How a virtual strategic grain reserve would work

What you need to know:

  • The first option would mean that Parliament would no longer allocate funds to the NCPB through the national budget every year
  • Government would not need to build up grain stores and artificially influence producer prices by being the country’s largest hoarder of grain.
  • This insurance premium model has the advantage that the premium paid upfront is much lower than the full amount required under the cash reserve policy above.

My last blog post argued that Kenya’s Strategic Grain Reserve policy has a sensible rationale, but is poorly designed and managed.

The gist of the argument was that alternative policies exist to ensure emergency food reserves when the occasion demands.

There is no overriding public purpose for maintaining food reserves through the National Cereals and Produce Board (NCPB).

Reforming the Strategic Grain Reserve policy would require considering three options.

They include the full conversion of the Strategic Grain Reserve into a cash-based programme, the use of a financial instrument in the form of an insurance policy or a mixture of the two options stated above. This article considers each of these options in turn.

The first option would mean that Parliament would no longer allocate funds to the NCPB through the national budget every year,

Instead of the nearly Sh4 billion going to administration and grain purchase, it would be directed to a separate account or fund in a private firm.

USE PRIVATE FIRMS

The reforming legislation would provide specific triggers or conditions that would automatically ensure the release of these funds for purchase of food in the spot markets.

Because of the fungible nature of cash, this reserve would be managed by a set of private firms, outside government, that would compete to manage it on behalf of the Ministry of Agriculture.

The Cabinet Secretary for Agriculture would be empowered to trigger the release of funds to purchase grain from both domestic and external markets.

One advantage of this cash reserve would be minimised administrative costs, because with no grain, only the fund would be under a fund manager with obligations to ensure it is available at short notice.

At the same time, government would not need to build up grain stores and artificially influence producer prices by being the country’s largest hoarder of grain.

Private sector actors would, at the same time, take up existing store and grain facilities after privatisation, through transparent means.

The second solution would involve purchase of an insurance policy to cover for the risk that grain prices or supply might fall.

After all, keeping strategic reserves of grain is a form of insurance, in essence a risk management tool, going by the first principles of economics.  Those reserves are meant to release grain when insufficient stocks are available from other sources.

Thus the government would use an annual allocation by Parliament to buy an insurance policy from a private firm against a fall in food supplies, in essence an insurance arrangement that leaves the risk with a private firm that can bear it.

SHORTAGE –BASED PREMIUMS

In its simplest form, the Ministry of Agriculture could find a diverse number of firms who would receive an annual premium payment.

Premiums would be paid on the condition that the insurers would provide a pre-agreed amount of cash whenever prices or supplies fell below an agreed level. This solution is different from the cash reserve because the insurers would be required to calculate the premium based on the risk of a shortage.

In the event of a shortage, the insurer would pay government an amount sufficient to buy the quantity of grain needed to restore supplies.

This insurance premium model is not common but is easily designed and has the advantage that the premium paid upfront is much lower than the full amount required under the cash reserve policy above.

Another advantage is that there is broad participation of private firms and the food markets will grow through market competition as opposed to government intervention.   

The third option for replacement of the Strategic Grain reserve for Kenya is a combination of a cash reserve and an insurance policy.

In the quest to distribute the risk of relying on only one tool, the reserve would have the funds split between keeping half of the money in a cash reserve and using the rest to buy a premium to insure against fall in prices.

Food supplies are crucial because of the centrality of nutrition to life, but clearly, there are options for more efficient ways to secure food availability than the storage of large grain stocks in state-owned silos.

Kwame Owino is the chief executive officer of the Institute of Economic Affairs (IEA-Kenya), a public policy think tank based in Nairobi. Twitter: @IEAKwame