Annex 1


* Apart from the types of food deficits presented above, an additional type of food deficit
 resulting from market imbalances (market deficits or surpluses) may occur. In our
 model, market imbalances emerge if the internal market prices differ from the equilibrium
 prices. A market (-supply) deficit emerges if, for example due to price setting below the
 equilibrium price (po in Figure A-I, pm in Figure A-2) or due to a lack of foreign
 exchange to pay for food imports, effective demand exceeds domestic market supplies in
 the closed economy case or the total market supplies (domestic supplies + imports/ -
 exports) in the open economy case. If the market price is set above the equilibrium price,
 the volume of market supplies exceeds effective demand and market surpluses occur.
 Examples of market imbalances, resulting e.g. from official price settings different from
 the equilibrium price, and the implications for the food situation and the structure of food
 deficits are illustrated in Figure A-3d) and explained below.

Description of cases of market imbalances:

* If the market price is fixed below the equilibrium price (po in Figure A-1 or pm in
 Figure A-2), e.g. in order to make food affordable also for the poorer sections of the
 population, food demand would increase, hence the demand deficit would diminish.
 However, food supplies from domestic production as well as food imports (in the open
 economy case) would go down, leading to a widening of the production and supply
 deficits and the emergence of a market deficit: market supplies would be insufficient to
 cover the effective demand.
 A market price below the equilibrium price can only be maintained if complementary
 measures of market intervention are applied, e.g. concessional food imports (food
 imports at lower than world market prices, e.g. programme food aid). stock draw-
 downs, producer subsidies, or food rationing. All are frequently applied policy
 measures which will be discussed later.

* If the market prices is set above the equilibrium price level, marketed food
 production will increase and the supply deficit diminish. However, at higher prices, less
 people will be able to afford the food they need, effective demand will go down and the
 overall demand deficit widen. As a result of the increased supplies and reduced
 demand, market surpluses would emerge: not all food offered on the market would be
 absorbed by effective demand.
 Higher than equilibrium prices can only be maintained if demand is increased by policy
 interventions, e.g. by building-up of food stocks and/or by consumer subsidies, or if
 supplies are reduced, e.g. by imposing restrictions on food import or by promoting food
 exports. These are, again, frequently applied policy measures. This scenario also shows
 that a country may well have market surpluses and even be a food exporter, yet food
 production, supplies and demand may be insufficient to meet total food requirements.
 In spite of abundant food supplies on the market, a large proportion of the population
 may lack the means to articulate their food needs as effective demand, and due to the
 lacking effective demand food production and supplies are insufficient to cover the
 requirements.


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