AAMP Training Materials Module 3.3: Household Impact of Staple Food Price Changes Nicholas Minot (IFPRI) n.minot@cgiar.org This is the fourth section of the AAMP Price Analysis Module. Exercises for this module are found in: Module 3.3 – Household Impact of Staple Food Price Changes.xls

Why are we interested in the household-level impact of food price changes? Food policies  food prices  well-being of people It is not enough to know the total costs and total benefits of alternative food policies Policy-makers are also interested in equity So they want to know impact of food policy on poor households, on vulnerable groups, on poverty rate, on inequality Policy-makers also take into account political economy So they want to know impact of food policy on households in rural vs urban areas, different regions, different occupations, different ethnic groups, different farm-size categories, etc. Thus, need to estimate impact of food price changes on different types of households

Objectives Understand how staple food price changes affect households Measure the welfare impact of price changes Calculate the net benefit ratio (NBR) Use NBR to understand the welfare impact of price changes Identify the characteristics of net buyers and sellers in sub-Saharan Africa

How do price changes affect households? Higher prices of consumer goods hurt households Higher prices of crops benefit farm households But: What about households that are mostly self-sufficient? How about households that buy and sell the same good? And how much do they gain or lose? Economics helps us measure the size of the benefit or loss in income

How price increases affect households Case of consumers Blue area represents cost to consumers Blue + green area is approximation and easier to measure Welfare effect ≅ negative Δ price x quantity consumed Amount of additional income that would allow you to consume as much as before the price increase demand Price Quantity

How price increases affect households Case of producers Blue + green area represents benefit to producers Green area is approximate and easier to measure Welfare effect ≅ positive Δ price x quantity produced Amount of additional income that producer would get if there was no change in output Price supply Quantity

How price increases affect households Y=income, P=price, Qd=demand, Qs=supply Δ y ≅ ΔP Qs – ΔP Qd = ΔP (Qs – Qd) = ΔP (PQs - PQd) P Δy ≅ ΔP (PQs - PQd) y P y Price Quantity

What is the net benefit ratio (NBR)? The percentage change in real income is approximately equal to the percentage change in price multiplied by the value of net sales of a crop divided by income. ΔY ≅ ΔP (PQs - PQd) Y P Y Net benefit ratio (NBR) The NBR is usually calculated for a crop (e.g. maize) or a crop category (e.g. cereals).

Using the NBR to understand the welfare impact of price changes Example NBR Effect of 50% increase in price on income A farmer sells 4 tons of maize at $200/ton and the household income is $2000. A farmer produces 500 kg of maize and consumes 900 kg. The price is $200/ton and his income is $1600. An urban household spends 30% of its budget on rice.

Using the NBR to understand the welfare impact of price changes Example NBR Effect of 50% increase in price on income A farmer sells 4 tons of maize at $200/ton and the household income is $2000. So his NBR for maize = (4x200)/2000 =800/2000= 0.40 +20% A farmer produces 500 kg of maize and consumes 900 kg. The price is $200/ton and his income is $1600. The maize NBR is 200x(0.5-0.9)/1600 = -80/1600 = -0.05 -2.5% An urban household spends 30% of its budget on rice. The rice NBR = - 30% -0.30 -15% In the first example, the household gains income by selling maize. Because quantity of maize sold (4 tons) is greater than the quantity of maize consumed (0), the NBR for maize is positive. In the second example, the household consumes more maize than it sells, so the NBR for maize is negative. This household spends more money on maize than it receives from sales. In the third example, the household does not produce any rice for sale. If 30% of the household’s budget goes to rice, the NBR of rice is negative 30%.

What are the characteristics of net buyers and net sellers? Type of household Zambia maize Mozam-bique maize Kenya maize Ethiopia cereals Madagascar rice Only seller 19 13 18 44 26 Net seller 5 * 12 No trade 39 24 8 1 14 Net buyer 3 7 54 61 Only buyer 33 51 55 Total 100 In Zambia, a country renown in Southern Africa for its reliance on maize as a staple food, 39% of households produce maize for subsistence only, they neither buy nor sell on the market. More interestingly, more households buy maize than sell it (36% either only buy, or are net buyers, compared to 24% who only sell or are net sellers). So, for the majority of Zambians, maize is not a financial benefit (NBR is zero or negative for 75% of households), and an increase in maize price has a neutral or negative welfare effect. * Net sellers and net buyers together are 12% Source: Jayne et al, 2005, Tefera and Seyoum, 2008, Dorosh and Minten, 2006.

What are the characteristics of net buyers and net sellers? Types of households Role in staple grain markets Net sellers Medium and large farmers Small percentage of net sellers account for bulk of sales No trade Farmers in remote areas or farmers growing other staple crops No role Net buyers Urban households, cash crop farmers, rural agricultural laborers, very small farmers Rural demand exceeds urban demand in some cases

What are the characteristics of net buyers and net sellers? Generally, NBR rises with income, that is, net sellers are richer than net buyers Source: Tefara and Seyoum, 2008

Exercise 1 If a farmer produces $800 of maize and consumes $300 and household income is $1000, what is the maize NBR for this household? If maize prices fall 20%, what is the approximate percentage fall in this farmer’s income? Suppose a farmer produces cassava for own consumption, but does not buy or sell it. What is the cassava NBR? If cassava prices rise 20%, what is the change in income for this household? ($800 – 300)/1000 = .5  NBR = .5 .5 x .2 = .1  10% fall in income NBR = 0 Change in income = 0

Exercise 2 Open the file: Module 3.4 – household impact of food price changes.xls Calculate household expenditure as per capita expenditure x household size Calculate the NBR for maize for each household as (sales – purchases)/household expenditure Calculate the % change in income as the NBR x the percentage increase in maize price (cell C4) Calculate the new expenditure per capita as original per capita expenditure x (1+% change in income) Do your work in the sheet labeled [Exercise] and use the yellow cells for your calculations. When you’re finished, you can check yourself by comparing with the green cells in the [Answers] tab.

Exercise 2 (continued) In column L, calculate a dummy variable indicating households that were poor before the price change using =if(e9<$C$5,1,0) In column K, calculate dummy variable indicating households that will be poor after the price change using =if(k9<$c$5,1,0) Calculate indicator for changes in poverty status as poor after minus poor before. Calculate average poverty rate before and after price change by calculating average of columns L and M Open the Exercise Sheet and use the yellow cells for your calculations. When you’re finished, you can check yourself by comparing with the green cells in the Answers tab.

Exercise 2 Discussion After a very large (80%) increase in price, there is only a very slight (1%) increase in poverty What does this say about people in this country? How can policy makers use this information? If maize sales were a very important income generating activity for people in this situation, an 80% increase in the price should reduce poverty substantially. The actual situation, however, is quite different. The majority of households are net-buyers of maize (maize purchases > maize sales) and many households neither purchase nor sell maize at all. Knowing that the majority of the population is not an active seller on the maize market means that policy mechanisms intended to raise the maize price in order to boost household incomes will not reduce poverty, and may actually increase it.

Conclusions NBR is a useful tool for understanding the effects of food price changes on households High grain prices usually generate benefits for rural area overall … … but benefits are concentrated among small number of net sellers, particularly large farmers Many (most) rural households are net buyers of the main staple crop Virtually all urban households are net buyers of staple crops Poor urban households have largest negative NBR for staples and are hardest hit by food price increases

References Deaton, A. 1989. Rice prices and income distribution in Thailand: a non-parametric analysis.” Economic Journal. 99(Conference): 1-37. Minot, N. and Goletti, F. 2000. Rice market liberalization and poverty in Viet Nam. Research Report 114, International Food Policy Research Institute, Washington DC. Ivanic, M. and W. Martin. 2008. Implications of higher global food prices for poverty in low-income countries. Policy Research Working Paper No 4594. World Bank, Washington, DC.