Food Price Inflation: Markets, Households

and Policy Implications

Paul Dorosh (World Bank)

Spatial and Local Development TeamWorld Bank

February 2008

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

International Prices of Cereals, 2000-07

0

50

100

150

200

250

300

350

400

Jan-

98

Jan-

99

Jan-

00

Jan-

01

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02

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03

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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)

International Prices of Wheat and Maize, 2000-07

0

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100

150

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98

Jan-

99

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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)

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)

Rice Prices and Quantity of Private Rice Imports in Bangladesh, 1993-2000

0.00

2.00

4.00

6.00

8.00

10.00

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14.00

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18.00Ju

l-93

Jan-

94

Jul-

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Jul-

95

Jan-

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96

Jan-

97

Jul-

97

Jan-

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99

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ce (

Tak

a/k

g)

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Imp

orts

('0

00 M

T)

Private Sector Imports Import Parity(ex: Bongaon) Dhaka Wholesale Price Import Parity(ex: Delhi)

Source : Dorosh (2001).

Maradi (Niger) and Kano (Nigeria) Millet Prices, 2003-06

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(CF

A/k

g)

Import Parity ex: Jibia Consumer Price Maradi GoN Kano FEWSNET Kano

El Salvador: precios de maiz, 2001-07

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ct-0

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7

Wholesa le Price PM no tariff PM w tariff

Madagascar: Rice Prices and Imports, 1995-2004

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1000

2000

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4000

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6000

Jun-

95

Dec-9

5

Jun-

96

Dec-9

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97

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99

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Fm

g /

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Th

ou

san

d M

etri

c T

on

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Imports in '000 tons (3 month moving average) Retail Price Local Rice

Retail Price Imported Rice CIF Price (3 month moving average)

Ethiopia: Maize Border Prices (with Kenya)

-50

0

50

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250

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350

Jan-

00

Apr-0

0Ju

l-00

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l-01

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Apr-0

2Ju

l-02

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Apr-0

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l-03

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4Ju

l-04

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l-05

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Apr-0

6Ju

l-06

Oct-

06

Jan-

07

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

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)

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

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

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

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

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

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%

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

Madagascar: Net consumers and poor are not synonymous

Source: Coady, Dorosh and Minten, 2008

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