the global food price crisis and china-world rice market...
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The Global Food Price Crisis and China-World Rice
Market Integration:A Spatial-Temporal Rational Expectations Equilibrium Model
Randall Xianglin Shu-Ling Mario J.Romero-Aguilar Liu Chen MirandaThe Ohio State University The Ohio State University National Taipei University The Ohio State University
2013 AAEA & CAES Joint Annual MeetingWashington DC, August 4-6, 2013
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In a nutshell
The question
How would China affect theinternational rice market if itliberalized its trade in rice?
China is the world’ largestproducer and consumer;
Only about 5% of rice is tradedinternationally.
Romero-Aguilar,Liu,Chen,Miranda The Global Food Price Crisis 2013 AAEA Meeting 1 / 11
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In a nutshell
The question
How would China affect theinternational rice market if itliberalized its trade in rice?
China is the world’ largestproducer and consumer;
Only about 5% of rice is tradedinternationally.
The answer
It will substantially reduce andstabilize the world rice price:
reducing risk faced by majorimporters;
particularly price spikes caused byexport restrictions.
The model
Spatial-temporal rationalexpectations:
four interdependent markets;
storage by speculative storers andgovernment.
Romero-Aguilar,Liu,Chen,Miranda The Global Food Price Crisis 2013 AAEA Meeting 1 / 11
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Outline
1 Introduction
2 The Model
3 Results
4 Conclusions
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Introduction
The Problem
Export Prices for Thai Rice2006-1013
200
300
400
500
600
700
800
900
1000
Price US$/mt
2006 2007 2008 2009 2010 2011 2012
US
dolla
rs p
er m
etri
c to
nne
Data source: FAO: Thailand, 100% B, 2nd grade, White ricebroken, Bangkok, f.o.b.
Rice is one of the world’s mainstaples.
The poor spend around 40% oftheir income on staples.
The sudden price increaseparticularly hurt the poor indeveloping countries.
Romero-Aguilar,Liu,Chen,Miranda The Global Food Price Crisis 2013 AAEA Meeting 2 / 11
http://www.fao.org/economic/est/prices
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Outline
1 Introduction
2 The Model
3 Results
4 Conclusions
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The Model Description
The spatial dimension
Exporters
China
World Market Importers
* Brazil * Pakistan
* Egypt * Thailand
* India * Vietnam
* Bangladesh * Philippines
* Indonesia * United States
* Malaysia
* Cote d'Ivoire * Nigeria
* Iran * Saudi Arabia
* Iraq * Senegal
* China
Romero-Aguilar,Liu,Chen,Miranda The Global Food Price Crisis 2013 AAEA Meeting 3 / 11
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The Model Description
The spatial dimension
Exporters
China
World Market Importers
q
ps
d
q
ps
d
q
ps
d
q
p s
d
Romero-Aguilar,Liu,Chen,Miranda The Global Food Price Crisis 2013 AAEA Meeting 3 / 11
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The Model Description
The spatial dimension
Exporters
China
World Market Importers
q
ps
d
q
ps
d
q
ps
d
q
p s
d
Romero-Aguilar,Liu,Chen,Miranda The Global Food Price Crisis 2013 AAEA Meeting 3 / 11
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The Model Description
The spatial dimension
Exporters
China
World Market Importers
q
ps
d
q
ps
d
q
ps
d
q
p s
d
Romero-Aguilar,Liu,Chen,Miranda The Global Food Price Crisis 2013 AAEA Meeting 3 / 11
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The Model Description
The spatial dimension
Exporters
China
World Market Importers
q
ps
d
q
ps
d
q
ps
d
q
p s
d
Romero-Aguilar,Liu,Chen,Miranda The Global Food Price Crisis 2013 AAEA Meeting 3 / 11
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The Model Description
The temporal dimensions
Past
Present
Future
Romero-Aguilar,Liu,Chen,Miranda The Global Food Price Crisis 2013 AAEA Meeting 4 / 11
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The Model Description
The temporal dimensions
Past
Present
Future
Romero-Aguilar,Liu,Chen,Miranda The Global Food Price Crisis 2013 AAEA Meeting 4 / 11
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The Model Description
The temporal dimensions
Past
Present
Future
Romero-Aguilar,Liu,Chen,Miranda The Global Food Price Crisis 2013 AAEA Meeting 4 / 11
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The Model Description
The temporal dimensions
Past
Present
Future
Old
Stock
Romero-Aguilar,Liu,Chen,Miranda The Global Food Price Crisis 2013 AAEA Meeting 4 / 11
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The Model Description
The temporal dimensions
Past
Present
Future
Old
Stock
New
Stock
Export
P����s
Romero-Aguilar,Liu,Chen,Miranda The Global Food Price Crisis 2013 AAEA Meeting 4 / 11
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The Model Description
The temporal dimensions
Past
Present
Future
YieldAcres N
ew
Harvest
Old
Stock
Consumption
New
Stock
Export
Prices
Prices
Expectation
Romero-Aguilar,Liu,Chen,Miranda The Global Food Price Crisis 2013 AAEA Meeting 4 / 11
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The Model Description
The temporal dimensions
Past
Present
Future
YieldAcres N
ew
Harvest
Old
Stock
Consumption
New
Stock
Export
Prices
Prices
Expectation
Acres
Romero-Aguilar,Liu,Chen,Miranda The Global Food Price Crisis 2013 AAEA Meeting 4 / 11
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The Model Solution
Solving the model
There are 31 variables in the model: 23 endogenous, 4 exogenous,and 4 predetermined.
Romero-Aguilar,Liu,Chen,Miranda The Global Food Price Crisis 2013 AAEA Meeting 5 / 11
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The Model Solution
Solving the model
There are 31 variables in the model: 23 endogenous, 4 exogenous,and 4 predetermined.
Two main challenges:
Solving the mixed-complementarity conditions (Newton’s methodapplied to Fisher’s function, the semismooth rootfinding formulation)
Romero-Aguilar,Liu,Chen,Miranda The Global Food Price Crisis 2013 AAEA Meeting 5 / 11
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The Model Solution
Solving the model
There are 31 variables in the model: 23 endogenous, 4 exogenous,and 4 predetermined.
Two main challenges:
Solving the mixed-complementarity conditions (Newton’s methodapplied to Fisher’s function, the semismooth rootfinding formulation)Approximating the expected prices as a function of availabilities(projection methods, using tensor product of quadratic Chebyshevpolynomials)
Romero-Aguilar,Liu,Chen,Miranda The Global Food Price Crisis 2013 AAEA Meeting 5 / 11
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The Model Solution
Solving the model
There are 31 variables in the model: 23 endogenous, 4 exogenous,and 4 predetermined.
Two main challenges:
Solving the mixed-complementarity conditions (Newton’s methodapplied to Fisher’s function, the semismooth rootfinding formulation)Approximating the expected prices as a function of availabilities(projection methods, using tensor product of quadratic Chebyshevpolynomials)
Parameter calibration
Romero-Aguilar,Liu,Chen,Miranda The Global Food Price Crisis 2013 AAEA Meeting 5 / 11
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The Model Solution
Putting the model to work
Once solved, model is simulated to compare alternative scenarios
Romero-Aguilar,Liu,Chen,Miranda The Global Food Price Crisis 2013 AAEA Meeting 6 / 11
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The Model Solution
Putting the model to work
Once solved, model is simulated to compare alternative scenarios
Comparison based on stationary distribution of variables
Romero-Aguilar,Liu,Chen,Miranda The Global Food Price Crisis 2013 AAEA Meeting 6 / 11
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The Model Solution
Putting the model to work
Once solved, model is simulated to compare alternative scenarios
Comparison based on stationary distribution of variables
Model allows to analyze the dynamic adjustment to new stationaryequilibrium, following a regime change
Romero-Aguilar,Liu,Chen,Miranda The Global Food Price Crisis 2013 AAEA Meeting 6 / 11
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Outline
1 Introduction
2 The Model
3 Results
4 Conclusions
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Results
How much rice would be traded?
Over time, China would export on average 6.25% of its rice production.
China only
3 6 9 12 15 180.00
0.05
0.10
0.15
China’s exports, percent of own production
Ker
nel d
ensi
ty
µ σ__________6.25 3.31
Baseline: NO exporter ban, YES importer stock.
Romero-Aguilar,Liu,Chen,Miranda The Global Food Price Crisis 2013 AAEA Meeting 7 / 11
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Results
How much rice would be traded?
That would increase the world volume of rice trade, while reducing its vari-ability.
China only
3 6 9 12 15 180.00
0.05
0.10
0.15
China’s exports, percent of own production
Ker
nel d
ensi
ty
µ σ__________6.25 3.31
World market
1 2 3 4 5 6 7 8 9 10 11 120.0
0.1
0.2
0.3
0.4
0.5
Rice traded, percent of world production
Ker
nel d
ensi
ty
µ σ__________3.33 1.85
4.94 0.75
No ChinaWith China
Baseline: NO exporter ban, YES importer stock.
Romero-Aguilar,Liu,Chen,Miranda The Global Food Price Crisis 2013 AAEA Meeting 7 / 11
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Results
The effect of China’s integration on world rice priceNormal
trad
e
No stockpile in importers
0.5 1.0 1.5 2.0 2.50.0
0.5
1.0
1.5
2.0
2.5
World Price
Ker
nel d
ensi
ty
µ σ__________1.01 0.09
No China
Importers have stockpile
0.5 1.0 1.5 2.0 2.50.0
0.5
1.0
1.5
2.0
2.5
World Price
Ker
nel d
ensi
ty
µ σ__________0.99 0.05
No China
Exp
ortban
s
0.5 1.0 1.5 2.0 2.50.0
0.5
1.0
1.5
2.0
2.5
World Price
Ker
nel d
ensi
ty
µ σ__________1.67 0.20
No China
0.5 1.0 1.5 2.0 2.50.0
0.5
1.0
1.5
2.0
2.5
World Price
Ker
nel d
ensi
ty
µ σ__________1.70 0.20
No China
Romero-Aguilar,Liu,Chen,Miranda The Global Food Price Crisis 2013 AAEA Meeting 8 / 11
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Results
The effect of China’s integration on world rice priceNormal
trad
e
No stockpile in importers
0.5 1.0 1.5 2.0 2.50.0
0.5
1.0
1.5
2.0
2.5
World Price
Ker
nel d
ensi
ty
µ σ__________1.01 0.09
0.92 0.02
No ChinaWith China
Importers have stockpile
0.5 1.0 1.5 2.0 2.50.0
0.5
1.0
1.5
2.0
2.5
World Price
Ker
nel d
ensi
ty
µ σ__________0.99 0.05
No China
Exp
ortban
s
0.5 1.0 1.5 2.0 2.50.0
0.5
1.0
1.5
2.0
2.5
World Price
Ker
nel d
ensi
ty
µ σ__________1.67 0.20
No China
0.5 1.0 1.5 2.0 2.50.0
0.5
1.0
1.5
2.0
2.5
World Price
Ker
nel d
ensi
ty
µ σ__________1.70 0.20
No China
Romero-Aguilar,Liu,Chen,Miranda The Global Food Price Crisis 2013 AAEA Meeting 8 / 11
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Results
The effect of China’s integration on world rice priceNormal
trad
e
No stockpile in importers
0.5 1.0 1.5 2.0 2.50.0
0.5
1.0
1.5
2.0
2.5
World Price
Ker
nel d
ensi
ty
µ σ__________1.01 0.09
0.92 0.02
No ChinaWith China
Importers have stockpile
0.5 1.0 1.5 2.0 2.50.0
0.5
1.0
1.5
2.0
2.5
World Price
Ker
nel d
ensi
ty
µ σ__________0.99 0.05
0.92 0.02
No ChinaWith China
Exp
ortban
s
0.5 1.0 1.5 2.0 2.50.0
0.5
1.0
1.5
2.0
2.5
World Price
Ker
nel d
ensi
ty
µ σ__________1.67 0.20
No China
0.5 1.0 1.5 2.0 2.50.0
0.5
1.0
1.5
2.0
2.5
World Price
Ker
nel d
ensi
ty
µ σ__________1.70 0.20
No China
Romero-Aguilar,Liu,Chen,Miranda The Global Food Price Crisis 2013 AAEA Meeting 8 / 11
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Results
The effect of China’s integration on world rice priceNormal
trad
e
No stockpile in importers
0.5 1.0 1.5 2.0 2.50.0
0.5
1.0
1.5
2.0
2.5
World Price
Ker
nel d
ensi
ty
µ σ__________1.01 0.09
0.92 0.02
No ChinaWith China
Importers have stockpile
0.5 1.0 1.5 2.0 2.50.0
0.5
1.0
1.5
2.0
2.5
World Price
Ker
nel d
ensi
ty
µ σ__________0.99 0.05
0.92 0.02
No ChinaWith China
Exp
ortban
s
0.5 1.0 1.5 2.0 2.50.0
0.5
1.0
1.5
2.0
2.5
World Price
Ker
nel d
ensi
ty
µ σ__________1.67 0.20
0.92 0.00
No ChinaWith China
0.5 1.0 1.5 2.0 2.50.0
0.5
1.0
1.5
2.0
2.5
World Price
Ker
nel d
ensi
ty
µ σ__________1.70 0.20
No China
Romero-Aguilar,Liu,Chen,Miranda The Global Food Price Crisis 2013 AAEA Meeting 8 / 11
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Results
The effect of China’s integration on world rice priceNormal
trad
e
No stockpile in importers
0.5 1.0 1.5 2.0 2.50.0
0.5
1.0
1.5
2.0
2.5
World Price
Ker
nel d
ensi
ty
µ σ__________1.01 0.09
0.92 0.02
No ChinaWith China
Importers have stockpile
0.5 1.0 1.5 2.0 2.50.0
0.5
1.0
1.5
2.0
2.5
World Price
Ker
nel d
ensi
ty
µ σ__________0.99 0.05
0.92 0.02
No ChinaWith China
Exp
ortban
s
0.5 1.0 1.5 2.0 2.50.0
0.5
1.0
1.5
2.0
2.5
World Price
Ker
nel d
ensi
ty
µ σ__________1.67 0.20
0.92 0.00
No ChinaWith China
0.5 1.0 1.5 2.0 2.50.0
0.5
1.0
1.5
2.0
2.5
World Price
Ker
nel d
ensi
ty
µ σ__________1.70 0.20
0.92 0.00
No ChinaWith China
Romero-Aguilar,Liu,Chen,Miranda The Global Food Price Crisis 2013 AAEA Meeting 8 / 11
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Results
Can importers stabilize domestic price?
Without a buffer stock, local prices in importing countries increase in re-sponse to a ban on exports.
Normal trade
0.5 1.0 1.5 2.0 2.50.0
0.5
1.0
1.5
2.0
2.5
Domestic price, Importers
Ker
nel d
ensi
ty
µ σ__________
1.01 0.09
No buffer
Export bans
0.5 1.0 1.5 2.0 2.50.0
0.5
1.0
1.5
2.0
2.5
Domestic price, Importers
Ker
nel d
ensi
ty
µ σ__________
1.67 0.20
No buffer
Baseline: China not integrated
Romero-Aguilar,Liu,Chen,Miranda The Global Food Price Crisis 2013 AAEA Meeting 9 / 11
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Results
Can importers stabilize domestic price?
Having a stock provides minimal help during normal trade years...
Normal trade
0.5 1.0 1.5 2.0 2.50.0
0.5
1.0
1.5
2.0
2.5
Domestic price, Importers
Ker
nel d
ensi
ty
µ σ__________
1.01 0.090.99 0.05
No bufferWith buffer
Export bans
0.5 1.0 1.5 2.0 2.50.0
0.5
1.0
1.5
2.0
2.5
Domestic price, Importers
Ker
nel d
ensi
ty
µ σ__________
1.67 0.20
No buffer
Baseline: China not integrated
Romero-Aguilar,Liu,Chen,Miranda The Global Food Price Crisis 2013 AAEA Meeting 9 / 11
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Results
Can importers stabilize domestic price?
...yet it is definitely ineffective in a trade disruption.
Normal trade
0.5 1.0 1.5 2.0 2.50.0
0.5
1.0
1.5
2.0
2.5
Domestic price, Importers
Ker
nel d
ensi
ty
µ σ__________
1.01 0.090.99 0.05
No bufferWith buffer
Export bans
0.5 1.0 1.5 2.0 2.50.0
0.5
1.0
1.5
2.0
2.5
Domestic price, Importers
Ker
nel d
ensi
ty
µ σ__________
1.67 0.201.70 0.20
No bufferWith buffer
Baseline: China not integrated
Romero-Aguilar,Liu,Chen,Miranda The Global Food Price Crisis 2013 AAEA Meeting 9 / 11
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Results
The dynamics of adjustment after China’s integrationChina
World
Prices
0 3 6 9 120.85
0.9
0.95
1
1.05
time
Pric
e
0 3 6 9 120.71
0.72
0.73
0.74
time
Pric
e
new steady state response to shock 90% interval
Romero-Aguilar,Liu,Chen,Miranda The Global Food Price Crisis 2013 AAEA Meeting 10 / 11
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Results
The dynamics of adjustment after China’s integrationChina
World
Prices
0 3 6 9 120.85
0.9
0.95
1
1.05
time
Pric
e
0 3 6 9 120.71
0.72
0.73
0.74
time
Pric
e
Stockpiles
0 3 6 9 120
5
10
15
timePe
rcen
t cap
acity
0 3 6 9 1220
40
60
80
100
time
Perc
ent c
apac
ity
new steady−state response to shock 90% interval
Romero-Aguilar,Liu,Chen,Miranda The Global Food Price Crisis 2013 AAEA Meeting 10 / 11
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Results
The dynamics of adjustment after China’s integrationChina
World
Prices
0 3 6 9 120.85
0.9
0.95
1
1.05
time
Pric
e
0 3 6 9 120.71
0.72
0.73
0.74
time
Pric
e
Stockpiles
0 3 6 9 120
5
10
15
timePe
rcen
t cap
acity
0 3 6 9 1220
40
60
80
100
time
Perc
ent c
apac
ity
Acreage
0 3 6 9 1294
96
98
100
time
Perc
ent l
and
avai
labl
e
0 3 6 9 1276
78
80
82
84
time
Perc
ent l
and
avai
labl
e
new steady−state response to shock 90% interval
Romero-Aguilar,Liu,Chen,Miranda The Global Food Price Crisis 2013 AAEA Meeting 10 / 11
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Outline
1 Introduction
2 The Model
3 Results
4 Conclusions
-
Conclusions
Summary of results
Bans on exports increase the expected price of rice and its volatility.
Romero-Aguilar,Liu,Chen,Miranda The Global Food Price Crisis 2013 AAEA Meeting 11 / 11
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Conclusions
Summary of results
Bans on exports increase the expected price of rice and its volatility.
Storage by importer do not affect the world price nor their local price.
Romero-Aguilar,Liu,Chen,Miranda The Global Food Price Crisis 2013 AAEA Meeting 11 / 11
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Conclusions
Summary of results
Bans on exports increase the expected price of rice and its volatility.
Storage by importer do not affect the world price nor their local price.
In all scenarios, China’s integration to international rice marketreduces both the mean and variance of the world price.
Romero-Aguilar,Liu,Chen,Miranda The Global Food Price Crisis 2013 AAEA Meeting 11 / 11
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Conclusions
Summary of results
Bans on exports increase the expected price of rice and its volatility.
Storage by importer do not affect the world price nor their local price.
In all scenarios, China’s integration to international rice marketreduces both the mean and variance of the world price.
Following China’s integration, price and acreage will increase inChina. Opposite result in world market.
Romero-Aguilar,Liu,Chen,Miranda The Global Food Price Crisis 2013 AAEA Meeting 11 / 11
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Conclusions
Summary of results
Bans on exports increase the expected price of rice and its volatility.
Storage by importer do not affect the world price nor their local price.
In all scenarios, China’s integration to international rice marketreduces both the mean and variance of the world price.
Following China’s integration, price and acreage will increase inChina. Opposite result in world market.
Prices would adjust fast, while acreage and China’s stockpile wouldadjust slowly.
Romero-Aguilar,Liu,Chen,Miranda The Global Food Price Crisis 2013 AAEA Meeting 11 / 11
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Additional material
Model equations:
Consumption demand
Prices: market clearing
Storage conditions
Production supply
Trade: arbitrage
Availabilities
High price volatility:
Export restrictions and price
-
Appendix Model’s equations
Consumption demand
0 ≤ Cc ≤ ∞ & Cc = αcP−βcc
0 ≤ Cx ≤ ∞ & Cx = αxP−βxx
0 ≤ Cm≤ ∞ & Cm = αmP−βmm
0 ≤ Cw≤ ∞ & Cw = αwP−βww
Romero-Aguilar,Liu,Chen,Miranda () The Global Food Price Crisis 2013 AAEA Meeting 12
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Appendix Model’s equations
Prices: Demand vs supply
0 ≤ Pc ≤ ∞ ⊥ Cc +Zc − Ac +Yc
0 ≤ Px ≤ ∞ ⊥ Cx +Zx − Ax + Yx
0 ≤ Pm≤ ∞ ⊥ Cm +Zm − Am −Ym
0 ≤ Pw≤ ∞ ⊥ Cw +Zw − Aw−Yc − Yx+Ym
Romero-Aguilar,Liu,Chen,Miranda () The Global Food Price Crisis 2013 AAEA Meeting 13
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Appendix Model’s equations
Storage
0 ≤ Zc ≤ Z̄c ⊥ P̄c − Pc
0 ≤ Zx ≤ Z̄x ⊥ P̄x − Px
0 ≤ Zm≤ Z̄m ⊥ P̄m − Pm
0 ≤ Zw≤ Z̄w ⊥ δ EPw − Pw − K
Romero-Aguilar,Liu,Chen,Miranda () The Global Food Price Crisis 2013 AAEA Meeting 14
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Appendix Model’s equations
Acreage and Production
Production
Qc = ǫ̃cqc,−1
Qx = ǫ̃xqx ,−1
Qm = ǫ̃mqm,−1
Qw = ǫ̃wqw ,−1
Acreage
qc ≤ qc ≤ q̄c ⊥ φc(EPc)θc −qc
qx ≤ qx ≤ q̄x ⊥ φx(EPx)θx −qx
qm ≤ qm≤ q̄m ⊥ φm(EPm)θm−qm
qw ≤ qw≤ q̄w ⊥ φw (EPw )θw −qw
Romero-Aguilar,Liu,Chen,Miranda () The Global Food Price Crisis 2013 AAEA Meeting 15
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Appendix Model’s equations
Trade
0 ≤ Yc ≤ Ȳc ⊥ Pw −Pc − τc
0 ≤ Yx ≤ Ȳx ⊥ Pw −Px − τx
0 ≤ Ym≤ Ȳm ⊥ Pm−Pw − τm
Romero-Aguilar,Liu,Chen,Miranda () The Global Food Price Crisis 2013 AAEA Meeting 16
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Appendix Model’s equations
Availability
Ac = Qc + Zc,−1
Ax = Qx + Zx ,−1
Am = Qm + Zm,−1
Aw = Qw + Zw ,−1
Romero-Aguilar,Liu,Chen,Miranda () The Global Food Price Crisis 2013 AAEA Meeting 17
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Appendix Model’s equations
The effects of export restrictions on rice prices
Jan: Egypt restrict exports, and China adds 10% tax on exports & rescinds VAT rebate
Jan-Feb: Drought in Iran order 0.8 million mt of Thai rice
Jan-Apr: Philippines buys normal annual quota injust 4 months, including govt-to-govt deal with Vietnam
Mar: India, Vietnam, China & Cambodia impose tighter export restrictions & new Thai govt discusses possibility of ban
Apr: Nigeria scraps 100% tariffs & imports 0.5 million mt Thai rice
Sep-Oct 2007, Vietnam and India place partial restrictions on exports
Sep: India lifts export ban on some higher quality varieties
Q1: Saudi Arabia subsidizes rice imports; Saudi imports from Thailand rise by nearly 90% after India’s ban
Strong demand from energyexporters keeps rice prices 25-30% above 2007 levels
Jun: Cambodia removes ban
Jun: Egypt announces re-export of rice from Sep.
Jun: Record harvests, Japan allowed to re-export rice
stocks, dollar strengthens, oil & other crop prices fall
Source: Headey 2011 Rethinking the global food crisis: The role of trade shocksRomero-Aguilar,Liu,Chen,Miranda () The Global Food Price Crisis 2013 AAEA Meeting 18
IntroductionThe ModelResultsConclusions