Session 4.2.
Introduction to
Market Integration
Analysis
WFP Markets Learning Programme
Price Analysis Training
4.2. 1
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
WFP Markets Learning Programme
Price Analysis Training
4.2. 2
Key
Areas of Session Focus
Content
 Markets and Food Security
 Defining Market Integration
 Determinants of Market Integration
 Implications of Market Integration for
Food Security
 Measuring Market Integration
WFP Markets Learning Programme
Price Analysis Training
4.2. 3
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?
WFP Markets Learning Programme
Price Analysis Training
4.2.4
Adapted from: Nyberg, Jennifer, “Pakistan Market Assessment – Earthquake Affected Areas”, WFP, 2005.
Markets in Food Security Analysis
 Market integration matters:
 This is where we see the
linkages between availability
and access…
WFP Markets Learning Programme
Price Analysis Training
4.2. 5
Markets in Food Security Analysis
Markets
A Simplified Framework
Markets are more
concerned with food
availability and access
than food utilization
Agricultural
inputs
Extension
National food
production
and stocks
Food production
Market
HH
Assets
Non-food
production
Food
Availability
Food
Security
Commercial
imports
Food
aid
Market
Market
HH CASH
AVAILABILITY
Microfinance
Employment
Market
Market
Food
Access
Transfers
Remittances
Loans
WFP Markets Learning Programme
Price Analysis Training
1.2. 6
What is Market Integration?
The existence of trade flows: the movement of food in
response to supply/demand imbalances
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
WFP Markets Learning Programme
Price Analysis Training
4.2. 7
Implications: Food Market Integration? (1)
Market Integration and Food Security
 Trade flows between areas cancel out food deficits
under two conditions:
• Positive correlation between prices & level of
food deficit
• Stable and low real food prices are good for net
food buyer, poor, vulnerable and food insecure
households
Drèze and Sen 1989
WFP Markets Learning Programme
Price Analysis Training
4.2. 8
Price patterns reflect food deficit situation
Real Price of Millet and Per capita Production
240
200
160
120
80
40
90 91 92 93 94 95 96 97 98 99 00 01 02 03 Year
04
Lagged per capita production
PROD_TETE_RETARDEE
WFP Markets Learning Programme
Real price, Maradi, Niger
MARADI_PRIX_REEL
Price Analysis Training
4.2. 9
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
WFP Markets Learning Programme
Price Analysis Training
4.2. 10
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.
WFP Markets Learning Programme
Price Analysis Training
4.2. 11
Implications: Food Market Integration? (4)
Risks of Decision-Making without Market Integration Analysis
If markets are integrated:
General food distribution:
Impact on prices: price decreases on all markets
Changes in relative prices: price distortion & increased
uncertainty
Cash Transfer
Impact on prices: price increases on all markets;
Changes in relative prices : price distortion & increased
uncertainty
 Impacts can be observed relatively quickly if markets are
integrated.
WFP Markets Learning Programme
Price Analysis Training
4.2. 12
What Determines Market Integration? (1)
Key determinants of market integration:
• Real prices (nominal
 CPI)
• Trade flows
• Transaction costs (transport, margins, risk
premium, information cost…)
WFP Markets Learning Programme
Price Analysis Training
4.2. 15
Answer:
(a) Little or no impact on Centreville prices
(b) Possible price decreases in Nordesian
border towns
Quick Quiz
Background:
Earthquake-affected HHs likely to benefit –
• Very little integration of Northern Province markets with rest of
from low prices (and from food).
Marketastan. More integration with neighboring Nordesian
border town markets.
Income of small producers and traders in
 WFP and partners
discussing
massive
food
Northern
Province
andgeneral
along Nordesian
border
distribution throughout
Northern
Province for earthquake
likely to
fall.
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?
WFP Markets Learning Programme
Price Analysis Training
4.2.16
What Determines 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…)
WFP Markets Learning Programme
Price Analysis Training
4.2. 17
Measuring price differentials
Analyst must try to
measure transaction
costs…why?
 When transaction
costs > the price
differential between 2
markets, then traders
have little or no
incentive to move food.
WFP Markets Learning Programme
Market
A
Market
B
1
2
3
6
2
0.5
3
4
7.5
2.5
T1
T2
T3
Total
Ave
Diff
.5
If transactions costs are
< .5/unit, then food is
likely to move
Price Analysis Training
4.2. 18
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!
WFP Markets Learning Programme
Price Analysis Training
4.2. 19
How to Measure Integration between Markets?
Correlation Coefficient
 The degree to which
variables (e.g., price
series) are related
Close to 1: strong positive
correlation
Close to -1: strong negative
correlation
 Can be linear, nonlinear, positive,
negative.
Close to 0: weak (or no)
correlation
 Value: always
between -1 and 1
Strong positive correlation
between price series of different
areas is indicative of potential
spatial market integration
WFP Markets Learning Programme
Price Analysis Training
4.2. 20
How to Measure Integration between Markets?
2. Signs of Correlation Coefficients
 Positive Correlation
decrease of variables
Simultanous increase or
 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.
WFP Markets Learning Programme
Price Analysis Training
4.2. 21
How to Measure Integration between Markets?
3. Correlation and co-movement
 Co-movement
of patterns
positive correlation or similarity
 But: co-movement does not measure the degree of
the relationship
 Co-movement illustrated graphically to provide a feeling
of potential correlation between variables
WFP Markets Learning Programme
Price Analysis Training
4.2. 22
Illustration of price co-movement
400.0
350.0
300.0
250.0
200.0
150.0
100.0
50.0
WFP Markets Learning Programme
Agadez
Diffa
Dosso
Tillabéri
Zinder
Niamey
Price Analysis Training
Maradi
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
0.0
Tahoua
4.2.23
Illustration of Correlation Coefficients - Niger
Niger
Agadez
/mil
Diffa
Agadez
/mil
Diffa
Dosso
Maradi
Tahoua
Tillabéri
Zinder
Niamey
Illela
Jibia
1
0.90
0.89
0.86
0.87
0.89
0.89
0.92
0.80
0.82
1
0.89
0.92
0.90
0.92
0.93
0.93
0.86
0.91
WFP Markets Learning Programme
Nigeria
Dosso Maradi Tahoua Tillabéri Zinder Niamey Illela
1
0.89
0.89
0.87
0.90
0.92
0.85
0.90
1
0.95
0.89
0.95
0.90
0.91
0.94
1
0.91
0.94
0.92
0.89
0.91
1
0.91
0.94
0.85
0.88
Price Analysis Training
1
0.91
0.91
0.92
1
0.85
0.90
Jibia
1
0.92
4.2. 24
1
Niger:
Before CFA Franc Devaluation in 1994
Agadez
/ Mil
Agadez/Mil
Diffa
Dosso
Maradi
Tahoua
Tillabéri
Zinder
Niamey
1
0.62
0.69
0.50
0.62
0.54
0.81
0.73
Diffa
1
0.55
0.41
0.51
0.71
0.71
0.70
WFP Markets Learning Programme
Dosso
1
0.53
0.68
0.59
0.77
0.75
Maradi
Tahoua Tillabéri Zinder
Niamey
1
0.67
1
0.47 0.49
1
0.56 0.80 0.69
1
0.39 0.62 0.66 0.77
Price Analysis Training
1
4.2. 25
Higher post-devaluation
Niger:
coefficients may
reflect:
After CFA Franc Devaluation
in 1994
Agadez
/ Mil
Agadez/Mil
Diffa
Dosso
Maradi
Tahoua
Tillabéri
Zinder
Niamey
1
0.94
0.92
0.92
0.92
0.91
0.91
0.95
Diffa
1
0.91
0.94
0.92
0.92
0.93
0.94
Dosso
• Increased costs for Niger
traders of doing business in
Maradi Tahoua Tillabéri Zinder Niamey
Nigeria
• More focus on domestic,
internal trade
1
0.92
0.92
0.90
0.90
0.95
• Greater domestic
1 competition with more
0.96 entrants
1 into domestic
0.91 markets
0.92
1
0.95…and
0.94
0.90 greater
1
therefore
of domestic
0.94integration
0.95 0.93
0.92
markets.
WFP Markets Learning Programme
Price Analysis Training
4.2.26
1
Using the =CORREL function
WFP Markets Learning Programme
Price Analysis Training
4.2.27
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:
o
Common factors: inflation, population, climate,
frequency of series…
o
Price setting mechanisms: e.g. monopolistic behaviour
(fixed price)
Transaction costs…
Situational analysis is required!
o
WFP Markets Learning Programme
Price Analysis Training
4.2. 28
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)
WFP Markets Learning Programme
Price Analysis Training
1.4.29
Marketastan 4.2.
Debriefing
WFP Markets Learning Programme
Price Analysis Training
4.2.30
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
WFP Markets Learning Programme
Price Analysis Training
4.2. 31