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AAMP Training Materials

This training module explains the concept of import and export parity pricing and how it can moderate food price fluctuations. It includes exercises to compute border prices and examines policies that can undermine the moderating effects of import and export parity pricing.

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AAMP Training Materials

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  1. AAMP Training Materials Steven Haggblade (MSU) blade@msu.edu Module 4.2: Import & Export Parity Pricing

  2. Module Contents • Objectives • Background material • Exercises • Conclusions

  3. Objectives • Understand border prices’ ability to moderate food price fluctuations • Import parity price (IPP) • Export parity price (EPP) • Be able to compute border prices • Examine policies that undermine the moderating effects of IPP and EPP

  4. Background Material • Discuss domestic price under two scenarios • Scenario 1: Drought reduces maize supply below normal • Scenario 2: Bumper harvest expands maize supply above normal • Examine the impact of these two scenarios with and without open borders

  5. Domestic Price Price $ / ton D S0 300 200 100 Quantity

  6. Scenario 1: Drought Price $ / ton D S1 S0 300 200 100 Quantity

  7. Drought + ClosedBorders Price $ / ton D S1 S0 300 200 100 Quantity

  8. Drought + OpenBorders Price $ / ton D S1 S0 300 Pm 200 100 Quantity

  9. Domestic Price Price $ / ton D S0 300 200 100 Quantity

  10. Scenario 2: Bumper Harvest Price $ / ton S2 D S0 300 200 100 Quantity

  11. Bumper Harvest + Closed Border Price $ / ton S2 D S0 300 200 100 Quantity

  12. Bumper Harvest + Open Border Price $ / ton S2 D S0 300 200 Pe 100 Quantity

  13. Border Prices Reduce Price Volatility Price $ / ton S2 S1 D S0 300 Pm 200 Pe 100 Quantity

  14. Discussion Questions • When will IPP influence domestic price? • When will EPP influence domestic price?

  15. South Africa domestic and border prices for white maize, 1992 - 2006

  16. Zambia, domestic & border prices for white maize, 2000 - 2006 Drought

  17. Saudi Arabia, domestic and border prices for wheat, 1980 - 2008

  18. Mechanics of computing border prices • Domestic reference price = price in Country 1 • Country 1 is the “home” country • Import parity price = price from Country X • Country X is a potential exporter to Country 1 • Export parity price = price to Country M • Country M is a potential importer from Country 1

  19. Mechanics of Computing IPP • IPP = the price at which purchases in Country X can be delivered to market in Country 1 • Country 1 is home country • Country X produces the good we want at a low price

  20. To Calculate IPP, Need to Include

  21. For example…

  22. Mechanics of computing (EPP) • EPP = the price at which purchases would have to be purchased in Country 1 in order to be sold at market price in Country M • Country 1 is the home country • Country M is a potential importer of the good we have to sell

  23. To Calculate EPP, Need to Include

  24. For example…

  25. 3 Exercises: Computing Border Prices • Use Excel workbook entitled: Module 4.2 – Import and Export Parity Pricing.xls • Exercise 1: Nairobi IPP & EPP Trends • Calculate domestic maize price • Compute and compare IPP Durban & EPP Durban • Exercise 2: Nairobi IPP & EPP Graph • Calculate and graph IPP & EPP Durban • Calculate and graph IPP & EPP Uganda • Exercise 3: Southern Malawi IPP & EPP • Calculate and graph IPP & EPP from N. Mozambique

  26. Discussion Questions • When, if ever, has import parity capped domestic price increases? • Can domestic price ever exceed import parity? • If so, when and why? • If not, why not?

  27. Empirical Conclusions • Open borders reduce price volatility • IPP becomes the upper limit to price fluctuations • EPP becomes lower limit to price fluctuations

  28. Policy Conclusions • Openness to international trade is an effective way to reduce price volatility. • Export bans harm producers by limiting their ability to gain maximum revenue from their sales • Creates disincentive to produce in future • Limiting imports harms consumers by requiring them to purchase high-priced domestic goods • Unnecessary cut into household incomes

  29. References • Dorosh, P.A., Dradri, S. and Haggblade, S. 2009. Regional trade, government policy and food security: Recent evidence from Zambia. Food Policy 34 (2009) 350–366. • Traub, L.N. 2008. South Africa Maize Trade Country Profile. Background report prepared for the World Bank under contract No. 7144132, Strengthening Food Security in Sub-Saharan Africa through Trade Liberalization and Regional Integration. Washington, DC: The World Bank. • Tschirley, D. and Jayne, T.S. 2010. Exploring the Logic behind Southern Africa’s Food Crises. World Development 38(1):76-87.

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