Brian Dillon University of Washington Christopher B. Barrett Cornell University University of Wisconsin April 11, 2014 Global Crude to Local Food: An Empirical Study of Global Oil Price Pass-through to Maize Prices in East Africa

Widespread, high-level concern about the impact of global commodity market price shocks on developing countries Considerable press and scholarly focus on oil-food price links, especially due to ethanol production and fertilizer prices Yet the relevance of those links is questionable in poor countries that use little fertilizer or biofuels Motivation Motivation: Global commodity price spikes in 2008 and 2011

Do global oil price shocks impact food prices in local (sub- national) markets in low-income countries where subsistence food production is widespread? If so, how much and by what mechanisms? We focus on maize markets in Ethiopia, Kenya, Tanzania and Uganda Newly assembled data set of local, monthly average maize and petrol prices (at the pump) from 17 sub-national markets, January 2000 – November Motivation Key question in this paper

1.Production costs Fuel for tractors and irrigation pumps Fertilizer costs 2.Structural link through biofuels markets 3.Transport costs Motivation Global oil prices and local maize prices: 3 potential links

In theory Production costs should not matter for prices in well- integrated, price-taking economies Higher costs affect output and profit levels, but not long-run equilibrium prices Empirically Very low use of tractors and irrigation pumps in study countries Fertilizer use high but variable in Kenya, low in the other three countries We show that local maize prices are not responsive to changes in global fertilizer price after controlling for global maize price Motivation 1.Production costs: we can reject

Motivation 1.Production costs: evidence Table C7. POE maize and global maize, fertilizer and oil, first-stage ECM results (1)(2)(3)(4) EthiopiaKenyaTanzaniaUganda Global maize ($/mt) ( )(0.0154)(0.217)(0.505) Global oil ($/bl) ( )(0.0319)(0.562)(0.85) Global DAP ($/mt) ( )( )(0.0545)(0.101) Exchange rate (Local/USD) (0.0445)(0.079)(0.0527)(0.0712) Constant (0.242)(5.734)(39.65)(107.3) N R2R Ethiopia result most likely due to DAP/oil collinearity and infrequent updating of ET fuel prices; Results are robust to different lag specifications

Motivation 2. Linkage through biofuels: detectable in global price series?

Motivation 2. Linkage through biofuels: detectable in global price series? Table D1. Johansen test trace statistics, global oil prices and global maize prices 1% critical values for maximum rank of 0 (no cointegration) Trace statistics Specification Jan 2000 – Oct 2012 Oct 2006 – Oct 2012 Trend and constant in both equations Constant in both, no trend in 2nd stage No trends, constant in both equations Constant only in long-run equation No trends or constants Notes: entries are trace statistics from Johansen (1991) test of maximum rank; all specifications based on 2 lags (1 lag in differences), as indicated by BIC

Clear theoretical link (de Goorter et al. 2013) And correlation is clear (Baffes 2007, Baffes and Dennis 2013) Recent literature: no evidence of a causal link from oil prices to maize prices (Zhang et al. 2007, 2009, 2010, Gilbert 2010, Serra et al. 2011, Enders and Holt 2012, Zilberman et al. 2013) We find no evidence of cointegration at the global level To be conservative: we assume no causation between global prices of oil and maize Motivation 2. Linkage through biofuels: not a part of this paper

Prospectively important because of: -Rudimentary transport infrastructure -Heavy dependence on truck/lorry service -Long distances to some markets We find global oil prices indeed influence subnational, local market maize prices through fuel prices. Motivation 3. Transport costs: the focus of this study

1.Effects are substantial: across 17 markets, average long run elasticity of local maize price to global oil price is Global oil price matters more than global maize price in markets farthest from coast 3.Global oil price shocks transmit much more rapidly than global maize price shocks Key implication for policy: when global commodity prices co- move, short-run effects on food grain prices at sub-national markets could be due as much or more to rising transport costs as to changes in the world market price of grain Motivation Preview of findings

1.Empirical approach 2.Data 3.Results 4.Interpretation and policy relevance Motivation Rest of talk

2 Motivation Empirical approach: stepwise estimation of error correction models 4 1 Global oil price Global maize price ? POE maize price Maize price in market j Petrol price in market j Includes exchange rate POE petrol price 3 X

Motivation Step 2: Global-POE price links Fuel Maize

Motivation Step 3: POE fuel price and fuel prices in other markets Step 4: POE maize price and maize prices in other markets

Motivation Identifying assumptions 1.Study countries are price-takers on international markets 2.Within region, no feedback from maize prices to fuel prices 3.Within countries, disequilibrium between POE price and market j price is resolved through adjustment in market j 4.Exchange rates weakly exogenous to global price changes (verified in Appendix)

Motivation Data Monthly average prices, Petrol and maize for each of 17 subnational urban markets, which we assembled from various sources Global oil, maize, and fertilizer price data from World Bank CPI and USD exchange rate data from IMF IFS

Data Study markets

Global crude oil – national petrol prices Step 2: Global oil prices and Port-of-entry (POE) fuel prices Addis Ababa, Ethiopia Mombasa, Kenya Dar es Salaam, Tanzania Kampala, Uganda

Global crude oil – national petrol prices Step 2: Global maize prices and Port-of-entry (POE) maize prices Addis Ababa, Ethiopia Mombasa, Kenya Dar es Salaam, Tanzania Kampala, Uganda

Global crude oil – national petrol prices Results: Within-country fuel price transmission Table 10. Within-country fuel price transmission, ECM stage 1 CountryMarket POE fuel priceConstantR2R2 N Pass-through elasticity EthiopiaBahir Dar Dire Dawa M'ekele KenyaKisumu Nairobi Eldoret/Nakuru TanzaniaArusha Dodoma Kigoma Mbeya UgandaGulu Mbale Mbarara Notes: Prices are nominal, in local currencies

Global crude oil – national petrol prices Results: Within-country maize price transmission Table 12. Within-country maize price transmission, ECM stage 1 POE maize price Own fuel priceConstantR2R2 N Pass-through elasticities CountryMarketPOE maizeOwn fuel EthiopiaBahir Dar Dire Dawa M'ekele KenyaKisumu Nairobi Eldoret/Nakuru TanzaniaArusha Dodoma Kigoma Mbeya UgandaGulu Mbale Mbarara Notes: Average prices are nominal, in local currencies; Uganda results are for due to data limitations; Entries are OLS coefficients;

Results: Cumulative pass-through elasticities

Results: Elasticity of local maize price to global prices

Results: Magnitude of oil price elasticity is increasing in distance from POE

Results: Speed of adjustment (number of months for 80% pass-through)

Results: Speed of adjustment (80% pass-through)

1.Oil prices matter because of their effect on transport costs 2.Across 17 markets, average long run elasticity of local maize price to global oil price is Global oil price matters more than global maize price in markets farthest from coast 4.Global oil price shocks transmit much more rapidly than global maize price shocks Next step: look at more foods and more countries to evaluate generality of findings Motivation Summary and interpretation

Brian Chris Barrett: Motivation Thank you for any comments, ideas, feedback