1. Tools to measure priceTransmission frominternational to
localmarketsPresented by: Nicholas Minot International Food Policy
Research Institute www.agrodep.org AGRODEP Workshop on Analytical
Tools for Food Prices and Price Volatility June 6-7, 2011 Dakar,
Senegal Please check the latest version of this presentation on:
http://www.agrodep.org/first-annual-workshop
2. Outline What is price transmission? p Why does price
transmission occur (nor not)? Review measures of price transmission
Simple percentage changes Correlation analysis Regression analysis
Co-integration analysis Threshold auto-regresion R Results of study
of impact of world markets on African lt f t d f i t f ld k t Af i
food prices Conclusions
3. Whatispricetransmission?What is price transmission? Price
transmission is when a change in one p g price causes another price
to change Three types of price transmission: Spatial: Between two
markets for same commodity Price of maize in South Africa price of
maize in Mozambique Vertical: Between two points in supply chain
Price of wheat price of flour C Cross-commodity: B t dit Between t
two commodities diti Price of maize price of rice
4. Whyisitusefultostudypricetransmission?Why is it useful to
study price transmission? Study of price transmission helps to
understand causes of changes in prices necessary to address root
causes prices, Example: If little price transmission from world
markets, then trade policy will not be effective in reducing
volatility Study of price transmission may help forecast prices
based on trends in related prices Example: If changes in soybean
prices transmitted to sunflower markets, then soybean futures
markets may predict sunflower prices Study of price transmission
helps diagnose poorly functioning markets Example: If two markets
are close together, but show little price transmission, thi may
indicate problems with t t i i this i di t bl ith transportation t
ti network or monopolistic practices
5. Whydoesspatial pricetransmissionoccur? Why does spatial
price transmission occur? Maize prices in Maputo & Chokwe p p S
ti l price Spatial i 16 transmission occurs because of flows of 14
goods between 12 markets & spatial arbitrage 10 If price gap
> 8 marketing costs, Maputo 6 trade flows will narrow gap g p 4
If price gap < Chokwe 2 marketing cost, no flows 0 Therefore,
price gap 1.0
11. Howispricetransmissionmeasured?How is price transmission
measured? There are several methods four are discussed here 1.
Ratio of percentage changes between two time periods 2. Correlation
coefficient 3. 3 Regression analysis 4. Co-integration analysis 5.
Threshold auto-regression model
12. 1.Ratioofpercentagechanges1. Ratio of percentage changes
Ratio of percentage changes between two time p p g g periods
PriceofmaizeinDares Salaam PriceofUS#2YellowMaize US$/ton
US$/tonJune 2007 120 165June2008J 2008 239 287% Change 99% 74%
Elasticity of transmission is 1.34 (= .99 / .74) Note that both
prices increased by about $120/ton
13. 1.Ratioofpercentagechanges1. Ratio of percentage changes
example Disadvantage: Crude method, only uses two points in g , y p
time and does not take trends into account 450
Maize,DaresSalaamwholesale , 400 Maize,USNo2yellowmaize,FOBGulf 350
300 ton) Price(US$/metrict 250 200 150 100 50 0 May06 May07 May08
May09 Mar06 Mar07 Mar08 Mar09 Sep06 Sep07 Sep08 Sep09 Jul06 Jul07
Jul08 Jul09 Nov06 Nov07 Nov08 Nov09 Jan06 Jan07 Jan08 Jan09
14. 2.Correlationcoefficient 2. Correlation coefficient
Indicates the degree of relatedness of two variables Two related
measures Pearson correlation coefficient = r Coefficient of
determination = R2 = r * r Both range from 0 (no relation) to 1
(perfect relation) 700 1000 900 600 R 0.9027 R= 0.9027 800 700
R=0.1191 Medium 500 400 600 P2 correlationP2 500 300 400 200 300
700 200 100 100 600 R=0.4812 0 0 500 0 100 200 300 400 0 100 200
300 400 400 P2 P1 P1 300WeakcorrelationW k l ti 200
Strongcorrelation Strong correlation 100 0 0 100 200 300 400
P1
15. 2.Correlationcoefficient2. Correlation coefficient
Advantage Easy to calculate (can use Excel) Easy to understand (R2
as pct explained) Disadvantages Only takes into account two prices,
excludes effect of other p prices and variables Only considers
relationship between prices at same time, does not take into
account lags in effect Cannot identify causality Misleading results
if prices are non-stationary
16. 3.Regressionanalysis3. Regression analysis Multiple
regression analysis: p g y Y = a + b1*X1 + b2*X2 + = a + biXi +
Advantages Gives information to calculate transmission elasticity
Can test relationships statistically Can take into account lagged
effects, inflation, and seasonality can analyze relationship of
> 2 prices Disadvantages Difficult to identify causality
Misleading results if prices are non-stationary non stationary
17. Non stationarity Nonstationarity Definition What is a
non-stationary variable?Stationary variable Y Non-stationary
variable YYt = a + Yt1 +bXt + t where||