PAT Session 4.1. Import Parity Price WFP Markets Learning ProgrammePrice Analysis Training 4.1.1

Learning Objectives By the end of this session, participants should be able to: Explain the concept of import parity price (IPP), its use & value as a market analysis tool, and pros & cons of its use List types of data required to calculate IPP Analyze graph of import parity prices, identify implications for food security analysis of changes in IPP Calculate import parity price for selected goods from country/region in which the workshop is held WFP Markets Learning Programme Price Analysis Training 4.1.2

Task: Read Quick Case and, with a partner, discuss questions below: High cereal prices continue to negatively affect the livelihoods of many households in Ethiopia. Local cereal prices are now higher than global market prices…imported wheat is currently cheaper than local maize or sorghum. Local wheat price is US$ 605/MT compared to import parity of US$ 355/MT. The situation is expected to further escalate as the hunger season progresses from June to September. How is the difference in local and global food prices likely to impact food security in Ethiopia – assuming free market conditions? How is the difference likely to impact small producers in Ethiopia? Quick Case IPP Comparisons in Ethiopia WFP Markets Learning Programme Price Analysis Training Adapted from: OCHA Humanitarian Bulletin, Weekly Humanitarian Highlights in Ethiopia, 23 June 2008.

Import parity price Definition and Objective IPP: the total cost (in domestic currency) of delivering a good that is imported to the main entry point in the importing country/province (e.g. to port of import, major trading city, or central warehousing location) IPP helps clarify whether the national market is integrated into regional or world markets WFP Markets Learning Programme Price Analysis Training 4.1.4

Import parity price Data required: cost of the commodity (fob) at the source freight, insurance & handling cost + domestic transport, handling & taxes (if key destination is within importing country) domestic wholesale price of the commodity WFP Markets Learning Programme Price Analysis Training 4.1.5

Import parity price Interpretation if a good is cheaper abroad (i.e. the domestic price > the IPP), traders could have incentives to import the good, assuming free trade comparison of the time series of domestic wholesale prices, import parity prices and import quantities of a good can give an indication whether traders are responsive to price changes and the reasons they are WFP Markets Learning Programme Price Analysis Training 4.1.6

IPP Example WFP Markets Learning Programme Price Analysis Training Calculation:

IPP Example WFP Markets Learning Programme Price Analysis Training Whenever IPP < domestic wholesale prices, private imports flows in Dhaka

Import Parity Price Pros & Cons Pros Monitoring world markets & potential incentives for private sector imports Cons Data availability Could be misleading if trade barriers, status of competition, trade uncertainties, public imports, internal transport costs and parallel markets (black market exchange rate, informal trade channels) are not analyzed. WFP Markets Learning Programme Price Analysis Training 4.2.9

Please turn to Workbook Exercise 4.1. The Marketastan File: Wheat IPP for Marketastan (use Excel data file: 4.1. Wheat IPP for Marketastan.xls) WFP Markets Learning Programme Price Analysis Training Small Group Work

Marketastan 4.1. Debriefing What are the likely implications for household food security in Marketastan – and for WFP - of the current IPP for wheat (i.e. in the first few months of 2010? Why? WFP Markets Learning Programme Price Analysis Training

Wrap-up IPP & Interpretation and Decision-making Interpretation Informs availability: Important part of overall Food Balances Informs responsiveness of private commercial traders to shocks Decision-making Amount of food aid required Local purchase vs. international purchase Purchase for Progress WFP Markets Learning Programme Price Analysis Training