Introduction to Market Integration Analysis

1. Introduction to Market Integration Analysis PAT Session 4.2. Price Analysis Training

2. Learning Objectives By the end of this session, participants should be able to: • Explain concept and definition of – and importance of analysing – market integration • Explain the possible implications of poorly integrated markets for food insecurity, vulnerable households, and WFP programming/response options including local procurement of food commodities • Analyse a graph and determine the degree to which prices move/do not move in tandem across markets to ascertain whether those markets are/are not integrated • Calculate average of price differences between markets in a given period Price Analysis Training

3. Key Areas of Session Focus Content • Markets and Food Security • DefiningMarketIntegration • Determinants of MarketIntegration • Implications of Market Integration for Food Security • Measuring MarketIntegration Price Analysis Training

4. Quick Case: Pakistan Earthquake and Market Integration • Task: Read the Quick Case and, with a partner, answer the questions below. • Quick Case: Large wholesale markets in Rawalpindi & Islamabad remain well integrated with secondary & tertiary (retail) markets in less affected urban and semi-urban areas. Major issues confronting affected urban populations are food access & lack of cash reserves. Most appropriate response for urban populations with functional & rapidly recovering markets is non-food response. • Localized food availability and food access are primary concerns for remote rural populations, where previously well-integrated markets remain temporarily disconnected until roads are reopened, infrastructure is repaired, and credit and supply chains are restored. Replacement of in-kind relief for cash in rural areas after the next harvest when transport corridors reopen and market infrastructure and supply chain linkages are restored should be considered. Little evidence of market recovery or capacity to resume normal market function was observed in Balakot, a severely damaged area. • Questions: • According to the case, what is the situation of markets in the larger urban areas? What factors likely account for this? • What is the situation of the more remote, rural markets in the case? What factors likely account for this? • Adapted from: Nyberg, Jennifer, “Pakistan Market Assessment – Earthquake Affected Areas”, WFP, 2005. Price Analysis Training

5. Markets in Food Security Analysis • Market integration matters: • This is where we see the linkages between availability and access… Price Analysis Training

6. HH CASH AVAILABILITY Transfers Remittances Loans Markets in Food Security AnalysisA Simplified Framework Food Availability Markets are more concerned with food availability and access than food utilization National food production and stocks Commercial imports Markets Food aid Agricultural inputs Extension Microfinance Market Food Security Food production Food Access Market Market Market HH Assets Non-food production Employment Market Price Analysis Training

7. What is Market Integration? The existence of tradeflows: the movement of food in response to supply/demandimbalances Market integration allows price signals to be transmitted from one market to another Impact on HH Food Security of market integration? • When markets are integrated, prices become more stable: then HH FS is likely to be improved, as poor HHs can obtain food at more affordable prices Price Analysis Training

8. Implications: Food Market Integration? (1) Market Integration and Food Security • Trade flowsbetween areas cancel out fooddeficitsundertwoconditions: • Positive correlationbetweenprices& levelof fooddeficit • Stable and low real foodpricesare good for net foodbuyer, poor, vulnerable and foodinsecurehouseholds Drèze and Sen 1989 Price Analysis Training

9. Price patterns reflect food deficit situation Real Price of Millet and Per capita Production Year Lagged per capita production Real price, Maradi, Niger Price Analysis Training

10. Implications: Food Market Integration? (2) • Avoid localized food shortages • Identify areas of effective economic policy impacts • Inversely, market segmentation protects against competition and external market instabilities Price Analysis Training

11. Implications: Food Market Integration? (3) • Indicator of food availability: trigger local purchases and cash & voucher for food assistance. • Improve effectiveness of program interventions such as local purchases and cash & voucher. • Optimize the level of food aid required. • Non-integration implies targeted food aid. Price Analysis Training

12. Implications: Food Market Integration? (4)Risks of Decision-MakingwithoutMarketIntegrationAnalysis If markets are integrated: General food distribution: Impact on prices: pricedecreases on all markets Changes in relative prices: pricedistortion & increaseduncertainty Cash Transfer Impact on prices: priceincreases on all markets; Changes in relative prices: pricedistortion & increaseduncertainty • Impacts canbeobservedrelativelyquicklyif markets are integrated. Price Analysis Training

13. WhatDetermines Market Integration? (1) Key determinants of market integration: • Real prices (nominal  CPI) • Trade flows • Transaction costs (transport, margins, risk premium, information cost…) Price Analysis Training

14. Answer: (a) Little or no impact on Centreville prices (b) Possible price decreases in Nordesian border towns Earthquake-affected HHs likely to benefit – from low prices (and from food). Income of small producers and traders in Northern Province and along Nordesian border likely to fall. Quick Quiz • Background: • Very little integration of Northern Province markets with rest of Marketastan. More integration with neighboring Nordesian border town markets. • WFP and partners discussing massive general food distribution throughout Northern Province for earthquake disaster affected. Questions: What are likely impacts on food prices (a) in Centreville, Marketastan and (b) in Nordesian border towns of a massive Northern Province GFD? Who is likely to benefit/lose because of the GFD? Price Analysis Training

15. WhatDetermines Market Integration? (2) Factors influencing market integration / segmentation: • Distance between markets • Trade infrastructure (transport, communication/telephone, credit, roads…) • Policies (e.g. tariffs, movement restrictions, exchange rate policy…) • Labor market functioning, production/productivity failures (e.g. drought, inputs availability…) Price Analysis Training

16. Measuring price differentials Analyst must try to measure transaction costs…why? • When transaction costs > the pricedifferentialbetween 2 markets, then traders have little or no incentive to move food. If transactions costs are < .5/unit, then food is likely to move Price Analysis Training

17. What happens when transfer costs are too high Traders try various strategies to minimise transaction costs. A similar strategy…that didn’t work too well! Price Analysis Training

18. How to Measure Integration between Markets? Correlation Coefficient • The degree to which variables (e.g., price series) are related • Can be linear, non-linear, positive, negative. • Value: always between -1 and 1 • Close to 1: strong positive correlation • Close to -1: strong negative correlation • Close to 0: weak (or no) correlation • Strong positive correlation between price series of different areas is indicative of potential spatial market integration Price Analysis Training

19. How to Measure Integration between Markets? 2. Signs of Correlation Coefficients • Positive Correlation Simultanous increase or decrease of variables • Negative Correlation Increase or decrease of one variable concomitant with opposite change of the other • No Correlation Change in one variable not related to the change of the other. Price Analysis Training

20. How to Measure Integration between Markets? 3. Correlation and co-movement • Co-movement positive correlation or similarity of patterns • But: co-movement does not measure the degree of the relationship • Co-movement illustrated graphically to provide a feeling of potential correlation between variables Price Analysis Training

21. Illustration of priceco-movement Price Analysis Training

22. Illustration of Correlation Coefficients - Niger Price Analysis Training

23. Niger: Before CFA Franc Devaluation in 1994 Price Analysis Training

24. Niger:After CFA Franc Devaluation in 1994 • Higher post-devaluation coefficients may reflect: • Increased costs for Niger traders of doing business in Nigeria • More focus on domestic, internal trade • Greater domestic competition with more entrants into domestic markets • …and therefore greater integration of domestic markets. Price Analysis Training

25. Using the =CORREL function Price Analysis Training

26. How to Measure Integration between Markets? 5. Limitations of Correlation Coefficients Difficult to interpret! • Coefficients may be high – even without market integration: This could be due to: • Common factors: inflation, population, climate, frequency of series… • Price setting mechanisms: e.g. monopolistic behaviour (fixed price) • Transaction costs… Situational analysis is required! Price Analysis Training

27. Small Group Work Please turn to Workbook Exercise 4.2. The Marketastan File: Market Integration in Northern Marketastan (use Excel data file: 4.2. Marketastan Market Integration – Excel Data.xls) Price Analysis Training

28. Marketastan 4.2.Debriefing Price Analysis Training

29. Wrap-up • Integrated markets = the existence of trade flows, the movement of food in response to supply & demand imbalances, leading to cancelation of food deficits • Capturing the time dimension of market integration requires close monitoring as it evolves over time • Detailed market integration analysis is likely to help reduce the risk of price distortions by programme interventions such as local purchases, cash transfer or general food distribution • Detailed market integration analysis helps decision makers determine appropriate food assistance programme Price Analysis Training