Food import risk in Malawi: simulating a hedging scheme for Malawi food imports using historical data

During the 1980s and 1990s least developed countries (LDCs) encountered increasing difficulties in maintaining national food security. By the turn of the century commercial food import bills reached unprecedented heights in terms of domestic food consumption. The already precarious state of food security has been aggravated by occasional spikes in food import prices. Additionally, food aid has been reduced substantially by the donor community. The combination of these three developments ‑ declines in food aid, increased commercial food imports and occasional spikes in food import prices ‑ have caused a significant increase in the vulnerability of these countries. These circumstances have motivated a further and intensified investigation of policy instruments that can reduce the impact of volatile food import prices. The use of financial derivatives as instruments to hedge risks particularly deserves further exploration since these instruments are possibly cheap and do not distort physical markets. An integral part of this study is the exploration of ways in which the use of such instruments may be embedded in existing food import marketing and financial arrangements. While food import risks have not been a large part of the recent policy debate, it is likely that the increase in the LDCs food import bill and the increasing difficulties of LDCs to meet their food security requirements will become a major issue in the near and medium term future.