Crowding out of private stocks by public stocks

Public stocks held by government have emerged as a food security issue as well as an issue in the Doha Round of World Trade Organization talks. Understanding the impact of public stocks requires understanding their crowding out of private stocks. A conceptual model of this crowding out effect is developed. It utilizes a call option associated with the release of public stocks. The model reveals that the crowding out of private stocks decreases as public stocks increase, in contrast to a constant marginal crowding out reported by earlier studies. Crowding out of private stocks is also a function of the commodity’s demand function, implying crowding out can vary by commodity. It is likely to be highest for commodities with the most inelastic demand. These commodities include wheat, rice, and other food staples often held as public stocks. Empirical analysis confirms these and other insights from the conceptual model.

© 2019 Czech Academy of Agricultural Sciences