Should private storage be subsidized to stabilize agricultural markets after price support schemes are removed?

A general equilibrium analysis applied to European reforms

Currently, there is increased focus on the methods in which public interventions stabilize agricultural markets. The subsidization of private storage is one of the options advocated. However, the efficiency of such an instrument is still being discussed and has not yet been explored in the context of imperfect information. Nevertheless, this is one of the potential sources of market fluctuations and one of the arguments in favor of a public intervention on agricultural markets. To fill this gap, our main objective in this paper is to simulate the effects of a subsidization of storage costs, aimed at stimulating private storage at the world level, on markets fluctuations following Common Agricultural Policy (CAP) reforms, so as to stimulate private storage at the world level, and to study the welfare effects of this public intervention. To do so, we conduct a dynamic general equilibrium analysis and assume that agents have imperfect expectations. We simulate the effects of a radical reform: the complete removal of the CAP in arable crops sectors; we then study the impacts of a subsidization of wheat storage costs at the world level. Our results first show that the CAP removal in arable crop sectors destabilizes European markets and tends to stabilize markets in the United States and in the rest of the world. Then, the subsidization of private storage effectively boosts the storage activity; it generates welfare losses, but these are very limited compared with the world welfare gains arising from the CAP removal. However, the effects of this subsidy on market volatilities are contrasted: we find some cases where crop markets are actually stabilized following the subsidy, but other cases with the opposite result, where markets are destabilized. To understand the factors related to the effects of the subsidy, we perform a logistic regression and show that results are dependent on the form of the agents’ expectations and on some distributional characteristics of the productivity shocks arising in the crop sectors. Namely, the more that information from the past is taken into account by economic agents to make their decision, and the more the productivity shocks are negatively auto correlated, the more the storage subsidy is efficient in stabilizing the markets.

Author: 
Femenia, Fabienne
Published date: 
2012
Publisher: 
International Food Policy Research Institute (IFPRI)
Series number: 
1205
PDF file: