A stochastic simulation of the impact of price insulation policies on world wheat market stability

Abstract

A nonspatial wheat trade model is developed for wheat. Stochastic simulation of the model is performed to determine the impact of insulated wheat markets in India, and the European Community, on the stability of world wheat prices. The effect of production variability in the Soviet Union on the stability of the world wheat market is also examined;The research shows widespread price intervention in world wheat trade, with price transmissions between world and domestic markets limited to only the United States, Canada, and Australia. A 79 percent reduction in production variability in the U.S.S.R. lowers U.S. gulf port price uncertainty by 34 percent. A 56 percent reduction in E.C. price levels lowers E.C. production by 22 percent and increases U.S. net exports by 10.3 MMT. The gulf port price level rises by 13 percent; instability of this price falls by 13 percent, also. Therefore, higher price transmission between world and E.C. prices indeed lowers world price uncertainty;Setting the wheat price in India to its world price equivalent lowers India's demand more than it increases production, therefore, India becomes a net exporter. The effect is a fall in both U.S. net exports and gulf port price. Lagged price response in India's supply equation is the reason why perfect world price transmission into India raises wheat market instability within and outside India;The analyses suggest that the greater market stability argument for free trade may be exaggerated because theoretical models supporting the argument do not include lagged price response in the supply functions.