cut in the same proportion as has its supply of maize. Other sources of income, such as sale of
other crops or of labor, are also likely to be equally adversely affected by the drought.

 Enforcement of a completely stable price would be entirely inconsistent with the
 functioning of a free market in which the primary decisions are made by free agents on the basis
 of relative price changes. In addition, public interventions to increase price stability can be
 effective only to the extent that there are enough resources to implement them. Given the very
 limited resources that can be devoted to this end in Malawi, it is probably correct to say that only
 extreme price instability should be cause for intervention.

 The other important thing to note in this context is that itevery useful to maintain a clear
 distinction between: 1) stability over the seasons of any particular year and over different locations
 in the country and 2) stability between one year and the next. For the former, it seems that the
 present arrangement of ADMARC's operating side by side with private traders provides adequate
 assurance that prices will be relatively stable within the limits of price differentials imposed by
 the cost of interseasonal storage and spatial transfer costs. ADMARC plans to maintain a price
 structure which is consistent with full recovery of these costs. The role of government here is
 primarily to provide for adequate road infrastructure and support for the development of improved
 storage technology. It is particularly important in the interim period, until there is more
 competition in the marketing of agricultural commodities, for the GoM to play the important role
 of collecting and disseminating effectively information on prices prevailing in markets.

 The Strategic Grain Reserve, as well as interventions in foreign trade in the context of a
 liberalized market, are meant to be used exclusively for making a contribution to inter-year price
 stability. The only way to raise or reduce the market price of maize in a liberalized market is to
 remove from the market excessive supplies or to inject into the market additional supplies. There
 are only two ways of accomplishing these interventions: storage operations or intervening in
 exports and imports.

 To decide which is more economical, storage or foreign trade transactions, it is necessary
to evaluate the cost of storage against the cost of stabilizing through trade. In order to estimate
the cost of storing, besides having to know the annual storage costs, it is necessary to know the
probabilities of how far apart in time extreme shortfalls or excesses are likely to occur. The
probability of a shortfall in production such as has occurred, for instance, in Malawi in 1991/92
is not only low, but the probability for such a shortfall to be preceded by a year with a similarly
large surplus to store is even much lower. The long time spans for which supplies need to be
stored for effective protection against extreme events, coupled with hih interest rates, make
storing quite cst effective compared with selling surpluses into other markets and buying them
back when needed. This principle is true even if such trading transactions also involve high costs.


 It should be noted in passing that no model used for evaluating stabilization through
storage interventions would suggest that year end stocks should be held after a year of short