ArticlePDF Available

Grain import dependency in the MENA region: risk management options

Authors:

Abstract and Figures

The Middle East and North Africa (MENA) Region is the largest grain importing region in the world. Severe constraints on arable land and water, coupled with a growing population and rising incomes, make the region inherently dependent on imports to meet rising demand for food, particularly cereals. These imports became exorbitantly expensive in recent years as world market prices for cereals were high and erratic. As a result, MENA countries, as well as food importing countries throughout the world, have placed a new premium on designing strategies for improving food security by reducing the risks that accompany being a food importing nation. This paper is meant to be an overview of strategies available to policy makers in the region in order to improve food security under the assumption of continued import dependence. KeywordsGrain imports–Import dependence–Risk management–Food security–Middle East–North Africa
Content may be subject to copyright.
ORIGINAL PAPER
Grain import dependency in the MENA region: risk
management options
Marc Sadler & Nicholas Magnan
Received: 3 September 2010 / Accepted: 30 December 2010 /Published online: 10 February 2011
#
Springer Science+Business Media B.V. & International Society for Plant Pathology 2011
Abstract The Middle East and North Africa (MENA)
Region is the largest grain importing region in the world.
Severe constraints on arable land and water, coupled with a
growing population and rising incomes, make the region
inherently dependent on imports to meet rising demand for
food, particularly cereals. These imports became exorbi-
tantly expensive in recent years as world market prices for
cereals were high and erratic. As a result, MENA countries,
as well as food importing countries throughout the world,
have placed a new premium on designing strategies for
improving food security by reducing the risks that
accompany being a food importing nation. This paper is
meant to be an overview of strategies available to policy
makers in the region in order to improve food security
under the assumption of continued import dependence.
Keywords Grain imports
.
Import dependence
.
Risk
management
.
Food security
.
Middle East
.
North Africa
Background
The majority of countries in the Middle East and North
Africa (MENA) Region are inherently not food self-
sufficient, that is, they do not produce enough food to
meet domestic demand. In the absence of the ability to
produce more food, the y are reliant on imports from
countries that are in surplus. This is especially true of
cereals; MENA countries are the largest net-importers of
cereals in the world (World Bank 2009). Traditionally, the
major risk that was foreseen in importing from other
countries was that the price of this food might increase
and that the importing countries would be unable to manage
this risk. The events of 2008 highlighted these risks, which
were realized due to a number of external factors. Not only
did the international prices for food increase dramatically,
but the availability of some foods was temporarily blocked
due to a decrease in global production and/or export bans
placed by exporting countries. These exporting countries
had suddenly found themselves in a position of food prices
spiraling upwards (largely due to contagion from the
international markets) and a requirement to create domestic
oversupply to hold down internal prices by restricting
exports (Mitchell 2008; Dorosh 2009; Wright 2009). The
effect of the export bans left many international trading
companies in a position of not being able to fulfill near-
term supply contracts and there was widespread default on
deliveries. It should be noted that, in general, these
companies were able to fulfill long-term supply contracts
because they had secured stocks well in advance of the
temporary bans and either held them in offshore storage or
they were already in transit.
The immediate effects of the shortages and price spikes
have caused many governments (not only in the MENA
region) to consider the issue of domestic food security in
much more detail than previously. Even the United
Kingdom has recently produced a paper considering issues
related to this subject (DEFRA 2008). International debate
continues as to the potential global responses to the food
M. Sadler (*)
Agricultural Risk Management Team,
Agriculture and Rural Development Department, World Bank,
1818 H Street, NW,
Washington, DC 20433, USA
e-mail: msadler@worldbank.org
N. Magnan
Environment and Production Technology,
International Food Policy Research Institute,
2033 K Street, NW,
Washington, DC, USA
Food Sec. (2011) 3 (Suppl 1):S77S89
DOI 10.1007/s12571-010-0095-y
crisis and means of ensuring that the situation does not
arise in the future. However, for sovereign governments,
while joint action and global plans are clearly strategically
important for them in the medium to long term, they
continue to search for means to address the issue in the
immediate future.
Outline of the paper
A number of food security strategies, individually or in
combination, are being consid ered or implemented in
different countries. This paper will not attempt to discuss
or evaluate all these. It will only consider issues relating to
bulk grain imports, not other types of food commodities
(although they are also important). The paper will consider
the tools at the disposal of governments, parastatals and
private sector companies for managing their relations with
the international grain trade, specifi cally in respect to
performance and price risk (which were the main problems
in 2008). These risks are prevalent even if (and perhaps
especially when) a decision is made to maintain
expanded physical grain stocks, as silos still need to be
filled, rotated and replenished, the supplies for which
need to be procured from the international markets. It
should be noted that t he paper will mainly consider
physical risk management options, as opposed to finan-
cial ones (which will be discussed and explained in more
detail later in the paper).
This paper is not academic in nature, nor is it designed to
provide a how to guide and best efforts have been made to
avoid the use of t echnical terminology. The paper is
targeted at non risk management practitioners, policy
makers, procurement agencies and commercial purchasing
units and seeks to provide an introduction to the main risks,
explain the correlation between different risks, and give an
overview of the potential tools and strategies that are
available to manage them. It should be noted, however, that
the use of these tools and strategies requires a deeper
understanding of them than it is possible to provide in this
short paper. In addition, the tools themselves need to be
managed in relation to a continually changing market and
therefore any government or organization seeking to make
use of them should seek the services of professionals in the
field.
In essence, the paper outlines how, through the use of
various tools and approaches, it would be possible for grain
importing governme nts in the MENA region to reduce the
risks of grain unavailability and also reduce their exposure
to the price, performance and financial risks involved with
imports.
Given the mar ked differences in terms of im port
volumes and logistics challenges between the countries in
the MENA region, it is not possible to draw clear
conclusions for the region as a whole. Indeed, certain
approaches and strategies may not be useful or available to
certain countries, while highly applicable to others. This
paper is therefore specifically not prescriptive, nor does it
seek to evaluate o r com pare th e differen t str at egie s, as the
results will be different depending on a given countrys
attitude to risk, financial and/or logist ical resource
availability and the extent to which they are food insecure.
Readers familiar w ith the specific challenges facing
certain countries in the region, however, will be able to
make connections between the s trategies discussed in this
paper and the needs of the country in question. The tools
and strategies outlined in this paper could help stake-
holders in each country to review their procurement
profile.
Risk management in a food security context
Riskthe possibility of the realization of an event
(normally negative in nature)is pervasive throughout
human existence. To avoid or minimize these potentially
negative outcomes, individuals and governments alike
engage in risk management (RM) continuously. Effective
RM relies on two initial stepsrisk identification and
quantification. Risk identification requires that a proposed
action or activity is considered in the light of recent events
and history that might affect what is planned. The risk can
be directan event or action of a third party that directly
affects the planned activity, or indirectthe event or action
directly affects another variable, but that in turn then has an
effect on the proposed acti on. Quantification of the risk
(i.e. the loss that would be suffered should the event occur)
and the likelihood of it occurring are normally calculated in
monetary terms either the extra cost incurred by the
realized risk or the cost of replacing or repairing what
was affected by the risk. The likelihood is based on the
number of times the risk has materialized itself, or is
projected to materialize, over a given previous period of
time. Having completed the identification and quantifica-
tion steps, the party at risk is now in a position to be able to
not only consider what steps to take to manage the risks,
but also to be able to evaluate the potential losses of a
negative event ex-post versus the costs of managing the
exposure ex-ante.
In the context of import related food security, the main
risks that a government faces are:
a)
Availability riskThe risk that grains may not be
available for import, potentially because of crop fail-
ures in producing countries or due to there being
barriers to import (physical or political).
S78 M. Sadler, N. Magnan
b) Counterparty performance risk
1
The risk that, despite
grains being available at an accept able price, the party
who contracted to deliver the grain defaults on the
contract.
c) Price riskThe risk that the price of imported grains
will increase above level s that the importing country
considers to be acceptable and/or may be ab le to afford.
We shall consider these risks and their drivers in more
detail in the following section. World Bank (2009) provides
an explanation of how price and availability risk differen-
tially affect different types of countries in the MENA
region.
Having identified and quantified the risks governments
need to develop a risk management strategy and identify
resources required to implement it. There are three broad
approaches to managing risks and it should be noted from
the outset that a risk management strategy may use all
three, a number of them or only one. The main approaches
are:
a) MitigateMitigation can be better understood as
avoidance or reduction. Having identified a risk
and decided that it is highly likely to happen and that
the losses will be high, an actor may decide to either do
something else or do the same thing in a way that does
not incur the risk. For example, a country may seek to
mitigate availabil ity risk by increasing the size of its
grain stockpiles.
b) TransferTransferring a risk involves passing the risk
to a third party, who will agree to do this because they
will charge you a fee for taking or assuming your risk.
Perhaps the best known example of this is insurance.
The amount of the fee (normally known as a premium)
is largely dependent on the likelihood of the risk
materializing and the expected value of the loss should
it materialize. For example, a country can seek to
transfer its price risk by purchasing grain on a fixed
price, forward purchase contract. In this case the price
risk passes to the party contracting to deliver at the
fixed price (which may contain a price p remium,
depending on the markets).
c) CopeCoping is a strategy normally based on a
decision that it is not possible to either mitigate or
transfer a risk. The actor simply reacts to the realized
risk as and when it occurs (i.e. after the event or ex-
post). While this may seem the least attractive option
and leaves the actor exposed to a risk, it is possible to
take measures prior to the event (ex-ante) by doing
such things as making financial provision or investing
in assets that will be used to address the realized risk.
An example of this would be where a government uses
a social safety net or subsidized bread program to
reduce consumer prices at a time when market prices
are higher than an acceptable level. The financial
resources to fund these programs may have been
earmarked or set aside on an ex-ante basis, or less
desirably, diverted from funds earmarked for develop-
ment and social goals.
Risk management strategies often use more than one
approach. For example, a government may increase the size
of its stockpiles to a level which would ensure their grain
supply during a period of unavailability (mitigation); seek
to protect itself against price risk for the stocks that they
would then rotate through this stockpile by entering into
forward fixed price contracts (transfer); ensure that the
forward contracts were concluded with a number of
suppliers with the provision of performance guarantees to
manage the counterparty risk (mitigation) and set aside
financial resources in periods of lower prices to provide for
periods when prices rise or more expensive spot purchases
are required to address contract defaults (coping).
It should be noted that an actor often faces a number of
related and non-related risks for each action and that
managing one risk may still result in loss if another risk is
realized. For example, transferring counterparty risk may
result in a financial payout in a case of contractual default,
but this will not address food security if there is also a
problem with grain availability. It should also be noted that
transferring a risk can result in the increase of another risk
unless that is properly managed. For examp le, a govern-
ment can transfer its price risk through the use of a fixed
price forward contract, but in so doing may well increase
the risk of the counterparty defaulting if the market moves
against them and they have failed to manage their own
price risk.
Typology of import risks to food security
As mentioned above, the main risks to be considered in this
paper are those of physical grain availability, price and
counterparty risks (contract performance risk). The scenario
considered in this paper is where a government has already
taken the decision to increase physical stock holdings
through expanded storage facilities. This paper does not
address risk management to avoid contingent liabilities,
such as a country which produces wheat, which then has to
import when there is a crop failure. The management of
Pure counterparty risk is normally a reference to actions or inactions
of a counterparty based on vol ition. There is another side to
performance risk and that is where the action or inactions of the
counterparty is not due to their own volition, but due to the actions or
inactions of a third party. For examplean export ban. The counter-
party wants to perform but cannot due to the actions of a third party
in this case a government.
Grain import dependency in the MENA region: risk management options S79
1
agricultural production risks is a compl ex issue and will not
be dealt with explicitly in this paper.
Physical grain availability can be affected by a number
of factors, the main one being a fall in production of grains
in the main export ing markets. This is invariably caused by
adverse weather or pest infestation events. Historically,
such e vents did not ha ve a major impact on a ctual
availability, due to the existence of global carryover stocks.
Global stocks have been declining over recent years (see
Figs. 1, 2 and 3 on global production, consumption and
ending stocks for wheat, maize and rice).
As is seen, while production of rice, maize and wheat
has expanded strongly, so has consumption, and therefore
stocks have not expanded. However, in absolute terms, it
would not appear that global stocks varied enormously.
They are, in fact, currently at almost period highs for both
rice and wheat. However and perhaps most importantly,
stocks have failed to expand as a ratio of consumption.
Although there was a tendency for growth in the period
from 1972 to the late 1980s and then a flattening through
the 1990s, a marked drop in ratios is seen since the
beginning of 2000 in rice, maize and wheat. This is
arguably the major factor affecting both availability and
price volatility on an annual basis (Fig. 4; Wright 2009).
Counterparty (performance) risk is the risk that a
counterparty in a grain purchase contract will default and
fail to deliver and is driven by both commercial and non-
commercial factors. Commercial factors include such things
as the inability of the counterparty to deliver the contracted
grains at the agreed price (especially if it was agreed in
advance of the time of delivery); inability to secure freight
at rates which will enable performance within the
contract price; inability to access the trade finance
necessary t o execute the trade (or inability to find it at
competitive rates), etc. Non-commercial factors that may
negatively impact contract performance are such events
as exp ort bans i n exporting countries ( as per 20 08); and
natural disasters or civil conflicts t hat do not enabl e the
counterparty to either export the grain, deliver it to the
buyer or ship it through a transit route. Recent examples
include the Asian tsu nami , the Gulf Wars (Reuters 2003;
Simhan and Raja 2003),andpiracyoffthecoastof
Somalia (Philp 2008;Guled2009).
Price risk can be a major factor that affects both parties
to the transaction and is one of the most common risks
faced in the trade of agricultural commodities. In the past
20 years or so, prices for grains (in constant 2000 US
Dollar terms) have been at all time lows (Fig. 5), reflecting
a general decline in the price of agricultural commodities.
However, since the beginning of 2000, there have been
marked increases in both the prices and price volatility of
wheat and maize, especially when one views them on a
monthly, as opposed to annual average basis (Fig. 6). For
rice, the picture is even more dramatic in terms of the
increase in price (Fig. 7). It is notable that the price
increases post-2000 coincide with the decreases in stocks to
use ratios. Arguably, the removal of programs to incentivize
excess production in Western countries and an apparent
slowing of yield growth potential are drivers of this
situation and that this is causing prices (and price volatility)
to rise. This culminated in the price shocks of 2008 and it is
widely believed that this situation will continue to persist
for the foreseeable future. With a growing world popula-
tion, adverse impacts of climate change on agriculture and
competing pressures on agricultural produce for alternative
uses (such as fuel) , the overall prognosis is for prices to
rise.
Food security risk management strategies
This section presents some of the specific tools available to
MENA countries and evaluates them along two dimen-
sions. The first dimension is the type of risk the strategy
helps manage, that is physical availability risk, price risk
and counterparty risk. The second dimension is the type of
risk management the tool provides, that is mitigation,
transfer or coping. In many instances these tools help
manage multiple types of risk (most notably both physical
availability and price risk) (Dorosh 2009). Because of the
links between global supply and world market prices, it is
impossible to completely detach price risk from physical
availability risk. Concretely, if supply is low there a
possibility that an importer will not be able to secure ample
physical grains. However, even if the importer can get the
quantity desired, the cost may be extremely high. Therefore
Fig. 1 Global statistics for
wheat, 19712010 (data from
USDA Production, Supply and
Distribution Online website http://
www.fas.usda.gov/psdonline)
S80 M. Sadler, N. Magnan
a strategy like stockpiling protects the importing country
from both physical availability risk and price risk. A
strategy like using financial instruments (futures and
options) might protect an importer from price risk, but it
does not ensure the ability to secure physical grains. There
is also overlap between counterparty risk and physical
availability risk, and between counterparty risk and price
risk. An exporter may ban exports, impeding the importer
from obtaining the physical grain. Alternatively, an exporter
may impose a tariff that increases the price for the importer.
The sections that follow are organized by the type of risk a
strategy is primarily designed to manage, but many of the
strategies help manage multiple types of risk.
Physical availability risk
Stockpiling: advantages and disadvantages
The most obvious way to manage the risk that grains will
not be available is to ensure that you have enough grains
stockpiled to supply the domestic market during a period of
unavailability (mitigation). Coupled with measures to shield
domestic stocks from global markets, stockpiling will also
help mitigate price risk as the stockpiling country can
essentially sell the stored grain to itself at a price lower than
global markets dictate. Stockpiling has a long history in the
MENA, but the recent food price crisis has renewed interest
in parts of the region (Karam 2008; Kawach 2010).
The primary strategi c decision to make is how large the
stockpile should be, and this amount depends largely on the
goal that motivates stockpiling (mitigating physical avail-
ability risk versus price stabilization). Models used to
determine optimal stock sizes for price stabilization are
complicated, dynamic and stochastic in nature, and must
take into account interest rates and demand (see Brennan
2003). However, in practice it is more common that
institutional limitations and uncertainty over risk parame-
ters lead to simple rules of thumb being used (Dorosh
2009). Estimating the size of physical stocks required to
mitigate physical availability risk is more straightforward,
yet h ighly political. This calculation might average per
capita consumption by month tim es the number of citizens
to be supported and the number of months that it is
perceived that it will not be possible to purchase new
stocks.
While it is possible to see that there are certain
advantages to using grain stocks as mitigation, there are
also disadvantages. First, stockpiling is costly. The base
cost of storage, including loss to pests or spoilage, is
estimated at around 2% for wheat in developed countries,
but the cost can be higher in developing countries. For
instance, in Bangladesh the cost of storage is estimated at
6% of the value of the grain. Much of this difference is due
to higher interest rates and high demand elasticity (Brennan
2003). In addit ion to these base costs, it is extremely
important to be able to track the replacement value of the
stocks. Each new delivery to the storage and release from it
(either to the market or a bread program) will have pricing
cost, either implicit or explicit. Failure to track these and to
make financial provision for either the shortfalls or
surpluses can lead to an inability to manage the real costs
Fig. 2 Global statistics for
milled rice, 19712010
(data from USDA Production,
Supply and Distribution
Online website http://www.fas.
usda.gov/psdonline)
Fig. 3 Global statistics for
maize, 19712010 (data from
USDA Production, Supply and
Distribution Online website http://
www.fas.usda.gov/psdonline)
Grain import dependency in the MENA region: risk management options S81
of the mitigation, which may well render it unsustainable in
the long term.
Second, public stocks can crowd out the private grain
trade sector. Notably, in almost every situation (except
where government is the sole importer of grains), public
stockpiles exist in parallel with the normal flow of private
sector grains. Given the need to rotate government stock-
piles (to minimize storage losses), there will be a need to
release stocks from the reserve and to replenish them. These
releases of government stocks decrease domestic prices,
which poses a risk to private storers and traders. The
distribution of grains by the government at prices below
those of imported private grains could cause the private
sector financial losses in the immediate term.
Slightly more concerning and potentially more damag-
ing, is that the private sector will be disincentivized to
continue to import due to the risk of future financial losses
induced by government market intervention. This burden
on the private sector is a hidden cost of government storage
that must be considered (Dorosh 2009). This added cost to
private storers may lead to a reduction in private sector
stock holding and therefore necessitate the government to
take a more active role in the import of grainsnot only to
cover emergency situations (Wright 2009). To mitigate this
risk, the government should either ensure that the release
prices for the grain are at prevailing import parity or that
they sell the grain for export from the country to avoid
negatively impacting the domestic market.
Third, stockpiling can place a large fiscal strain on
governments. The financial resources required to purchase
and maintain an expanded stock of grains can be prohib-
itive. For example, an imported stock of 100,000 t at an
indicative price or US$250/t delivered silo will require a
minimum of US$25 million in hard currency. One risk that
can flow from this commitment of resources is that the
government does not then have resources available to either
address other domestic requirements or to react to other
unforeseen situations. The implications of this financial
burden on MENA countries are wide ranging. For countries
that do not benefit from major hard currency denominated
exports, mainly petroleum, the foreign reserve pressures
that can ensue from having to commit such large amounts
of hard currency can place the bu dget and domestic
currency exchange rates under stress. Even for oil-rich
countries in MENA, drops in oil prices or major changes in
the international foreign currency markets can be problem-
atic, particularly when the price of cereals does not move in
lockstep with oil prices.
Further considerations of physical stocks
Stock management, inventory and position management
systems The management of physical grain stocks is a
regular activity in the major production markets. There
have been major advances in technology for moni toring
grain quality and ensuring stock turnover to minimize
losses. This technology and know how are commercially
available and any government implementing a strategy that
involves stockpiling should avail themselves of them. In
addition, for those commercial operators who are involved
with the sale and position management (i.e. monitoring
price implications for stock positions) of grain s, their stock
Fig. 4 Stocks to use ratios for
major grains, 19722009
(data from USDA Production,
Supply and Distribution
Online website http://www.fas.
usda.gov/psdonline)
Fig. 5 Constant 2000 annual
average prices for major grains,
19602008 (data from
World Bank Commodity
Price Data website http://www.
worldbank.org)
S82 M. Sadler, N. Magnan
management system is intrinsically linked to their sales
operations. Use of such systems is critical for financial
management of stockpiles and, by implication, the sustain-
ability of a stockpiling strategy. Governments should retain
the services of professionals active in this field.
Overseas stocks A mitigation strategy that should be
considered in conjunction with other approaches is the use
of overseas stocks. One risk inherent with domestic stock-
piling is that, should there be a need to release stocks to the
market (either for rotation or position management rea-
sons), the additional freight costs of re-exporting the grain
may be prohibitive and/or incur severe financial losses. The
use of temporary hub storage in facilities that are still
located on major grain transit routes is an effective method
to mitigate this risk. The government will still have the
stocks at its disposal should they be required, but can
release them to the international market with no additional
freight/handling losses should that not be the case. For
MENA countries, these overseas stocks could be held near
the point of production, or for greater security over physical
availability, stocks could be held at a shipping hub within
the region. This strategy would allow for more flexibility in
distribution throughout the region than a collection of
domestically held stock s scattered throughout the region.
Private sector stocks A strategy that mitigates the need for
government funding and management of stocks is one that
would involve the private sector in maintaining stocks in
domestic storage facilities. In this scenario, the government
would have first call (perhaps at a pre-determined price) or
option on these private sector held (and financed) stocks.
For this, the private sector would require a premium
(payment) for this service . However, this would only
represent a small percentage of the total value of the goods.
Should government decide that they do not need the stocks,
then they would not exercise their option to buy and the
private sector would be free to sell them on the world
market. If government were to decide that they did need the
stocks, then they would purchase the grains at the agreed
price. The advantage of this strategy is that it reduces the
initial financial burden on the government. It also enables
government to transfer the price risk to the priva te sector,
while reducing counterparty risk (the stocks being held
domestically). For the private sector, the existence of the
price agreement enables them to manage their price risk in
the financial markets and working within the government
strategy gives them increased predictability in terms of
government actions. Private firms are also able to transfer
the risk of adverse government actions (e.g. sequestration
of stocks or export bans despite non-exercise of the option)
to the international market through the purchase of political
risk insurance.
Commodity fina nce If a strategy of active involvement of
the private sector is not attracti ve, or is only to be used for a
portion of a stockholding strategy, the issue of the finan cial
demands on the budget created by purchasing and holding
large stocks (and the inherent additional macroeconomic
stresses) still remain. The use of trade commodity finance
tools can reduce this burden. The stockpile presents a
government with the opportunity to use stocks as collateral
to enable them to structure a financial solution. By pledging
the stocks to a commercial bank, the government will be
Fig. 6 Price levels for wheat
and maize, 20002009
(Data from World Bank
Commodity Price Data website
http://www.worldbank.org)
Fig. 7 Price levels for rice, 2000
2009 (Data from World Bank
Commodity Price Data website
http://www.worldbank.org)
Grain import dependency in the MENA region: risk management options S83
able to release cash from the original transaction. This
obviously comes at a cost and it should be noted that it will
not be possible to raise 100% of the cost of the original
purchase, as a bank will discount the value of the stock in
relation to the underlying price volatility in the grains
market. While this is normal practice in commodity trading,
it is appreci ated that in the MENA region it would need to
be adapted to Islamic financing models. We have provided
a short overview of the availability of this sort of financial
solution in the Sharia context in a separate section later in
the paper.
Early warning systems and market information
To help identify and mitigate both physical availability risk
and price risk, the League of Arab States has proposed a
regional food security monitoring system to help determine
the location and magnitude of assistance that would be
needed in the event of a global food shortage. Such a
strategy can be combined with monitoring of seasonal
production in the main grain exporting markets (whether or
not they actually import from these countries) and the
annual global stocks carry over ratios. Such an activity
requires little investment, but does require the creation of a
small, dedicated unit whose sole responsibility is to provide
the risk management decision makers with clear market and
production information. Much of this information is
available for free and even online.
2
Factors such as weather
and planting indications should be closely monitored. In the
case of MENA countries that produce a substantial amount
of their own grains, such as Syria and Morocco, monitoring
would need to be done domestically as well as in exporting
countries (World Bank 2009 ).
It would also be advisable to retain the services of a
qualified commodity broker specialized in grains who
could provide clear production information on a regular
basis. Clearly, maintaining a large stock of grain when there
is ample global production and large stocks available is not
a cost effective mitigation strategy (especially in the face of
inevitably falling international prices). Equally, early
warning of crop failures in major producing countries or
indications of potentially non-favorable weather patterns
(e.g. El Niño) would enable the government to start taking
measures to ensure that their stockpiles are of sufficient
volume should there be a problem with availability of
supply. This forewarning would also enable the government
to mask its trade, which effectively means that they would
be able to go into the market on a staged basis seeking to
minimize the price pull effect that they would cause if they
were to suddenly request very large volumes for delivery.
Bilateral and multilateral agreements to limit export
restrictions
It is held that export bans and other restrictions were one of
the main drivers that pushed grain prices higher in 2008
(Mitchell 2008; Dorosh 2009; Wright 2009). Restrictions
occurred in Argentina, India, Kazakhstan, Pakistan,
Ukraine, Russia, and Vietnam. These restrictions were
placed by the governments of the exporting countries, not
by their private sectors, which would have benefited by
selling at high prices on world mark ets. Such restrictions
result in counterparty risk (risk that a shipment will not be
made, or be made at a higher price, because of government
imposed restrictions), quantity risk (there is less grain on
world mark ets), and price risk (world price increases are
exacerbated by exporting countries restrictive policies to
keep domestic prices low). It is clearly an option for the
governments of importing countries to attempt to reach
agreements with the governments of the major exporting
countries to ensure that they would receive preferential
terms of trade should such an event occur in the future.
Taking this strategy a step further, countries or groups of
countries could apply political pressure to outright forbid
these policies in times of global food shortages (Wright
2009). Obviously, the potential for defaults on these
agreements would still exist and there remains the issue of
the private exporters in the countries still performing. This
is obviously not a stand-alone mitigation measure, but may
be of value in conjunction with other approaches.
Overseas production arrangements
The potential for direct investment in grain producing
countries as a means to secure supply has attracted a large
amount of interest, especially in the past 2 years. There has
been and continues to be international debate about the
potential beneficial and negative impacts of such a strategy,
consideration of which are not within the ambit of this
paper but dealt with extensively in other papers in the
current special issue of this journal.
From a risk management perspective, this mitigation tool
may potentially red uce the likelihood of export bans,
remove counterparty performance risk, and potentially
increase production and the reby reduce the physical
availability risk. However, it does not address underlying
production risk itself. A drought (the sort of event that
could lead to an export ban) will still have a major negative
Examples include United States Department of Agriculture Foreign
Agriculture Service, United Nations Food and Agriculture Organiza-
tion, Chicago Mercantile Exchange, InterContinental Exchange, and
Euronext Liffe.
S84 M. Sadler, N. Magnan
2
impact on the yield of crops covered by the arrangement.
Such a drought may also cause domestic food insecurity in
the production country and potentially complicate grain
exports, even to the investing country. The large amounts of
capital required for these types of investment will be
subject to both political and project risk. The price and
availability risk in relation to freight (both internal and sea
freight) will both remain, unless addressed by m ajor
investments in transport assets. Therefore, from a cost-
benefit perspective, such a strategy would require careful
examination and comparison with other alternatives, espe-
cially when one con siders the risks that ar e either
unaddressed or created by such a strategy.
Performance risk
Spot purchasing: advantages and risks
In the majority of cases, government grain procurement
throughout the MENA region is executed through the use
of international spot tenders. After a declaration of intent to
tender, bidders are invited to subm it their price quotes
against a standard set of procurement parameters (volume,
quality, acceptable origins, and delivery date). Declaration
periods differ, but generally tenders are announced from
between 1 to 2 weeks before closing date, with no pre-
tender announcement having been made.
Although there are clear transparency advantages to this
form of public procurement, from a risk management
perspective, it does leave a number of inher ent risks. First
among these is the fact that the tendering government is left
vulnerable to the market, having to take the market price on
the day of the tender, but we shall discuss this in more
detail in the section on price risk below.
Traditiona lly it has been perceived that the shorter the
period between contract conclu sion (and price fixation) and
the time of delivery, the lower the performance risk related
to the transaction because of the heightened certainty for
the supplier and reduced price exposure on a time basis.
However, in volatile price markets and with increasing
production uncertainty (or reduced stocks availability), the
exact opposite may now be true. When there are ample
global stocks, suppliers access to grains to supply under
this type of tender is high. When there are low stocks, the
ability of suppliers to source grains at short notice is vastly
reduced and their own counterparty supply risk is higher.
When a supplier has short lead times to procure and
position stocks for supply to buyers, they do not have time
to lock in a number of different supply options and
therefore their ability to perform in accordance with the
contract is reduced (and therefore the governments
counterparty performance risk increases).
In addition to the above, although not a technical issue,
the tender system speci fically runs counter to the develop-
ment of supplier loyal ty. For a supplier, the inherent value
of any one tender is the profit margin that they may make
on that trade. They do not take a long-term view, as they
may well not succeed at the next tender and their positive
performance under this one will largely not affect the
outcome of the next. Because of the nature o f the
transaction under a tender system, suppliers and buyers
have little incentive to establish trust, and therefore the
probability of default is higher.
An associated risk is the availability and pricing of
reliable freight. Depending on the terms of the supply
contract, this may be faced by e ither the supplier or the
importing government (depending on whether the grains
are to be supplied on a delivered to the buyer basis), but
ultimately will be suffered by the governmentthe nega-
tive effect of the risk being non-delivery of the grain.
Alternatives/complementary strategies and management
tools to spot tenders
If spot tenders remain as the preferred procurement method,
then there are a number of mitigation tools that can be used
to manage some counterparty performance risks. The
requirement for posting performance bonds prior to tender
is an effective means to ensure that only serious parties
actually tender. Of course, the value of the bond needs to be
of sufficient quantum to ensure that the loss of the bond
deters suppliers from defaulting on contract conclusion
after the tender. However, in order that this requirement
does not constitute a major impediment to many suppliers,
the bond should be in the form of a guarantee issued by the
suppliers bank (which would need to be rated first class),
releasable or claimable on very clear terms (i.e. not in the
form of cash deposit bonds). In the actual supply contract,
there should be a requirement for the provision of a
performance guaran tee issued by the sellersbankor
structured escrow account. The amount of the performance
guarantee or bond needs to be carefully considered in light
of prevailing market conditions. For example, in times of
high price volatility, the amount of the guarantee should be
sufficient to cover potential adverse price moves (normally
the main reason for supplier default). However it should be
noted that (if it is not already normal practice) the buyer, in
return for this protection, may need to provide collatera l in
the form of an intermediated payment vehicle (for example
an irrevocable letter of credit).
Another possibility is to use structured forward con-
tracts, which are still tendered. In order to increase the
ability of suppliers to meet the terms of delivery (espec ially
quality) and thereby mitigate the risk of default, the use of
tenders with longer delivery terms would be advant ageous.
Grain import dependency in the MENA region: risk management options S85
As opposed to issuing spot tenders with nearby delivery
terms (e.g. 6 weeks), placing tenders with longer delivery
terms would enable suppliers not only to identify more
supply options, but also enable them to better manage the
performance risk that they face on the supply side (they
could use alternate sources of supply if they faced defaults
themselves and/or place physical call options with other
suppliers to manag e the risk of default of their principal
supplier). Obviously, the use of such tenders will necessi-
tate governments using improved stock pipeline systems
and longer-term stock requirement forecasting.
An alternative to using spot tenders is a long-term supply
contract. If a government is able to identify and forecast a
core stock requirement for an extended period (e.g. for
deliveries over a 6 to 12 month period), then there would be
value in the conclusion of long-term supply contracts with
major trading houses. These contracts should still be
awarded on a competitive basis and would have the
advantage that the government can introduce a number of
performance and pre-qualification criteria that would enable
a government to choose its partners on more than simply
price indicators. Such contracts can include performance
based indicators that would dictate continuation of and/or
re-awarding of the supply contract. Standard indicators are
price performance against an agreed price refere nce point,
timeliness and quality of deliveries, etc. Another advantage
of such contracts is that the government can require that
some of the major terms are variable or fixed (for example
price, quantities, origins, qualities) and choose the dates for
execution of the options. This type of contract would enable
governments to gain a number of contract certainties, while
building in flexibility to enable them to adjust the supply
contract to take into account market realities. If these types
of contracts are of sufficient volum e and offer some form of
intermediated payment vehicle, then the supplier has a
major vested interest in ensuring their performance. From a
business point of view, there is a big difference between
defaulting on a 30,000 t supply contract and losing a
500,000 t long-term supply contract. For the supplier, the
existence of the contract and a payment vehicle enables
them to take suitable physical positions, manage price risks,
make long-term freight agreements at prefer ential rates and
ensure quality requirements, thereby reduci ng their own
performance risks (to the benefit of the buyer).
As we will see in the following section, performance risk
can be reduced through the use of commodity exchanges,
which manage this risk through margin requirements on
buyers and sellers of futures through the exchange.
However, this only applies to financial, not physical
products. There is, however, a means of seeking to achieve
the same coverage in the physicals marketthe use of an
intermediated contract. There are many different definitions
and types, but the best known is a physical OTC, or Over-
the-Counter transaction. OTCs are normally used for
trading of financial products between banks and their
clients, although they are also used in physical trading.
For a physical OTC, a bank will contract to deliver the
physical commodity to the buyer, effectively taking the
counterparty risk of the original seller. From the buyers
point of view, they may find that taking the banks risk is
more attractive than the sellers (the bank being financially
stronger and having larger reputational drivers to ensure
performance). For the bank, they will charge a fee for this
service and feel that they are either able to ensure the
sellers performance (because they have a long standing
financial relationship) or would be able to contract another
seller to perform on the terms of the contract, while
pursuing the original seller legally. This type of transaction
is often used by buyers when there is a degree of concern
about the counterparty risk that is potentially posed by a
seller.
There are a number of mostly unforeseeable risks that
may either directly or indirectly impact on the ability of the
supplier to perform the contract, collectively called force
majeure. These include such issues as natural disasters or
civil conflicts. These would normally be covered in the
force majeure clause in a suppl y contract. While a contract
may be frustrated by force majeure clauses, the buyer can
seek to insure certain types of specific force majeure events.
Obviously, the quantification of fores een losses will be
required and the higher the quantum, the more expensive it
will be to insure. Equally, while there will be financial
compensation in the case of a force majeure driven default,
the grains will still not have been delivered. However, the
value of the payment can be used to discount the cost of
concluding prompt grain deliveries (which are often more
expensive than the original transaction).
Price risk
Price risk with spot purchasing
A risk inherent with spot purchasing is that governments
are not able to manage the price that they will pay on an ex-
ante basis. They are at the mercy of the market whenever
they need to make a purchase. This applies not only to the
price of the grains, but also to the frei ght rates (which can
be heavily driven by demand for freight and the price of
fuel). For oil-rich countries, high fuel prices can act to
partially counteract high food prices (when there is
correlation in terms of pricing and timing), but for MENA
countries that do not produce petroleum, concurrently high
grain prices and oil prices pile on each other.
One impact of this price uncertainty and inability to
manage price risk is that budgetary planning for grain
S86 M. Sadler, N. Magnan
imports is difficult and often incorrect. When price
volatility is low, this risk is not of major concern. However,
when price volatility increases, the impact of this risk can
be dramatic and potentially disastrous. In a constrained
budgetary environment, this may result in the purchase of
lower levels of grain than required, with an impact on either
rations or levels of market support.
Alternatives/complementary strategies and management
tools
It is possible to transfer price risk to the international
markets through the use of futures and options. Effectively,
this is the purchase of price insurance and the use of such a
strategy may offer a government price protection against
increases in the price of grains. The contracts on the futures
exchanges are financial products or assets and only a very
small percentage are actually settled by the delivery of
physical stocks against the futures contracts (e.g. circa
0.5% of wheat contracts on CBOT, the Chicago Board of
Trade).
Countries large and small, rich and poor, exporters and
importers, can potentially use these instruments to stabilize
grain prices by using global exchanges, establishing local
exchanges, or a combination of both (Dana et al. 2006;
Larson 1993; Sheales and Tomek 1987). In a region as
diverse as MENA, financial instruments are risk manage-
ment tools that have the potential to be employed by all
countries in the region as part of a broader risk-
management strategy (World Bank 2009). Estimates pro-
duced by the World Bank (2009) indicate that Egypt, a
major wheat importer in the region, could have saved
between 5 and 24% of the approximately $2.7 billion spent
on wheat imports from November 2007 to October 2008
through the use of financial hedging products.
There are, however, limitations to this strategy. Prima
facie, purchasing futures and options will not address the
availability or physical delivery issue, only financial
compensation and therefore it should only be considered
as potentially part of an overall strategy which also has a
physical delivery component. In other words, this strategy
potentially protects an importer from price risk, but not
from physical availability risk unless special considerations
are also made concerning physical delivery.
The financial strategy may not completely cover the
government from all adverse price moves. This is known as
basis risk. This is a simple concept, but a complicated
subject. Firstly, price moves on the futures exchange may
not mirror the price moves in the physical market from
which the government is actually buying. Secondly, it is
possible that the price moves in the futures market do not
even match the changes in the physical price in the delivery
markets in which the futures are traded. This phenomenon
is known as divergenc e and is normally a temporary
situation, although the CBOT wheat contract (Hard Red
WheatHRW) has been suffering from varying degrees of
divergence for over a year. Thirdly, the cost of freight from
different origins may move dramatically, which the strategy
does not cover. Given that the cost of freight is a relatively
high proportion of the value of delivered grains, this can
lead to large losses.
The costs of maintaining a futures position can be much
more expensive than originally perceived. A buyer of
futures is required to post an initial margin and also a
maintenance margin. The value of these margins depends
on the commodity, on the exchange and on the price
volatility of the commodity. Presently, total margins are
circa 10% for most commodities. Holders of futures
positions are then expected to replenish the maintenance
margin in accordance with the movements in the futures
price. In highly volatile markets where there are large price
swings, this can require a large amount of cash to be
deposited with the exchange at very short notice. As an
example, in the cotton futures price crash of March 2008,
one trading house was required to post a US$1 billion
margin call within 4 h. In the grain markets, this sort of
magnitude should not occur, as the pricing of the margins is
different. Howeve r, in simple terms, if the futures markets
for wheat drop by US$10/t and the government has a two
million tonnes futures position, there will be a requirement
for a margin call of US$20 million.
Given the potential cash requirements for margin calls
on futures, it mig ht be more attractive to purchase call
options. These are simply the opportunity (option) to buy a
futures contract at a predetermined (fixed) price at a given
time in the future. The seller of the option will charge the
buyer a fee called a prem ium. The value of the premium is
largely determined by the price volatility in the market, the
length of time in the future that the option is available for
and prevailing market view of the likely value of the future
at that future time. The premium has to be paid in full at the
time of the purchase of the option. This is likely to be more
expensive than the margin calls that are required for futures
and it is also non-refundable. If the market price in the future
is higher than the price at which the option is bought, then the
buyer exercises the call, receives the future, sells the future at
the new higher price and the market difference is their
financial margin (minus the original cost of the option).
However, as with futures, options have limitations. First,
the option, if exercised, provides a buyer with a futures
contract, which still has the same problems in terms of lack
of physical delivery and basis risks. Second, if the actual
futures price is lower than the option at the time of expiry,
then the buyer will not exerci se the call and it will expire.
The buyer thus loses the original cost of the option, but
theoretically now buys the physical commodity at the lower
Grain import dependency in the MENA region: risk management options S87
market price, thereby making a saving, but this can be
eroded by the basis risk. In highly volatile markets options
premiums can be a substantial percentage of the value of
the future and therefore the lost premium can be high.
Forward contracts, discussed earlier in the section on
alternatives to spot tenders, can also be used to mitigate
price risk. A traditional strategy for a buyer to mitigate
future price risk is to conclude forward delivery contracts at
a fixed price (commonly referred to as physical price risk
management). This effectively now passes or transfers the
underlying price risk to the seller, who now has the price
risk exposure. One problem with this strategy is that
transferring this risk may result in a heightened counter-
party performance risk. If the seller fails to manage the
price risk and the market moves against them in the
intervening period, they will be faced with a choice of
making a financial loss on the delivery, or defaulting on the
contr act. The larger the financial loss, the higher the
likelihood of default. This is the advantage of a financial
strategythe exchange is the counterparty, but they cover
their exposure through requiring margin calls and therefore
mitigate the financial performance risk for the buyer. We have
referred to the use of guarantees, OTCs and engendering
supplier loyalty, but another means to reduce counterparty
risk, while achieving a degree of price risk cover, is to share
the price risk with the supplier. Contracts can be structured on
a number of different price terms, e.g. buyers declared option,
determined share between buyer and seller of price moves
outside of certain price bands, use of initial price point with
agreed buyer and seller share of price movements, percent of
contract volume with fixed price and percent unfixed, etc. A
critical decision for a government entering into such types of
price clauses revolves around the price that they are willing to
pay and to what extent they are prepared to retain some of the
price risk themselves. In so doing, they do not put all of the
pressure on the seller and thereby reduce the counterparty
performance risk.
As a final note on price risk, it should be mentioned that
price volatility offers governments not only negative price
exposure, but also positive. There will be periods when
stocks (purchased when prices were below current market
prices) will be of relatively high value. At these times,
governments can sell stock that is in excess of strategic
requirements, bringing a financial windfall. The depositing
of these funds into a price stabilization account would
enable government to have funds at its disposal when faced
with an increase in purchase prices or having to subsidize
the release of grains into the domestic market at prices
below their replacement cost. Obviously, this strategy
neither seeks to mitigate nor transfer the price risk, but
does seek to enable the government to be able to cope with
the financial impact of unmanaged price risk. This would
be the least attractive strategy, as it does not really address
the risk. It also requires government to have a very accurate
understanding of its stock position (both physically and
financially) and for it to clearly set a price point at which it
will seek to intervene with subsidized releases, etc.
The Sharia context
This paper has been based on risk management strategies
and tools that may not be, prima facie, Sharia compliant.
For example, there are potential issues in relation to bayu
al-gharar (loosely translated as trading in risk) and the use
of financial price risk management tools such as futures and
options. The use o f traditional types of collateralized
finance products would equally raise issues in relation to
the charging of interest (riba) on such facilities. A
comprehensive discussion of Sharia compliant tools that
may be available would constitute a paper of its own.
However, it should be noted that there are such products
and practical examples of thei r use available. For example,
the Global Multi Commodities Receipt (GMCR) and
International Commodity Receipt (ICR) products offered
by the Dubai Multi Commodities Centre (DMCC) provide
a clear example of the potential to use collateralized
finance. The developments on the same trading platform
and others in the region that will now link with other
commodity exchanges have opened opportunities in finan-
cial risk management. In addition, Maybank Islamic Berhad
(MIB) has recently (August, 2009) launched a special
Sharia compliant trade finance solution called the Collateral
Management Arrangement-i (CMA-i) which involves a tri-
partite contract between the bank, the customer and a
collateral manager. It would therefore appear that the tools
and strategies that have been outlined in this paper are
relevant for governments who operate in a Sharia context,
but that their specific format should be identified within the
Islamic banking community.
Managing the risk management
As mentioned in various parts of the paper, risk manage-
ment strategies need to be managed themselves. They need
to correlate with market and production realities at the time
of development. They need (in order to be sustainable) to
be sufficiently financed and monitored. They also need to
be reviewed during implem entation to take into account any
relevant developments since they were initiated (political,
production-related, financial constraints, price, etc.). More-
over, any successful strategy will take into account and
consist of a number of tools. It is rare that any one tool can
address all risks and invariably (as we have seen), they
often result in other risks becoming prevalent and requiring
supporting tools to manage them.
S88 M. Sadler, N. Magnan
References
Brennan, D. (2003). Price dynamics in the Bangladesh rice market:
implications for public intervention. Agricultural Economics, 29,
1525.
Dana, J., Gilbert, C. L., & Shim, E. (2006). Hedging grain price risk in
the SADC: case studies of Malawi and Zambia. Food Policy, 31,
357371.
DEFRA (Department for Environment, Food and Rural Affairs).
(2008). Ensuring the UKs food security in a changing world: a
DEFRA discussion paper. London: DEFRA.
Dorosh, P. A. (2009). Price stabilization, international trade and
national cereal stocks: world price shocks and policy response in
South Asia. Food Security, 1, 137149.
Guled, A. (2009). Somalis hijack grain ship, take Spaniards hostage.
Reuters. http://www.reuters.com/article/idUSTRE5A43J220091105.
Accessed 14 August 2010.
Karam, S. (2008). Saudi eyes food investments overseas, stockpiles.
Arabianbusiness.com. http://www.arabianbusiness.com/518499-
saudi-eyes-food-investments-overseas-stockpiles. Accessed 14
August 2010.
Kawach, N. (2010). Arab states food gap soars above $155 billion in
nine years. Emirates Business. http://farmlandgrab.org/10390.
Accessed 14 August 2010.
Larson, D. F. (1993). Policies for coping with price uncertainty for
Mexican wheat. World Bank Policy Resear ch Working Paper, 1120.
Mitchell, D. (2008). A note on rising food prices. World Bank Policy
Research Working Paper, 4682.
Philp, C. (2008). Hong Kong grain ship seized as Somali pirates hold
world to ransom. Times online. http://www.timesonline.co.uk/tol/
news/world/africa/article5183710.ece. Accessed 14 August 2010.
Reuters (2003). Indian traders fear Iraq war will hit wheat deals.
Rediff.com. http://www.rediff.com/money/2003/mar/20war5.htm.
Accessed 14 August 2010.
Sheales, T. C., & Tomek, W. G. (1987). Hedging Australian wheat
exports using futures markets. Journal of Futures Markets, 7(5),
519533.
Simhan, T. E. Raja (2003). Fallout on shipping routes, costs. The
Hindu Business Line. http://www.blonnet.com/2003/03/24/
stories/2003032400250600.htm. Accessed 14 August 2010.
World Bank. (2009). Improving food security in Arab countries. Joint
report with FAO and IFAD. Washington: World Bank.
Wright, B. (2009). International grain reserves and other instruments
to address volatility in grain markets. World Bank Policy
Research Working Paper, 5028.
Marc Sadler is leader of the
Agricultural Risk Management
Team (ARMT) of the Agricul-
ture and Rural Development
Department of the World Bank.
He is an expert on commodity
markets, logistics, trading and
risk management. Before joining
ARMT, Marc spent six years
working as a consultant for the
World Bank and FAO, special-
izing in agribusiness and agri-
cultural policy in Central Asia,
the Caucasus and Turkey. Prior
to working in development,
Marc spent nine years as an agricultural commodities trader (both
import and export), based out of the former Soviet Union. He has a
Masters in Jurisprudence from Trinity College, Oxford University. In
his role as Team Leader of ARMT, Marc advises both governments
and agricultural supply chain stakeholders about risk assessment and
management in a wide range of commodity sectors.
Nicholas Magnan joined IFPRI
in 2010 as part of the CGIAR
Challenge Program on Climate
Change, Agriculture and Food
Security (CCAFS ). His previous
and current research spans the
areas of technology adoption, cli-
mate change adaptation, sustain-
able agriculture and agroforestry ,
drought and pest risk, imperfect
markets and property rights, and
food security. He received his
Ph.D. in Agricultural and Re-
source Economics from the Uni-
versity of California, Davis in
2010. While completing his degree he concurrently worked on food security
issues in the Middle East and North Africa region for the W orld Bank.
Grain import dependency in the MENA region: risk management options S89
... As shown in Figure 4, the conflict can affect considerably other countries, not just European ones. In many developing countries, such as in Pacific Islands (Barnett, 2011), Asia (Kim et al., 2020) or Middle Easters and African countries (Sadler & Magnan, 2011), preserving food security remains a problem because they are not self-sufficient and need to import several types of staple food. However, the cultivation and import of grains are significantly affected by weather and climate conditions (Barnett, 2011;Sadler & Magnan, 2011), pest infestations (Sadler & Magnan, 2011), and restrictions on exports and imports, for example triggered by COVID-19 (Kim et al., 2020;Mohamed et al., 2021). ...
... In many developing countries, such as in Pacific Islands (Barnett, 2011), Asia (Kim et al., 2020) or Middle Easters and African countries (Sadler & Magnan, 2011), preserving food security remains a problem because they are not self-sufficient and need to import several types of staple food. However, the cultivation and import of grains are significantly affected by weather and climate conditions (Barnett, 2011;Sadler & Magnan, 2011), pest infestations (Sadler & Magnan, 2011), and restrictions on exports and imports, for example triggered by COVID-19 (Kim et al., 2020;Mohamed et al., 2021). Our findings also suggest that the Russia-Ukraine war can also result in food security problems in certain countries because Ukraine is one of the largest grain exporters on the global market (Markus, 2022;Vasylkovska et al., 2021), and several countries have high exposure to Ukrainian imports. ...
... In many developing countries, such as in Pacific Islands (Barnett, 2011), Asia (Kim et al., 2020) or Middle Easters and African countries (Sadler & Magnan, 2011), preserving food security remains a problem because they are not self-sufficient and need to import several types of staple food. However, the cultivation and import of grains are significantly affected by weather and climate conditions (Barnett, 2011;Sadler & Magnan, 2011), pest infestations (Sadler & Magnan, 2011), and restrictions on exports and imports, for example triggered by COVID-19 (Kim et al., 2020;Mohamed et al., 2021). Our findings also suggest that the Russia-Ukraine war can also result in food security problems in certain countries because Ukraine is one of the largest grain exporters on the global market (Markus, 2022;Vasylkovska et al., 2021), and several countries have high exposure to Ukrainian imports. ...
Article
This study provides a product network-based analysis of the impact of the Russia–Ukraine war on the economy of third countries. While recent studies based on input–output data already revealed several economic consequences of the conflict, our approach allows for more detail regarding geographical coverage and heterogeneity of the affected products. The method also provides a decomposition of exposures on a country-by-country basis. After identifying the most important products exported by Ukraine and Russia, we apply a comprehensive indicator of exposure and measure the dependence of third countries on products imported from Ukraine or Russia. Results reinforce that Ukraine dominates in iron and agricultural products, while Russia is important through exporting energy sources, raw materials and iron products. Post-Soviet and European countries have high exposure to Russian imports, confirming the energy dependence of these countries. Middle Eastern and African countries heavily depend on Ukraine, especially for grain imports, possibly causing food security problems. Using data on trade restructuring over the past year, we also analyse the relationship between trade exposure and the extent to which countries were willing to support Ukraine. Results show that it is not exposure itself, but the decrease of exposure over time which correlates with military support.
... The region is, unfortunately, one of world's most food deficient and water insecure, where imports cover up to 90% of the domestic food requirements (EIU, 2018(EIU, , 2021Hamza, 2019). 1 In these countries, domestic food production is not a viable option as a result of the harsh environment and lack of resources for agriculture (e.g., water and arable land; Pirani & Arafat, 2016;Shah, 2010). Subsequently, food security in the GCC heavily relies and will continue to rely on import of agri-food products (Pirani & Arafat, 2016;Sadler & Magnan, 2011). Although the GCC countries are food secure through imports owing to their wealth and affluence (Hassen & El Bilali, 2019), they lack food sovereignty and food self-sufficiency since food security "does not equal to food self-sufficiency" (Breisinger et al., 2010;EIU, 2018). ...
... A few studies assessed external food supply risks in the literature, notably Hubbard and Hubbard (Hubbard & Hubbard, 2013) for the United Kingdom. A study by Sadler and Magnan (2011) identified and analyzed risk management options associated with grain import dependency in the MENA region, without measuring and assessing the actual risk levels associated with the import dependency. ...
... Since the war directly and indirectly affects the global food market, the UAE needs to adopt different risk management tools for mitigating short-and long-term external supply risks. One of these risk management options is cereal stockpiling (Sadler & Magnan, 2011), which enables to mitigate both physical availability and price risks. As shown in Figure 1, the import dependency rates of the UAE are greater than 100% (where import dependency refers to the ratio between import and domestic consumption). ...
Article
Full-text available
The coronavirus pandemic and the Russian invasion of Ukraine have exposed the vulnerability of the food systems of import-dependent countries to supply chain disruptions. This study measured the short-term external cereal supply risks for the United Arab Emirates (UAE) by applying the Herfindahl–Hirschman Concentration Index (HHI) and the Shannon–Wiener Diversity Index (SWI) during 2012–2020. We measured the security of UAE’s external cereal supplies by taking the degree of UAE’s cereal import dependency, the level of political- and business-related risks of UAE’s cereal supplying countries, and the distance between UAE and its supplying countries into account. The results of the index values generally imply that UAE’s cereal external supply risk has been low during the sample period. However, the external wheat supply risk has increased since 2017. This was mainly attributable to UAE’s increasing dependence on less secured countries, i.e. countries with higher levels of risk assessment values such as Russia. UAE has heavily been dependent on one or two, mostly price competitive, sources for its cereal imports, which also raises the external cereal supply risk. The UAE’s increasing dependence on Russia as the main source of cereals and the increasing consolidation of sources pose a serious threat to sustaining food security.
... China's high reliance on the international soybean market could lead to price risk exposure. Dramatic price fluctuations in international agricultural markets are directly transmitted to countries with high import reliance, impacting the agricultural markets of importing countries [2,3]. China is the world's largest commodity trader but it does not have a discursive power in prices and is a passive recipient of prices [4]. ...
Article
Full-text available
China is the largest soybean importer and consumer in the world. Soybean oil is the most-consumed vegetable oil in China, while soybean meal is the most important protein feed raw material in China, which affects the costs of animal husbandry. Volatility in the international soybean market would generate risk spillovers to China’s soybean industrial chain. This paper analyzed the channel of risk spillover from the international soybean market to China’s soybean industry chain and the asymmetry of the risk spillover. The degree of risk spillover from the international soybean market to the Chinese soybean industry chain was measured by the Copula–CoVaR model. The moderating role of inventory and demand in asymmetric risk spillovers was analyzed by quantile regression. We draw the following conclusions: First, the international soybean market impacts China’s soybean industry chain through soybeans rather than soybean meal and oil. The price fluctuation of China soybean market is obviously lower than that of the international soybean market. Second, there are apparent asymmetric risk spillovers from the international soybean market to China’s soybean industry chain, especially the soybean meal market. Third, increasing the Chinese soybean inventory and growing demand could effectively prevent the downside risk spillover from international markets to China’s soybean market. This also explains the asymmetry of risk spillovers. The research enriches the research perspective on food security, and the analysis of risk spillover mechanisms provides a scientific basis for relevant companies to develop risk-management strategies.
... If geopolitical risks have reduced China's agricultural exports to trading partner countries, are there factors that could diminish this negative impact? A larger area of agricultural land in trading partner countries indicates a greater consumption demand for agricultural products [33][34][35]. Countries with a high demand for agricultural products are likely to attract more Chinese economic and trade personnel who are willing to trade in agricultural exports with those countries. Chinese economic and trade personnel are diligent and courageous and have a pioneering entrepreneurial spirit. ...
Article
Full-text available
Geopolitical conflicts and power games among major nations present substantial challenges to cross-border trade and global economic development; however, the existing literature has paid limited attention to the role of geopolitical risk in agricultural exports, especially the underlying macroimpact mechanisms from the perspective of agricultural land. This paper utilizes China’s agricultural export data spanning 1995–2020 to empirically investigate the influence of geopolitical risk on China’s agricultural exports and unveil its specific internal mechanisms. The findings reveal that China’s agricultural exports are negatively affected when its trading partners are exposed to geopolitical risk. Notably, trading partners’ agricultural land is instrumental in mitigating the adverse effects of geopolitical risk on China’s agricultural exports. Moreover, a heterogeneity analysis shows that the impact of geopolitical risk on China’s agricultural exports is more significant in non-Belt and Road countries than in Belt and Road countries. Given China’s status as one of the world’s major agricultural exporting nations, the results of this study hold significant importance in proactively addressing and alleviating the impact of geopolitical risks on both Chinese and global agricultural exports.
... As a result, MENA is highly dependent on imports (13,14), especially of grains, where imports account for most of the supply (15). The region is thus highly vulnerable to trade disruptions that limit the global supply of grain and/or increase the price. ...
Article
Full-text available
The Middle East and North Africa (MENA) region has seen remarkable population growth over the last century, outpacing other global regions and resulting in an over-reliance on food imports. In consequence, it has become heavily dependent on grain imports, making it vulnerable to trade disruptions (e.g., due to the Russia-Ukraine War). Here, we quantify the importance of imported grains for dietary protein and energy, and determine the level of import reductions at which countries are threatened with severe hunger. Utilizing statistics provided by the Food and Agriculture Organization (FAO), we employed a stepwise calculation process to quantify the allocation of both locally produced and imported grains between the food and feed sectors. These calculations also enabled us to establish a connection between feed demand and production levels. Our analysis reveals that, across the MENA region, 40% of total dietary energy (1,261 kcal/capita/day) and 63% of protein (55 g/capita/day) is derived from imported grains, and could thus be jeopardized by trade disruptions. This includes 164 kcal/capita/day of energy and 11 g/capita/day of protein imported from Russia and Ukraine. If imports from these countries ceased completely, the region would thus face a severe challenge to adequately feed its population. This study emphasizes the need for proactive measures to mitigate risks and ensure a stable food and feed supply in the MENA region.
... On the other hand, by increasing their agricultural import dependency, MENA countries exacerbate their exposure to price shocks in global food markets, be these shocks provoked by a global economic and financial crisis (like in 2008-2011), or a disruption of supply chains (as observed during the COVID 19 pandemics) or a political or geopolitical crisis affecting any part of the world (as the current conflict between Russia and Ukraine perfectly shows). In this sense, increasing agricultural import dependency would rather weaken MENA countries' food security (Sadler and Magnan 2011;Nigatu and Motamed 2015;Jobbins and Henley 2015;Nin Pratt et al. 2018;OECD/ FAO 2018;Zolfaghari and Jariani 2021). ...
Article
Full-text available
Unlabelled: The dependence on imports of the Middle East and North Africa (MENA) region for its food needs has increased steadily since the early 1960s, from 10% to about 40%. This import dependence could continue to rise in coming decades due to the projected MENA population growth and the expected negative impacts of climate change on the region's natural resources and agricultural performances. To what extent the food import dependency of the MENA region will continue to increase up to 2050 and how the region could mitigate its rising reliance on food imports is both a key question for the region itself and a crucial geopolitical issue for the world as a whole. In this paper, we use a biomass balance model to assess the level of the food import dependency of the MENA region in 2050 resulting from six scenarios. We show that under current trends and severe impacts of climate change the food import dependency of the MENA would continue to rise and reach 50% in 2050. Maghreb would be particularly affected becoming dependent on imports for almost 70% of its food needs. Adopting a Mediterranean diet, reaching faster productivity growth in agriculture or reducing waste and loss along the food chain would contribute to decelerate the rise of the MENA's food import dependency. However, only the combination of these three options could significantly offset the increased import dependency in the most affected sub-regions: Maghreb, the Middle and the Near East. In all scenarios, Turkey strengthens its position as a net exporter of agricultural products. Supplementary information: The online version contains supplementary material available at 10.1007/s10113-023-02045-y.
... 3. Price risk. The risk that the price of imported grains will increase above levels that the importing country considers to be acceptable and/or may be able to afford (Sadler and Magnan 2011). ...
... Faster growth in consumption relative to agricultural production is likely to increase the need for imports in developing countries with already high levels of import-dependency (Sadler and Magnan 2011, Luan et al 2013, Porkka et al 2013, Puma et al 2015. High levels of import dependency prompt the possibility that production shocks in exporting regions may destabilize food prices in importing countries (d 'Amour et al 2016, Challinor et al 2017, d'Amour and Anderson 2020. ...
Article
Full-text available
International trade helps to smooth food price swings caused from seasonal imbalances between domestic supply and demand. Trade also increases the possibility of importing price volatility from abroad. This concern looms large in the face of increased crop yield variability associated with climate change. We assess the extent to which maize yield shocks in exporting countries exacerbate the intra-seasonal variability of maize prices in a cross section of 75 markets in Africa, Asia, and Latin American countries during 2000-2018. We find that extreme below-trend reductions in maize yields in exporting countries are associated with increased intra-annual maize price variability in the focus countries. In contrast, above-trend maize yields in exporting countries are associated with reduced variability.
Article
Full-text available
Key Outcomes: - Food security in the Arab world is a seasonal event that triggers debate and discourse during transitory shocks caused by external factors (e.g., war in Ukraine), and causes disruption in the price and food supply chain. - The nature of the shift and diversity in consumption patterns in the Arab world is caused either by a change in the lifestyle due to the change in living standards, or by the significant food assistance over decades, in which traditional approaches to the food security do not seem to be working and require a shift towards a more dynamic and mixed approach. - Innovative solutions and revisiting the entirety of the food security approach require a mixed approach to food security to make the most out of commodity markets to support and smooth consumption and avoid transitory food deficits for countries during price hikes and to stabilize the prices accompanied with building grain storage strategy as part of the precautionary strategies for unusual times.
Article
Full-text available
In the long view, recent grain price volatility is not anomalous. Wheat, rice, and maize are highly substitutable in the global market for calories, and when aggregate stocks decline to minimal feasible levels, prices become highly sensitive to small shocks, consistent with storage models. In this decade, stocks have declined due to high income growth and biofuels mandates. Recently, shocks including the Australian drought and biofuels demand boosts due to the oil price spike were exacerbated by a sequence of trade restrictions by key exporters beginning in the thin global rice market in the fall of 2007, which turned market anxiety into panic. To protect vulnerable consumers, countries intervened in storage markets and, if they were exporters, to limit trade access. Recognizing these realities, vulnerable countries are building strategic reserves. The associated expense and negative incentive effects can be controlled if reserves have quantitative targets related to the consumption needs of the most vulnerable, with distribution to the latter only in severe emergencies. More-ambitious plans manipulate world prices via buffer stocks or naked short speculation to keep prices consistent with fundamentals. Past interventions of either kind have been expensive, ineffective, and generally short-lived. Further, there is no significant evidence that prices do not reflect fundamentals, including export market access.
Article
Full-text available
The three goals of recent agricultural pricing policies in Mexico for maize have been to raise farm income and crop profitability by boosting domestic prices through trade restrictions, to provide some price certainty at planting time, and to reduce year-to-year variations in maize prices. The government pursued all goals jointly, using import quotas and a state marketing agency to implement a mandated pan-Mexico price for maize. Farmers benefited primarily from the price support, and very little from the other goals. Maize policies were unsustainable and enormously expensive, so the government has decided to reform the sector. [The reforms will be institutionalized in the North American Free Trade Agreement (NAFTA).]The author shows that the same price enhancement and stabilization could have been achieved at less cost by using variable border tariffs within a price-band mechanism. Moving immediately to such a policy can lower costs yet produce the same effects as current policy. The multiple effects of policy on price can be measured separately, and a variable tariff/price-band scheme can be used to target both price levels and price variability. International markets in commodity futures and options (through millers and banks) could offer farmers an inexpensive way to provide in-season price stability. But the farm sector can take advantage of these instruments only if the domestic distribution system is reformed - by liberalizing interstate trade, harmonizing standards and measures (including sanitation standards), and privatizing storage facilities. No market mechanisms exist to ease the underlying year-to-year price variability for wheat and maize. But the benefits of government intervention to smooth prices are small and, in themselves, do not justify using a price-band mechanism. Still, a price-band system might be considered as a transitional tool. NAFTA calls for slow liberalization of the maize market, but the Mexican government could liberalize its markets more aggressively. Levels of transfer under current policies remain high and the costs of adjustment may depend on the path of international prices during the transition. The advantage of the price-band mechanism is that relief is granted (transparently and automatically) to consumers when prices are abnormally high and to producers when they are abnormally low. This would help forestall political pressures for ad hoc measures.
Article
The sharp rise in international cereal prices in 2007 and 2008 had a profound impact on food security at national levels for net importing countries, sharply raising the cost of imports. Domestic trade policies and government market interventions in a set of South Asian countries have been critical, however, in determining the effects of the international price shocks on domestic markets. While these price shocks are a sober reminder that reliance on international markets will not guarantee price stability, it is important that governments do not over-react to recent events and adopt policies that ultimately result in large costs in terms of slower economic growth and less poverty reduction. Instead, national policies should involve some combination of (1) national stocks to prevent very large price increases, (2) reliance on international trade to limit the need for government interventions in most years, (3) promotion of domestic production through investments in irrigation, research and extension that is economically efficient when evaluated at medium-term border prices, and (4) targeted (ideally cash-based) safety net programs to address the food security needs of poor households. The appropriate design and implementation of these broad food policy guidelines will necessarily vary according to individual country conditions; the need to avoid government interventions that ultimately have very high costs is universal.
Article
The rapid rise in food prices has been a burden on the poor in developing countries, who spend roughly half of their household incomes on food. This paper examines the factors behind the rapid increase in internationally traded food prices since 2002 and estimates the contribution of various factors such as the increased production of biofuels from food grains and oilseeds, the weak dollar, and the increase in food production costs due to higher energy prices. It concludes that the most important factor was the large increase in biofuels production in the U.S. and the EU. Without these increases, global wheat and maize stocks would not have declined appreciably, oilseed prices would not have tripled, and price increases due to other factors, such as droughts, would have been more moderate. Recent export bans and speculative activities would probably not have occurred because they were largely responses to rising prices. While it is difficult to compare the results of this study with those of other studies due to differences in methodologies, time periods and prices considered, many other studies have also recognized biofuels production as a major driver of food prices. The contribution of biofuels to the rise in food prices raises an important policy issue, since much of the increase was due to EU and U.S. government policies that provided incentives to biofuels production, and biofuels policies which subsidize production need to be reconsidered in light of their impact on food prices.
Article
We use simulation methods to examine the results of hedging maize food security imports into Malawi and Zambia on the South African Exchange (SAFEX). Results show that hedging using either futures or options can spread import costs over time, thereby reducing variability, and also possibly generating lower average costs. These benefits are increased if hedging only takes place when local prices are at less than import parity and also if the hedge is levered. However, problems will remain so long as intra-regional transport costs remain high.
Article
In this paper, the price dynamics of a rice market are examined using dynamic programming techniques. The model is parameterised to the case of Bangladesh and thus represents the situation of a very poor country which has characteristically high price elasticity (due to income effects) and high storage and interest costs. The incentives for private sector storage and its impact on price stability are examined. Various options for public intervention in the storage sector are also explored, including price ceiling schemes and subsidisation of storage costs. Results show that interventions that remove private disincentives (such as storage subsidies) are much cheaper than direct intervention by government, but the impact on the probability distribution of prices is quite different. The effect of trade on the probability distribution of prices is also examined.
Indian traders fear Iraq war will hit wheat deals
  • Reuters
Reuters (2003). Indian traders fear Iraq war will hit wheat deals. Rediff.com. http://www.rediff.com/money/2003/mar/20war5.htm. Accessed 14 August 2010.
Fallout on shipping routes, costs. The Hindu Business Line Improving food security in Arab countries. Joint report with FAO and IFAD
  • T E Simhan
Simhan, T. E. Raja (2003). Fallout on shipping routes, costs. The Hindu Business Line. http://www.blonnet.com/2003/03/24/ stories/2003032400250600.htm. Accessed 14 August 2010. World Bank. (2009). Improving food security in Arab countries. Joint report with FAO and IFAD. Washington: World Bank.
Indian traders fear Iraq war will hit wheat deals. Rediff.com
Reuters (2003). Indian traders fear Iraq war will hit wheat deals. Rediff.com. http://www.rediff.com/money/2003/mar/20war5.htm. Accessed 14 August 2010.