1. 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

2. 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

3. 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?)

4. 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 This is our baseline
We can subtract the baseline from the actual price to get the discretionary part of the price increase

5. 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

6. 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

7. Real Food Price Indexes for the Project Countries, 1995: :6, 2000=100, Log Source: ILO

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

9. 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

10. 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

11. 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

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

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

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

15. Prediction and Prediction error for 12 project countries

16. Outcomes and Model Predictions for the Project Countries
Growth in real FPI Dec 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

17. Real Food Price Indexes for the Project Countries, 1995: :6, 2000=100, Log Source: ILO

18. 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)

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