food price inflation: markets, households and policy implications paul dorosh (world bank) spatial...
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![Page 1: Food Price Inflation: Markets, Households and Policy Implications Paul Dorosh (World Bank) Spatial and Local Development Team World Bank February 2008](https://reader036.vdocuments.net/reader036/viewer/2022062301/56649cca5503460f94992455/html5/thumbnails/1.jpg)
Food Price Inflation: Markets, Households
and Policy Implications
Paul Dorosh (World Bank)
Spatial and Local Development TeamWorld Bank
February 2008
![Page 2: Food Price Inflation: Markets, Households and Policy Implications Paul Dorosh (World Bank) Spatial and Local Development Team World Bank February 2008](https://reader036.vdocuments.net/reader036/viewer/2022062301/56649cca5503460f94992455/html5/thumbnails/2.jpg)
SummaryCause and likely duration of shocks have implications for policy
response• Maize and fuel: medium-term price increase?• Rice and wheat: short-term price increase?• Domestic trade policies can worsen or mitigate effects of world
price changes
Methodology• Where there is general inflation, prices of non-food and nominal
incomes are also likely to rise• Assuming no change in nominal incomes may overstate effects
of food price changes
Household effects• Demand changes in response to price changes• Substantial variation in net food sales among poor farmers
• Not all poor farmers are food deficit; not all deficit households are poor
![Page 3: Food Price Inflation: Markets, Households and Policy Implications Paul Dorosh (World Bank) Spatial and Local Development Team World Bank February 2008](https://reader036.vdocuments.net/reader036/viewer/2022062301/56649cca5503460f94992455/html5/thumbnails/3.jpg)
International Prices of Cereals, 2000-07
0
50
100
150
200
250
300
350
400
Jan-
98
Jan-
99
Jan-
00
Jan-
01
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Jan-
06
Jan-
07
(US
$ / t
on
)
Wheat (US HRW#2, FOB Gulf) Maize US #2 Yellow, US Gulf)
Rice (FOB Bangkok, A1 Super) Sorghum (US Gulf No.2 Yellow)
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International Prices of Wheat and Maize, 2000-07
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400
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98
Jan-
99
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Jan-
01
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(US
$ / t
on
)
0.0
0.5
1.0
1.5
2.0
Wheat (US HRW#2, FOB Gulf) Maize US #2 Yellow, US Gulf)
Ratio (P Wht / P Mze)
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Markets: What Determines the Domestic Price?
Comparisons of monthly domestic wholesale prices with import parity (inclusive of taxes and marketing costs) Indicate incentives for private sector trade Provide an indication of whether border prices determine domestic
prices (e.g. Bangladesh 1998-99) In some cases, it is not possible to prevent pass-through of border
prices to domestic markets (Niger-Nigeria)
Domestic prices above import parity border prices in periods of substantial imports suggests the presence of binding quotas (e.g. El Salvador 2007)
Domestic prices within import-export band indicate domestic prices not directly affected by world prices In this case, changes in domestic supply and demand determine
movements in domestic market prices (Ethiopia maize 2007)
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Rice Prices and Quantity of Private Rice Imports in Bangladesh, 1993-2000
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00Ju
l-93
Jan-
94
Jul-
94
Jan-
95
Jul-
95
Jan-
96
Jul-
96
Jan-
97
Jul-
97
Jan-
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Jul-
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Jan-
99
Jul-
99
Jan-
00
Pri
ce (
Tak
a/k
g)
0
50
100
150
200
250
300
350
400
Imp
orts
('0
00 M
T)
Private Sector Imports Import Parity(ex: Bongaon) Dhaka Wholesale Price Import Parity(ex: Delhi)
Source : Dorosh (2001).
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Maradi (Niger) and Kano (Nigeria) Millet Prices, 2003-06
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350
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03
Apr
-03
Jul-0
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Oct
-03
Jan-
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Apr
-04
Jul-0
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-04
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Apr
-05
Jul-0
5
Oct
-05
Jan-
06
Apr
-06
Jul-0
6
(CF
A/k
g)
Import Parity ex: Jibia Consumer Price Maradi GoN Kano FEWSNET Kano
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El Salvador: precios de maiz, 2001-07
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500O
ct-0
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-02
Jul-0
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-02
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-03
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-03
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-04
Jul-0
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-05
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-06
Jul-0
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Oct
-06
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-07
Jul-0
7
Wholesa le Price PM no tariff PM w tariff
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Madagascar: Rice Prices and Imports, 1995-2004
0
1000
2000
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6000
Jun-
95
Dec-9
5
Jun-
96
Dec-9
6
Jun-
97
Dec-9
7
Jun-
98
Dec-9
8
Jun-
99
Dec-9
9
Jun-
00
Dec-0
0
Jun-
01
Dec-0
1
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Fm
g /
kg
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5
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Th
ou
san
d M
etri
c T
on
s
Imports in '000 tons (3 month moving average) Retail Price Local Rice
Retail Price Imported Rice CIF Price (3 month moving average)
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Ethiopia: Maize Border Prices (with Kenya)
-50
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0Ju
l-00
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Apr-0
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Apr-0
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Apr-0
6Ju
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Jan-
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Month/Year
Pric
e (B
irr/q
uint
al)
Wholesale Price Addis Import Parity Export Parity Import Parity ex: Nairobi Export Parity ex: Nairobi
Notes: Import and export parity ($/ton) estimated using transport and marketing cost of $100/ton between Nairobi, Kenya and Addis. Import parity is calculated without taxes.Source: FEWSNET data and World Bank staff
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Separating Out Effects of Macro- Inflation
Macro-economic inflation caused by increases in money supply in excess of real GDP growth and other factors), by definition, implies an increase in the average price of all goods and services in the economy
Food prices will also rise (unless controlled by the government or determined by border prices (with fixed world prices and nominal exchange rates)
In the context of macro-economic inflation, understanding what drives domestic prices requires analysis of real prices of food (the nominal price of food relative to a measure of overall inflation)
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Nominal and Real Prices
Overall price inflation confounds interpretation of nominal market prices; since most or all prices and incomes are rising: Increases in nominal prices do not necessarily indicate
increases in demand relative to supply Increases in nominal incomes do not necessarily indicate
increases in purchasing power or welfare Difficulty in interpreting price signals are one of the costs
of inflation; other costs include loss of welfare to those with incomes in nominal terms and to those who are holding cash
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Nominal and Real Prices (2)
Standard neo-classical micro-economic theory: only relative prices matter Consumer demand: if all prices and incomes are doubled,
quantity of consumed of each good and service is unchanged (homogeneity of degree zero in prices and income)
Production: prices of all outputs and factor inputs double than profit-maximizing levels of output are unchanged (homogeneity of degree zero in input and output prices)
Appropriate deflator for demand analysis is the overall consumer price index: Pi / CPI
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Ethiopia Food Price Inflation
The Ethiopian context High overall inflation Large increases in food prices Substantial increases in food production
Are markets working well? How would we know?
Nominal vs real food prices
Time frame for the analysis: annual price changes vs monthly price fluctuations
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Are Markets Performing Well?
The food price puzzle: production increases with price increases
Step 1: Analyze real prices (nominal prices divided by an appropriate price index) to remove the effects of overall inflation
Step 2: Compute total supply, shifts in demand, and expected changes in real prices
Step 3: Compare with actual real price movements Time frame for analysis: 1 crop marketing year
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Real price trends, 2000 - 2007
Notes: EGTE wholesale cereal prices (Addis) deflated using CSA Consumer Price Index.
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Month/Year
Pric
e (B
irr (
2000
)/qu
inta
l)
Teff Wheat Maize
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Trend Growth in Supply, Demand and Real Prices of Major Cereals, 2003/04 to 2005/06
Note: Simulations do not include cross-price effects or effects of rural-urban income growth differentials * Denotes simulated variable.
Source: Model simulations.
Real Real Production Supply Demand* Sim Price* Addis Price Teff 14% 14% 9.0% -7.3% -6.6% Wheat 17% 11% 8.6% -4.3% -9.0% Maize 15% 14% 8.6% -10.8% -4.2%
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Zambia: Simulated Effects of Drought on Poor Households
Base Simulation 11a. No Imports
1b. Cassava
1c. Private Imports
Production (‘000 tons)
1,015 - 20% -20% -20%
P(maize)(K/kg) 1,136 +75% +75% +11%
Consumption of Poor Households (‘000 tons, maize equivalents)
Maize 507 384 384 481
Cassava 119 119 151 124
Total 687 503 535 606
Shortfall 0 123 91 20
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Madagascar: Net consumers and poor are not synonymous
Source: Coady, Dorosh and Minten, 2008
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SummaryCause and likely duration of shocks have implications for policy
response• Maize and fuel: medium-term price increase?• Rice and wheat: short-term price increase?• Domestic trade policies can worsen or mitigate effects of world
price changes
Methodology• Where there is general inflation, prices of non-food and nominal
incomes are also likely to rise• Assuming no change in nominal incomes may overstate effects
of food price changes
Household effects• Demand changes in response to price changes• Substantial variation in net food sales among poor farmers
• Not all poor farmers are food deficit; not all deficit households are poor