Supporting farmers and consumers under food price uncertainty: the role of price support policies
This research work follows the recent trend in most African countries in introducing (or strengthening) price support programs for selected cereals. Under this background, this study examines the impact of a potential implementation of a minimum support price MSP) policy on cereals in Ethiopia. To that end, positive and negative productivity shocks were considered under alternative producer and consumer pricing policies backed up by public storage services. The quantitative analysis show that the effectiveness of price policies and government intervention in the commodity market depends on the nature of the productivity changes. Producer price floors are effective only when there are productivity gains which would ultimately decrease producer prices, suggesting the productivity enhancing role of this policy option. Also, producer price support works against consumers as prices of target commodities could not fall anymore beyond the level dictated by the support program. On the other hand, price ceiling on commodities is effective only when there are productivity losses since consumer prices tend to increase. Consumer price support policies help urban households since they slightly dampen increases in consumer prices and declines in incomes to these households. However, rural households lose more welfare mainly due to further losses in incomes as the control in consumer prices limit the increase in producer prices for cereals. The price policy of keeping producers prices of cereals within a 5% floor does not effectively affect the economy since producer prices tend to increase significantly if productivity is falling by the simulated levels due to exogenous shocks, such as extreme weather conditions.