Indian Express Editorial Summary

Editorial Topic : Food for a Rainy Day: Buffer Stocks to Tame Food Price Volatility

Problem: High volatility in food prices hurts both consumers and producers.

Solution: Create buffer stocks of essential food items, similar to RBI’s forex reserves.

How RBI Manages Currency Volatility:

Maintains foreign exchange reserves (over $650 billion) to ensure orderly exchange rates.
Doesn’t interfere with the normal functioning of the currency market.

Replicating RBI’s Model for Food Prices:

Build buffer stocks of rice, wheat, pulses, oilseeds, sugar, skimmed milk powder (SMP), and staple vegetables.
Don’t set prices or supplant the market, but curb excessive volatility.
This volatility makes it difficult for RBI to manage inflation:
- Core inflation (excluding food and fuel) is low (3.1%).
- Retail food inflation is high (8.7%).

Causes of Food Price Volatility:

Primarily due to climate change:
- Fewer rainy days, dry spells, and intense precipitation.
- Shorter winters and heat waves.
Recent example: Poor crops of pulses, tomato, potato, and wheat in central India.
Supply shocks (climate, war, pandemic) cause price spikes.
Farmers increase production, leading to price declines.

Example: Milk Price Volatility:

Feb-March 2023: Dairies paid Rs 37-38 per litre for cow milk.
July 2024: Procurement price dropped to Rs 26-27 per litre due to falling SMP prices.
Low prices discourage milk production, potentially leading to shortages and inflation next year.

Benefits of Buffer Stocks:

Procure from farmers during surpluses and sell during shortages.
Moderate extreme price fluctuations.
Low fiscal cost: stocked items can be sold at near-market rates during scarcity.
Example: Open market sales of wheat and chana helped control cereal and pulses inflation.
Avoids regressive measures like export bans or stock limits on traders.

Conclusion:

Buffer stocks of essential food items can help manage food price volatility caused by unpredictable supply shocks.