Optimization of national grain imports to balance risk and return: A portfolio theory approach

Abstract

Global grain trade plays a key role in food security. Many nations rely on imported grain to meet their dietary requirements. Grain imports may be at risk due to weather shocks, economic crises, or international conflicts. Countries aim to balance import risk with the expected return of their grain supplies. This research brings these dual objectives together in an innovative modern portfolio theory framework. Modern portfolio theory provides a set of concepts to formulate the trade-off between risk and expected return in national grain imports. Using Markowitz mean-variance optimization model, we identify opportunities to reduce risk in existing national grain import accounts, without increasing costs under realistic supply mass constraints of trade partners. Several major grain importers may be able to reduce risk in their grain imports without increasing cost, such as wheat imports in Egypt, maize imports in Vietnam, and rice imports in Saudi Arabia. However, some countries would indeed have to pay more to achieve more stable grain supplies, such as wheat imports in Turkey. This study provides a framework to quantify the different costs, benefits, and levels of risk in grain trade that can inform future research and decision-making.