Aggregate Food Price Transmission Patterns Before and During the Food Crisis Political Economy of Food Price Policy Project: Workshop 3 July 10-12, 2012 Statler Hotel, Cornell University Henrik Hansen, Christian Elleby, and Kenneth Baltzer Department of Resource Economics and Food Policy University of Copenhagen

The contents of the paper Introduction Studies of transmissions of world food prices during the crisis Price transmission theories and concepts Transmission of world market prices to domestic prices before and during the 2007/08 food crisis Conclusion We have received detailed comments from Phil Abbot (a gentle but firm beating) And gentle requests from Per I will present our basic ideas and results related to the project countries

The Main Idea We wish to split the price transmission during the crisis into two components: “Normal times” transmissions from the world market prices (a baseline) Crisis-specific transmissions & local shocks (derivations from the baseline) We wish to argue that food price policy during the crisis Was related to the baseline transmission (caused?) Affected the crisis-specific transmissions (caused?)

The math of the idea Price transmission rates are country specific —but, hopefully, fairly stable over time We estimate the transmission rates based on data from 1995 to 2006 We use the estimated transmission rates to predict the price in each country in June 2008. This is our baseline We can subtract the baseline from the actual price to get the discretionary part of the price increase

The Minor Ideas We wish to look at transmissions across commodities and across countries. Therefore, we use a broad measure of food prices: The food price index relative to the overall price index We wish to split price transmission into three partial effects: World food prices (the IMF food price index / US-CPI) Exchange rate movements (the real effective US-exchange rate, EUROSTAT) Oil prices (Brent oil price from IMF, IFS / US-CPI) It is not obvious how the three world price series will affect national real food price indexes

The real food price index and food/non-food terms-of-trade We look at the food price index divided by the total price index The log-transform gives a linear link

Real Food Price Indexes for the Project Countries, 1995:1 -2008:6, 2000=100, Log Source: ILO http://laborsta.ilo.org/

World Food Price, Oil Price, and US-effective exchange rate, January 1995 – June 2008

A First Pass: Real Food Price Growth in the Project countries, monthly growth (%) 1995m1-’02m12 2003m1-'06m12 2007m1-'08m6 Country Growth Ratio Egypt 0.031 -10 0.146 43 0.289 13 Ethiopia Zambia -0.066 21 -0.251 -74 0.050 2 Malawi -0.125 39 -0.152 -45 -0.436 -20 Nigeria -0.047 15 -0.118 -35 0.401 18 Senegal 0.057 -18 0.028 8 0.277 South Africa 0.052 -16 0.054 16 0.229 10 Kenya -0.029 9 0.376 111 0.309 14 Mozambique -0.179 56 0.010 3 0.208 Bangladesh -3 0.074 22 0.285 China India -0.081 25 0.092 27 0.241 11 Viet Nam 0.030 0.084 0.497 23 Brazil -0.315 99 -0.420 -123 1.127 51 Average -0.055 17 -0.006 -2 0.290 World Food -0.32 0.34 2.19 US-EER 0.18 -0.28 -0.63 Brent Oil 0.38 1.25 4.93

A dynamic forecast model and its twin-sister The main assumption is weak exogeneity and non-Granger causality of the three world market series The I(1) and I(0) properties of the individual series do not invalidate parameter estimation and predictions

Estimated partial effects of world price changes Estimated Long-run Elasticities R2 Country Food Oil US-REER Egypt 0.67 0.17 1.39 0.30 Ethiopia Zambia 0.09 -0.07 -0.08 0.54 Malawi 0.31 -0.17 -0.25 0.71 Nigeria 0.45 -0.01 0.62 0.35 Senegal -0.22 0.03 -0.26 0.58 South Africa -0.19 0.05 0.01 0.53 Kenya 0.13 0.16 0.29 Mozambique 0.20 Bangladesh -0.24 -0.42 0.40 China India 0.61 0.11 0.65 0.56 Viet Nam 0.07 0.38 Brazil 0.36 -0.11 1.33

Actual and predicted real food price increases, January 2007-June 2008 across 102 developing countries

Actual and predicted real food price increases, January 2007-June 2008 across 12 project countries

Prediction and Prediction error for 102 countries Political Economy of Food Price Policy Project, July 10-12, 2012

Prediction and Prediction error for 12 project countries

Outcomes and Model Predictions for the Project Countries Growth in real FPI Dec. 2006- June 2008 (%) Country Actual Predicted Error Egypt 4.9 3.1 1.8 Ethiopia Zambia 0.9 3.8 -3.0 Malawi -7.4 -9.5 2.0 Nigeria 6.8 13.2 -6.4 Senegal 4.7 1.6 South Africa 3.9 3.0 Kenya 5.2 6.9 -1.7 Mozambique 3.5 8.0 -4.5 Bangladesh 4.8 0.4 4.4 China India 4.1 4.2 -0.1 Viet Nam 8.4 5.3 3.2 Brazil 19.1 -0.7 19.8 Average 3.3

Real Food Price Indexes for the Project Countries, 1995:1 -2008:6, 2000=100, Log Source: ILO http://laborsta.ilo.org/

Concluding Remarks We have learned that food price policy is about a single crop: maize, rice But real food price index changes do not always follow the changes in the main food crop How do we square that? Does it make sense to think of the prices as having a systematic transmission component and a discretionary component during the crisis? If yes, can we model it like this, or do we need structural models We should probably look at inflation during the crisis (as IMF and others)

All comments are welcome THANK YOU All comments are welcome (Unless your name is Phil)