Working Paper: International Risk Sharing for Food Staples

No: WP-2020-002

Author: Digvijay S. Negi and Bharat Ramaswami

Title: International Risk Sharing for Food Staples

Abstract: It is claimed that the world food supplies are more stable than the domestic supplies, and therefore free trade should achieve a higher degree of stability in prices and consumption than autarkic policies. The risk sharing implicit in such an argument, has, however never been formally examined. In this paper, we study the patterns of risk sharing in the global markets of rice, wheat and maize, and quantify the contribution of trade and stocks towards risk sharing. We adopt the predictions of the efficient risk sharing hypothesis as a benchmark and generalize the canonical single composite good model. While the data rejects the efficient risk sharing hypothesis, the wheat market is closest to the efficient risk sharing allocation. Trade is more important than storage in smoothing domestic production shocks. Further, we find that the degree of risk sharing is positively associated with income levels of the countries.

Keywords: food markets, risk sharing, international trade, supply shocks

JEL Code: F14, Q17, D52