Just as wheat is an important commodity for the region, MENA is an important region for the global wheat market. Between 2008 and 2010, an average of more than 29 percent of all exported wheat was destined for a country in the region. Over the last decades, countries in MENA have added to their capacity to store grains and wheat stocks have grown along with populations and demand. Precautionary policies led to an increase in the stock-to-use ratio as well, concentrating a greater share of global stocks in the region (Figure 2). From negligible levels in 1970, the region now holds more than 13 percent of global wheat stocks, an amount equivalent to 15 percent of global wheat trade and 52 percent of MENA imports (USDA, 2011, based on 2008-10 averages). Consequently, decisions taken by the region about strategic stores of wheat are of increasing importance for global markets. Moreover, with the expansion of domestic production constrained by available land and water resources, and with significant population growth projected in MENA, the region’s influence on global wheat markets is expected to grow.

In this paper, we examine whether stockpiles of wheat in the region could be used strategically to ameliorate the effects of sharp run-ups in international wheat prices. Using a numerical model of competitive storage under rational expectations, we examine a strategic storage rule designed to insulate the region from the most severe price spikes, those that fall in the top 10 percent of the range of simulated prices.<sup>2</sup> We find that the strategy can reduce the variability of domestic wheat prices and blunt the domestic impact of increases in global prices. In contrast to most policy approaches that countries use to insulate themselves from off-shore price disturbances, the strategy has positive spillover effects, reducing global price variability rather than increasing it. However, the strategy will sometimes fail, when consecutive negative supply shocks occur and MENA inventories are dissipated. The frequency of failure declines as larger inventories are held, but the costs of the strategy increase as well. By comparison, a pro-cyclical relief program that targets up to 40 percent of the population is a less expensive alternative.

# **Background**

Poverty is at the core of the region’s concerns about food security. About one-quarter of the population in MENA countries is poor and about three-quarters of these poor people live in rural areas (World Bank, 2009).<sup>3</sup> Poor households in the region spend anywhere between one-third and two-thirds of their income on food, so they are hardest hit by food-price shocks. In addition, since a relatively high concentration of the population lives on incomes near the poverty line in the region, small increases in the cost of living can have a very large impact on the incidence of poverty (World Bank, 2009).

> 2 The term competitive storage means that grain is held with the expectation of a profit and that competition among inventory holders limits profits to normal risk-adjusted rates of return. The condition is spelled out more rigorously in a later section describing the conceptual model.

> 3 Poverty calculations are based on national poverty criteria.

3