stored for seed and as inputs into household enterprises such as beer brewing, or the preparation of cooked food. When there are significant inter-seasonal price variations, small farmers often store for speculative gain, that is to say they 'play the market'. This is most common in more prosperous areas, such as the Southern Highlands of Tanzania and southern Mali, which produce a mixture of cash and food crops, and where farmers' financial circumstance make it easier for them to sell when the price is best. Speculative considerations are even more important in the storage decisions of large-scale commercial farmers.

Despite the desire to store grain in order to cover food requirements and future cash needs, farmers often sell a large proportion of their produce at harvest, when prices are low. This is frequently the case with deficit producers, who must satisfy cash needs immediately after the harvest, only to buy in food later in the season.

There is an ongoing debate about whether farmers are forced to sell because of debt and economic dependence on others, or whether they sell because they regard storage as too costly (in terms of time), or too risky (given the risk of losses and unpredictability of future prices), or unprofitable in relation to other investments such as cattle. There is no single answer to the debate, since there is much variation in the circumstances under which individual farmers operate, both within and between nations. The 'forced sales' situation has been documented by some authors in South Asia (e.g. Crow, 1987), while the 'wise farmer' been found to apply in South-East Asia by Mears (1980) and Ellis et al. (1992). In the Sahelian countries of Africa, conflicting findings have been reported. Carefully documented work by Dione (1989) has shown head taxes in Mali to have resulted in forced sales, but Berg and Kent (1991) report several authors who have reached opposite conclusions.

Another reason for not storing is the unpredictability of future prices, which often makes storage a risky business. This is particularly the case in countries such as Mali where prices vary widely from year to year, and do not follow a steady monthly trend. From Figure 1.1 (see Figure 1.1. Retail Prices of Millet in Mali, 1986 - 1991 Annual Monthly Averages compared with Monthly Averages combined over 5 years), it can be seen that Malian prices normally rise between harvest time and the lean season, but farmers who engaged in speculative storage in 1989 suffered significant losses. Storage was particularly risky as Mali was passing from a period of scarcity, when prices levels were related to the cost of imports, to a period of surplus, when they were related to the price at which Mali could export. Movement between surplus and deficit in the Sahelian countries probably explains the wide variation in Mali's prices from year to year.

Farmers may sell their grain at any time from maturity (sale of the standing crop) onwards. Sale at or before harvest has the advantage that the farmer is saved the cost and time involved in preparing the crop for storage. Transport, threshing, winnowing and drying are all passed on to other levels in the marketing chain, leaving the farmer free to attend to the next crop, or to other farm or off-farm activities. It has been estimated that post-harvest activities account for one quarter of the total cost of production even for small farmers in poor countries (Greeley, 1991 p.5). Early sale also reduces the risks of losses in postharvest activities, and this is particularly advantageous in cases where the harvest occurs in the wet season.


Trader Storage

The role of traders in cereal storage varies enormously between different parts of the world and between different crops. In most African countries traders carry out very little interseasonal storage of coarse grains, but buy and sell quickly, earning a moderate profit on each transaction. Most storage is carried out by farmers, and to a lesser degree by Government marketing boards and consumers who buy in anticipation of future household needs. Given a general situation of capital shortage, long-term storage of staple grains is insufficiently profitable to attract the interest of traders, who can earn more money by investing in fast moving consumer goods.

However the opposite is often true with rice in Africa. This crop is generally produced as a cash crop for the urban markets, but does not have a major demand for use as a staple in rural areas. Often much of the rice is imported and this has encouraged the emergence of large traders able to obtain finance major shipments and to negotiate advantageously with the authorities. Even when sourcing supplies from local producers, traders and millers must hold stocks to cover the needs of their urban clientele, and cannot rely on steady supplies arriving from rural areas.

In Asian countries, traders have a much larger role in interseasonal storage. The two major cereals are rice and wheat and both of these must be milled before reaching the consumer. This is unlike the situation in most of Africa where coarse grains such as maize, millet and sorghum are the main staples. Typically African consumers buy these grains whole, and either grind them at home or take them to be ground at small custom-mills.

Large millers who become involved in the marketing chain tend to have good banking connections and can obtain capital at reasonable cost. Studies by the Natural Resources Institute (NRI) in Indonesia and Pakistan indicate, that wherever Government policy is conducive, millers enter the storage business on a large scale. In Indonesia, traders and millers store about 50% of that part of the rice crop which is carried over from the first harvest (Ellis et al., 1992). Indeed it is common for them to store beyond the point when storage is profitable in its own right. This is because storage is only part of a business activity which involves milling and distribution of milled rice; millers must store in order to keep the mills running out of season, and to maintain supplies to regular customers. Losses on storage are more than compensated for by the gains on other operations.

In Pakistan, the millers' role in wheat storage has been limited by Government subsidies to public sector institutions, which procure about 60% of the marketed portion of the wheat crop. Rather than procuring wheat themselves, millers found it cheaper to procure from these Government institutions which carried out most of the long-term storage. However, when the Government raised their selling price in 1989 and thereby improved the incentives for millers to store, these responded promptly by buying up more stock.

In the future, storage behaviour in African countries will probably evolve towards the Asian pattern. The liberalisation of cereal markets will encourage the development of the private trade, the reform of banking systems should gradually increase traders' access to capital markets, and increased urbanisation and sophistication of tastes will favour the emergence of large milling enterprises.


Government Storage

As already mentioned, Government may become involved in storage for the purpose of stabilising prices and revenues to farmers. Related to this is Governments' overriding concern for national food security, which is fundamental to political stability. Governments therefore use storage to balance national supply and demand over time, and to minimise the risk of politically embarrassing shortages. They are thus attempting to supplement, and in some cases to replace, market mechanisms, on the assumption that the market can only achieve the balance with an unacceptable degree of supply and price fluctuation.

Governments do not involve themselves in the grain market only for reasons of national interest: they are often concerned with rewarding or placating particular lobbies or sectional interests. In developed countries farmers' interests often receive a high priority in Government decisions, out of proportion to their numbers. High 'support prices' encourage production in excess of demand, and surpluses have to be stockpiled at the taxpayers' expense. In many developing countries, the interests of the civil service and ruling party often take priority. Large national food reserves tend to be supported by the civil servants whose job it is to manage them, and by politicians who sometimes use their procurement and distribution as a means of dispensing patronage.

Governments may keep different types of storage reserve, depending on how much they wish to intervene in the grain market. Some of the options are:

  1. a food security reserve to be sold or distributed for free at times of extraordinary shortage or famine. Such reserves can be found in Sahelian countries like Mali and Chad. They are of limited size (e.g. 10% of the normal volume of grain marketed crop), and are usually limited to the amount thought necessary to tide the country over until the arrival of food aid or imports. They are not designed for the purpose of stabilising prices to producers and consumers. This is reflected in Figure 1.1 which shows that, since a reserve was created in Mali, monthly average retail prices have fluctuated by up to 260% of the lowest figure.
  2. a price stabilisation stock, as in the case of Indonesia. Here the Government has no monopoly role in grain procurement and distribution but buys and sells grains in competition with private operators. Average interseasonal retail price increases in Java are only 11% of the lowest monthly figure (Ellis et al, 1992). How much this extraordinary low figure is due to Government stockholding and how much to the stockholding activities of millers is a matter of debate.
  3. national storage reserves designed to supply most or all consumer needs in urban areas, and in rural deficit areas. In this case the Government has either a statutory trading monopoly, or a monopoly of all interregional shipments, and is the only party allowed to store significant quantities of grain. Between the 1960s and the early 1980s, such systems were the norm in many African countries, before the onset of liberalisation. Even now, the grain marketing systems in some countries, including Zimbabwe and Kenya, are still partially structured in this way.

Such Government operations usually benefit from public subsidy (intended or de facto) and capital investments are largely financed by overseas aid. Indeed subsidies are necessary if the public sector is to carry out functions which would not be profitable to the private sector. However, in some countries subsidies have allowed the State to 'crowd out' private sector competition. In the case of Pakistan for example, this phenomenon has resulted in the State handling about 60% of the marketable surplus. In many countries, such competitive advantages are outweighed by the high cost of fulfilling Government requirements (e.g. to buy and sell at fixed politically-determined prices, and to supply civil servants' consumption needs), overstaffing and slow decision-making processes. In such countries e.g. Tanzania in the 1980s, the official marketing agency may become insolvent and be gradually displaced by private sector competition.

Even relatively efficient Government trading operations face the problem that the more grain they buy, and the more they succeed in stabilising prices throughout the year, the less the incentive for private sector storage'. The responsibility for storage then falls very heavily on Government, and the private traders and millers concentrate on buying and selling quickly. Consequently, the Government finds that it has very high storage costs which it cannot recover through sale prices which have been politically determined. In the end the Treasury or Government banks must bale out the Government enterprise, thereby increasing the budgetary deficit.

Since 1981, there has been a major move to liberalise grain marketing systems in developing countries, and this has been stimulated by both donor pressure and the massive budgetary deficits stemming from the operation of Government marketing boards. Many African Governments are opting for the first of the above options i.e. a limited food security reserve.

Some countries do not appear to need any reserve stocks but can rely on international trade to assure food security and to stabilise prices. This is particularly the case with some deficit countries in Africa, such as Swaziland and Namibia, who have good communications with the world market and are close to major grain suppliers.

Lastly there are some countries where it would seem most appropriate for Government to maintain some sort of price stabilisation role. Such is the case in landlocked countries like Zimbabwe and Malawi, whose production fluctuates between surplus and deficit. If the Governments of these countries totally withdraw from price stabilisation, prices are likely to be subject to very wide interannual fluctuations, with adverse effects on production incentives and consumer welfare (Pinkney, 1993). Nevertheless these countries still have major scope for liberalisation. By improving port facilities and communications with the outside world, and by developing intra-regional trade, they can greatly reduce the required level of stockholding.

The move towards liberalisation in developing countries contrasts with the situation of the developed countries, where Governments are still heavily involved in the grain trade. Developing country officials often ask why they should be asked to liberalise while rich countries fail to do so. The answer is simply that these countries have the wealth to support their farmers at the expense of their non-farming majorities.

Farmers, traders and governments all have reasons to store grain, but they also have reasons for limiting the amount of storage. The unit costs of storage tend to be constant (or to decrease slowly) as larger quantities are stored, but the benefits fall off as more is stored. In deciding how much to store, the benefits must be balanced with the costs involved (see Figure 1.2: Balancing the Supply and Demand for Storage.).

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