MONITORING AND ANALYZING PRICES: 11. How are prices changing? Local and Regional Procurement Learning Alliance

Overview of Monitoring and Analyzing Prices Objectives of price monitoring and analysis are: Identify which prices change and by how much –Identify when to investigate further (using triggers) Identify factors that can cause price changes –Data sources for these factors –Analytical tools to evaluate the likelihood of each factor changing prices 2

Food prices can be unstable

Why do prices matter? In spatially integrated markets, an increase in prices due to a large local purchase of food would signal traders to bring in more supply, bringing prices back down. A procurement or distribution is less likely to cause lasting price impacts in integrated markets –To understand the degree of spatial integration, we need to track prices across markets over time For definitions and overviews, review LRP Price Collection Training powerpoints: –3 Introduction to Markets.ppt –4 Introduction to Prices.ppt

Why do prices matter? Do No Harm conditions under USDA pilot program (2010 Interim Guidelines, p. 27) : –Prevent local and regional purchases that would: Have a disruptive impact on farmers Unduly disrupt world prices… or [unduly disrupt] normal patterns of commercial trade with foreign countries Significantly increase commodity costs for low- income consumers 5

Examine retail prices separately from wholesale prices 1. Convert prices 2. Examine magnitude of price changes 3. Determine when to investigate further (using triggers) 4. Categorize price changes: use analytical tools and data to identify possible sources of price changes 6 How are prices changing?

First, convert prices to standard price per kg (or price per liter for liquids) Different units often have different prices, even when converted to a standard price per kg –Small volume purchases tend to have higher purchase prices per standard unit. Price/kg = (Price/unit * Number of units) / Weight in kgs on scale Or: Price/kg = (Price/unit) / (units/kg) 7 Convert prices

8 Market A Standard Unit Number of units to reach at least 2kgs Weight on the scale Price / standard unit Local rice price /kg Trader 1kg2250 Trader 2cup Trader 3cup Trader 4cup Trader 5can Average70

Convert Prices Evaluate retail and wholesale prices separately If a single per unit price is 2-3 times larger or smaller than other prices for the same commodity in the same market, enumerator or market analyst should verify that that reported price is correct –What could be causing these differences? Conversion error Misreporting by enumerator (e.g., reporting wholesale price as a retail price) Misunderstanding by trader –Rule out reporting error before proceeding 9

Magnitude of price changes by commodity For each commodity: –For each market, for each period: take average of converted retail prices across retailers (e.g., per kg) –For each market, for each period: take average of converted wholesale prices (e.g., per ton) Then, graph. 10

For each commodity: A.Question: How do prices differ within markets over time? A.Trigger = large price differences within markets over time –Inspect graph –Compute period-to-period price changes (next slide) B. Question: How do prices differ across spatially distinct markets over time? B. Trigger = large changes in price differences across markets over time –Compare price changes across markets over time Will likely vary across markets due to varying transportation costs and other factors –Look for outliers 11 Triggers for further investigation

Triggers: A. Large change in prices within a market A. Question: How do prices differ within markets over time? Investigate further if prices change more than 30% from one month to the next month Compute period-to-period difference in prices to determine how large the price differences are. Formula: (Current price – Last price)/Last price 12

13 A.Large change in prices within a market: Example within a maize market in Kenya – reported prices NairobiMombasaKisumuEldoretBusia Mkt avg Jul Aug Sep Oct Nov Dec

14 A. Large change in prices within a market: Example within a maize market in Kenya - inspecting prices

A. Large change in prices within a market: Example within a maize market in Kenya A. Question: How do prices differ within markets over time? –By inspection, prices are much higher in July than in September. –Compute month-to-month price changes 15

16 A. Large change in prices within a market: Example within a maize market in Kenya NairobiMombasaKisumuEldoretBusia Mkt avg Jul-Aug Change-5%-23%-11%9%-17%-10% Aug-Sep Change-16%-23%-11%-31%-18%-20% Sep-Oct Change-2%7%1%-4%9%2% Oct-Nov Change1%3%4%-6%2%1% Nov-Dec Change-4%3%12%6%1%3%

A.Large change in prices within a market: Example within a maize market in Kenya A. Question: How do prices differ within markets over time? –By computation: Compute period-to-period difference in prices to determine how large the price differences are: (Current price – Last price)/Last price –Trigger is 30% –The price of maize in Eldoret fell by more than 30% between August and September 17

A. Large change in prices within a market: Example within a maize market in Kenya What could be causing this change?: Unique to the community? –Is there something happening in Eldoret that is different from other markets (e.g., infrastructure disruption)? Unique to the commodity? –Is this price change specific to maize or are all (monitored) prices falling quickly in Eldoret? Unique to the time period? –Did the same price pattern occur in earlier years (i.e., is it recurring, perhaps seasonal)? 18

A.Large change in prices within a market: Example within a maize market in Kenya Further investigate: Unique to the community? –Use key informant discussions to assess whether that change is likely to continue impacting prices. Discussed in more detail in next ppt. Unique to the commodity? –Identify possible factors related to that commodity (e.g., local release of stock). Discussed in more detail in next ppt. Unique to the time period? –Compute seasonal price index –Examine for seasonal flow reversals 19

A. Large change in prices within a market: Seasonal Price Index 20 To examine impact of seasonality on Kenyan markets: Formula: 1.Take average by month and by year across all markets (or group of markets, if investigating a particular region) 2.Take average by month across years for these markets 3.Take overall average for these markets (across months and across years) 4.Divide monthly average by overall average When the ratio is above 1, prices are higher in this season When the ratio is below 1, prices are lower in this season 5.Ground-truth seasonal price index through creation of seasonal calendar for maize

A. Large change in prices within a market: Seasonal Price Index 21 JanFebMarAprMayJunJulAugSepOctNovDec Overall avg Avg Index

A. Large change in prices within a market: Seasonal Price Index Low prices in Jan – Mar; High prices in May-Aug 22

A. Large change in prices within a market: Seasonal Price Index - Eldoret 23 To examine impact of seasonality on prices in a single market: Formula: 1.Report market price for a single market 2.Take average by month across years 3.Take overall average (across months and across years) 4.Divide monthly average by overall average When the ratio is above 1, prices are higher in this season When the ratio is below 1, prices are lower in this season 5.Ground-truth seasonal price index through creation of seasonal calendar for maize

A. Large change in prices within a market: Seasonal Price Index - Eldoret 24 JanFebMarAprMayJunJulAugSepOctNovDec Overall avg Avg Index

A.Large change in prices within a market: Seasonal Price Index – Eldoret Examine seasonal price patterns per market Low prices in Oct – Mar; High prices in May-Sept More variability than across averaged Kenyan markets 25

A. Large change in prices within a market: Seasonal flow reversals - Eldoret 26 Eldoret faces more variability in prices than other Kenyan markets Common trend for outlying production areas, which may have lower prices during post-harvest and higher prices during lean seasons than urban areas Traders evacuate products from outlying areas to urban areas for storage during post-harvest, and move them back to outlying areas during lean seasons, incurring storage and transportation costs, driving prices in rural areas up during lean season Therefore, there may be divergence between urban and outlying area price patterns. Use historical prices to compute ratio between outlying area prices and urban prices

A. Large change in prices within a market: Seasonal flow reversals - Eldoret 27 Seasonal flow reversals may be responsible for greater price variability in Eldoret relative to Nairobi, when: The lean season in Eldoret coincides with the ratio being above 1 (indicating that food is more expensive in Eldoret than Nairobi) The harvest season in Eldoret coincides with the ratio being below 1 (indicating the food is cheaper in Eldoret than Nairobi)

B. Question: How do prices differ across spatially distinct markets over time? –By inspection, compare prices across markets Will likely vary somewhat across markets due to varying transportation costs and other factors –Examine historical patterns to assist in identification of divergence Is the pattern of the difference relatively consistent over time? If so, markets are said to be spatially well-integrated; if not, what may be causing prices to change in one market but not in another? 28 Trigger: B. Large change in price differences across markets over time

29 B. Large change in price differences across markets: maize markets in Kenya

B. Large change in price differences across markets: Inspection of Kenyan markets in Kenya B. How do prices differ across spatially distinct markets over time? –Eldoret’s prices differ from the standard pattern. Eldoret’s prices increase in August, whereas prices are falling in other markets. And, in September, Eldoret’s prices fell faster than in other markets. –Kisumu’s prices differ from the standard pattern too, but not as dramatically. Kisumu’s prices increase faster in December than other market prices. 30

B. Large change in price differences across markets: Inspection of Kenya markets B. How do prices differ across spatially distinct markets? –No rule of thumb for trigger –Consider historical data: Is the current pattern divergent from historical pattern? Are changes in the current pattern proportionally much larger than previous patterns? If yes to either of these, consider changes to factors that may be influencing prices 31

Are large month-to-month price changes observed for a single commodity? For many commodities? –Repeat computations for each commodity 32 How are prices changing?: Categorize price changes

What is the scale of price change? –Global, regional or national price changes –Localized price changes In procurement areas? In distribution areas? Single market price changes (e.g., Eldoret)? 33 How are prices changing?: Categorize price changes

34 How are prices changing?: Categorize price changes Categorize price change by number of affected communities and number of commodities –If price changes occur for many commodities, it may be due to changes in cost of commerce (e.g., inflation, fuel price changes) –If price changes occur for a single commodity, it may be due to commodity-specific shocks or policy changes –If prices change for a single market, may indicate insecurity, localized transport issues, trader collusion –If prices change for many markets, may indicate national-level factors Begin to brainstorm: have any factors that influence prices changed? –Next: frequent factors that cause prices to change