Managing agricultural price instability is a long standing policy challenge that has gained especially more prominence since the two recent price spikes in international food markets, in 2007/08 and 2010/11. The growing recent literature on commodity markets have identified a set of forces that drive food prices, including extreme weather events (such as extreme heat, droughts and floods-exacerbated by global warming), biofuel demand, oil prices, speculation in commodity futures markets, stockpiling policies, trade restrictions and macroeconomic shocks to money supply and exchange rates (Abbott & Borot de Battisti, 2011; Abbott et al., 2009; Abbott et al., 2011; Baffes & Haniotis, 2010; Gilbert, 2010; Headey & Fan, 2008;
Mitchell, 2008; Roache, 2010; Tadesse et al., 2013).
As shown in Figure 1, after a relative stable trend, food prices in SSA became higher and more volatile, with most notable two recent price spikes in 2008 and 2011. It is generally recognized that high food prices and extreme price instability have negative impacts on food security. High food prices adversely affect the majority of the consumers in developing countries who spend a very high share of their total budget on food and lack diet diversity.
Urban wage rates do not adjust to food price rises and rural consumers are not able to produce market surplus that is more than their food consumption (Wodon & Zaman, 2010). High food crop prices do not necessarily benefit agricultural producers since they are net buyers of agricultural products. Price instability rather causes uncertainty among producers leading to less than optimal production investment decisions. Wodon & Zaman (2010) argue that the negative impact of rising food prices on net consumers is more than any positive impact of high prices to producers in SSA. They show that for a 50% price increase during the global crisis, average poverty head count increases by 4.4% if accounting only the consumer side, whilst it still increases by 2.2% if the positive impact on producer income is taken into account. Ivanic & Martin (2008) also indicate the recent global crisis results in additional 105
million people falling into poverty, which is 4.5% increase in poverty headcount,
corresponding to loss of seven years of poverty reduction efforts. Moreover, even though the recent food price spikes and instabilities may remain temporary, they have long-term negative consequences on food security and welfare of the households in SSA (Dethier & Effenberger, 2011; Wodon & Zaman, 2010).
Figure 1: Food Consumer Price Index (CPI) Trend and Variability in SSA (2000-2013) Source: Own calculation based on data from FAOSTAT (2014).
Average staple grain prices in SSA are higher and more volatile than their
corresponding world prices as indicated by data in Table 2. Maize and wheat prices in SSA are more volatile than the estimated import parity price of maize and wheat. Higher grain prices in SSA are attributed to higher cost of production and marketing, as well as higher import tariffs, import restriction and more administrative bottlenecks that increase the cost of importing (Minot, 2011). In contrasts to the common view that food prices have recently become more volatile in SSA, Minot (2014) finds no evidence that food price volatility has increased based on price series from 2007 to 2010.
Table 2 Comparison of Food Grain Price Volatility between World and SSA (June 2007 to
The potential of world commodity price shocks to disrupt staple food markets in developing countries is of major concern to policymakers and practitioners. Price
transmissions from global to local markets vary among countries and commodities in SSA (Dethier & Effenberger, 2011). It depends on domestic supply response and government policy interventions that are aimed to dampen the impacts on local food markets. Based on data from June 2007 to June 2008, Minot (2011) finds that 13 out of 62 staple food prices show long-run relationship with their corresponding world prices in seven SSA countries examined. Crop-wise, rice markets are found more connected to world markets as compared to maize markets, with half of the rice prices studied from different markets in SSA showing long-run relationship with world rice prices (Minot, 2011). Similarly, a recent study based on global and regional food price indices in SSA further show that it only takes two months to experience the maximum impact of world food price changes in eastern Africa, as compared to more than 7 months for the northern and western Africa (Table 3). Also, the international long-run price transmission elasticity reaches 100% in eastern Africa, followed by 90% in western Africa, 64% in southern Africa and 53% in northern Africa.
Table 3 Price Transmission from World to SSA, by Region (2001 to 2013)
The central concern of this thesis is the measurement and explanation of food price movements in Ethiopia and Malawi. The important and substantial role of food prices in shaping food security in developing countries motivates a need for a better understanding of the drivers of food price levels, volatility and extremes. This concern is even more acute when one considers the periods of high price spikes and instability observed over the past few years.
Market analysis provides information commonly used for government policy interventions that bear considerable implications to poverty alleviation and food security programs.
This thesis contributes to a growing body of methodological and empirical literature regarding food price movements in SSA. I extend the analysis of food grain markets in SSA by focusing on how staple food grain prices respond to domestic and international commodity price shocks, and government policies. In particular, my main objective is to measure
whether, and to what extent, domestic agricultural and trade policy interventions affect food grain prices. I also examine how domestic staple food prices respond to international commodity prices. In this context, four papers included in this thesis empirically investigate