IFPRI Discussion Paper No. 1059, February Nicholas Minot (2011)

The study examines the degree to which changes in world food markets influence the price of staples in Sub-Saharan Africa. The study states that staple food prices rose over 50 percent between mid-2007 and mid-2008 and that African governments can moderate the effects of such price increases by pursuing more predictable policies.

The global food crisis of 2007-08 saw an increase in the prices of international agricultural products. Between January 2007 and March 2008, the food price index of the Food and Agriculture Organization (FAO) increased by 61 percent. The prices of staple food crop increased even more – wheat and rice doubled and maize increased by 42 percent. These higher global prices were passed onto domestic markets, hence eroding purchasing power of urban households and net buyers in the process. Poor urban households in particular were affected since they spend a larger share of their income on food. The impact of this food crisis has been severe in Sub-Saharan Africa, since the region is a net importer of food and agricultural commodities and a large proportion of households are net buyers of food. This paper aims to examine the impact of the food crisis on Sub-Saharan African countries and in particular, the study examines the extent to which changes in international grain prices are transmitted to domestic markets in these countries.

The authors defines price transmission as the degree to which prices in one market affects prices in another market. Price transmission is usually measured as transmission elasticity, which is the percentage change in price in one market brought about by a one percent change in price in another market.  The monthly data of food crop prices in international markets and the Sub-Saharan countries cover 83 monthly price series for the period 2007-08. The researchers use the vector error correction model (VECM) in order to examine the relationship between the world food prices and domestic food prices in African countries.

The authors publish a set of key findings. The first finding shows that overall food prices in eastern Africa have increased by 76 percent between June 2007 and June 2008. In Ethiopia food price increases were significantly higher – ranging between 83 percent and 184 percent, whereas in other countries most of the increases were between 40 percent and 65 percent. In eastern African countries, except Ethiopia, the change in domestic prices was less than the proportional changes in international prices. The percentage change for beans was lower than for maize and rice, indicating that beans are usually nontradeable commodities.

Food prices exhibited a similar pattern in southern Africa, with the average increase in prices for the same time period to be 107 percent. Malawi experienced the highest price increases – 6 out of 9 products in the country increased by more than 150 percent. Mozambique and Zambia saw staple food prices to increase between 40 to 60 percent, much less than Malawi. Among all the countries, South Africa exhibited the smallest price increases. Yellow and white maize prices increased by less than 10 percent in dollar terms while wheat prices rose by 32 percent.

In western Africa, the food prices appeared to have increased less than in southern and eastern Africa. Across the 42 prices, the average increase over period was 42 percent, compared to 76 percent in eastern Africa and 86 percent in southern Africa.

The authors then reveal the findings of the increase in domestic prices as a percentage of the increase in world prices. Overall, the increase in domestic prices was 42 percent of the increase in the equivalent world prices. The average price increase across 83 markets was 63 percent and Malawi and Ethiopia saw the sharpest increases in staple crop prices over the one year period. In both countries, the average price increases was more than 100 percent and in both countries, the rise in domestic prices exceeded the world prices for corresponding commodities.

The authors then study the relationship between international and domestic prices using monthly data for 62 staple food prices. Overall 13 out of 62 food prices show a significant long-run relationship with world prices. Malawi, Mozambique and Ethiopia have the highest proportion of prices that are linked to world markets, with a percentage of 40 percent. Prices in countries like Zambia, Uganda, South Africa and Kenya exhibit no long-run relationship with world prices, indicating that such countries might have been less affected by the impact of increasing world prices.

In terms of the commodities, the findings indicate that almost half the domestic rice prices have a significant long-run linkage with world rice prices while maize prices have insignificant relationship with world prices.

The authors conclude the paper by putting forward several policy recommendations to reduce vulnerability to such fluctuations in world prices. They suggest countries to restrict imports, at least in the short run, through tariffs, quotas or an import ban. The authors explain that these policies might increase the rate of self-sufficiency at little cost to the government. Finally African governments are encouraged to promote resilience to volatility in grain prices by diversifying the diets of consumers – having a diversified diet can allow households to shift to less expensive staple foods when price of one of them rises. The diversification of crops can also be promoted on supply side.