17th ICABR Conference
“INNOVATION AND POLICY FOR THE BIOECONOMY”
Ravello - June 18-21, 2013
PRICE CHANGES, WELFARE EFFECTS AND
FOOD SECURITY IN RURAL ETHIOPIA
PASQUALE LUCIO SCANDIZZO1, ADRIANA PAOLANTONIO12, SARA SAVASTANO1
1University
of Rome “Tor Vergata”
2FAO
Motivations
• The recent food prices spikes have increased the concerns on food
security, also in light of the global climate change, population and
income growth, and the evolution of nutritional standards and
habits.
• Food security is a facet of the wider issues of enhancing nutritional
achievements and the performance of the food sector.
• While the impact of the recent crisis on the welfare and poverty of
rural population remains controversial (Ataman Aksoy and
Hoekman 2010; Barrett 2011; Swinnen 2011; Ivanic and Martin
2011), the impact on nutrition and food security are more limited.
• Lack of a consensus on the core household food security indicators
that are needed in order to properly measure and monitor food
security.
Background
• Food risk and poverty are related by a double bind.
• Small farmers in developing countries undergo this twofold
challenge under often difficult choice conditions and the
stress of market forces.
• When commodity prices show the sharp increases
experienced lately, several farmers appear to have
abandoned the pattern of production characterizing their
traditional subsistence status. Has that determined an
increase in real well being?
• Alternatively, have more costly changes on the level of
nutrition somewhat voided the apparent success of these
farms as market agents?
Objectives and Contributions
• We extend previous results obtained by Savastano, Weaver and
Paolantonio (2013), who analyzed the extent and magnitude of the
impact of food price crises on household welfare and agriculture
productivity, to the wider issues of food security and nutritional intakes.
• We propose to analyze the effects of commodity price movements on
revenues, nutrition and well being of Ethiopian farmers focusing on the
role of the adaptation option of the household diet to the patterns of
production and sales determined by changing prices, and on the
asymmetries that they may determine in production and consumption
patterns
• We use 4 rounds of panel survey on 1,239 Ethiopian rural households
(ERHS conducted by CSAE and IFPRI) for the years 1994, 1999, 2004,
and 2009, to understand differential impact of two different crisis: midnineties, and 2008 spike.
• We focus on net producers and net consumers of the main cereals (i.e.
tef, maize, wheat, barley, sorghum and millet).
Some Stylized Facts
• According to the existing literature, the impact of a price spike on
the rural farmers depends on their net position (i.e. net
producer/net consumer). An increase in price results in consumers’
losses and producers’ gains.
• Since Deaton (1989; 1989a; 1997), the Net Benefit Ratio (NBR)
approach has been widely applied to analyze the effect of a change
in food prices on household welfare (Budd 1993; Barrett and Dorosh
1996; Minot and Goletti 2000; Seshan and Umali-Deininger 2006;
Levinsohn and McMillan 2007; Ivanic and Martin 2008; Wodon and
Zaman 2008; Zezza et al. 2008; Simler 2010; Karfakis et al. 2011). The
impact of price spikes is considered in monetary term.
• However, consumer prices differ from producer prices and
nutritional content of own production differs from market
purchased food: thus net producers and net consumers distinction
may not be decisive.
Evolution of Poverty and Food Deficiency
Approach and Hypotheses
• We adopt the NBR metric and define a household as a net
producer (consumer) of cereals if it is positive (negative).
• We use the “before-response” concept of the price effect
applied to prices of calories and not prices of crops.
• Own consumption and market consumption have
different compositions in terms of nutrients and, in
particular, calories.
Approach and Hypotheses (cont’d)
• Households first make production and investment plans
to maximize the present value of their expected wealth
and then choose consumption levels by maximizing
utility, given their wealth maximizing production level.
• Households choose the share of own consumption to
maximize utility, given consumer and producer prices.
• They also maximize utility by choosing consumption
levels conditioned on such a share and their other wealth
maximizing choices.
The Model
• Consider the consumption problem:
maxU(CM ,CQ )
s.t. : PM CM + PQCQ = PQQ
(1)
• Solving under the hypothesis of a Cobb Douglas utility implies:
U = AC C
(2)
wCQ
PM
=
(1- w)CM PQ
(3)
w
M
1-w
Q
The Optimal Solution
CM
• Definition: a =
C
• Optimum share:
a=
(4)
w
PM
[ (1- w) + w]
PQ
PQQ
• Optimum consumption: C =
[a PM + (1- a )PQ ]
(5)
(6)
The Welfare Effect
¶V
dV* =
PQ [Q - (1- a )C]d log PQ -PM a Cd log PM } (7)
¶(Y )
{
{
dV* = PQ [Q - (1- a )C]d log PQ -PMa Cd log PM }
(8)
Kcalorie Impact of
Food Price Changes
• When there is a price shock, the change in welfare, or
change in real income (i.e. change in utility in moneyequivalent) has two distinct effects:
1. An increase in the producer price for calories has a
positive welfare effect if the household is a net seller of
the calories produced and a negative welfare effect if it is
a net buyer.
2. Conversely, an increase in the consumer prices of calories
has always a negative effect on real income, which is
larger the larger the share of consumption that comes
from the market.
Kcalorie Impact
of Food Price Changes (cont’d)
• Notice that this is a different result from saying that the effect of a
price change is positive if the household is a net seller and
negative if it is a net buyer.
• In reality, even if it is a net seller, the effect on real income may be
negative, if the increase in consumer prices is sufficiently larger
than the increase in producer price.
• Vice versa, the household may be a net buyer and yet the effect of
a price increase may be positive, if the difference between the
increase in producer and consumer prices is sufficiently large, as
shown by equation:
(8)
{
dV* = PQ [Q - (1- a )C]d log PQ -PMa Cd log PM }
Estimation Strategy
• Estimate first the demand equation for own consumption share.
• Obtain predicted value of the share.
• Use this predicted value as a regressor in a second stage estimation of
total demand.
• Model predicts negative relation of share with consumer-producer
price ratio and negative relation of consumption with share weighted
index of producer and consumer price, as suggested by equations:
(5)
a=
and:
(6)
C=
w
PM
[ (1- w) + w]
PQ
PQQ
[a PM + (1- a )PQ ]
Results from First Stage Estimation
Price ratio (consumer/producer)
Month of interview
Dummy HH is food deficient
Dummy HH is poor
Dummy for HH storing cereals
Log area cultivated with cereals
Share of land of good soil quality
Dummy drought shock between 1999 and 2009
Dummy flood shock between 1999 and 2009
Dummy pest before harvest shock between 1999 and 2009
Dummy lack access to inputs shock between 1999 and 2009
Dummy decrease of ouput prices shock between 1999 and 2009
Dummy land redistribution within PA shock between 1999 and
2009
Constant
Share of cereals kcal
consumption over total
cereals kcal
consumption (per AE)a
-0.200***
(-3.83)
-0.112***
(-9.16)
0.649***
(9.92)
-0.0615
(-0.85)
-1.031***
(-15.62)
-0.338***
(-10.70)
0.128
(1.80)
0.0472
(0.67)
0.196**
(2.90)
0.191**
(2.92)
0.295***
(4.02)
0.229**
(2.97)
-0.00207
(-0.02)
0.410**
(2.68)
4,586
1,235
875.02
0.0000
Observations
Number of groups
Wald chi2(13)
Prob > chi2
t statistics in parentheses p<0.05 ** p<0.01 *** p<0.001
aPanel nested binomial with logit link function and RE (Papke and Wooldridge, 2008)
Results from Second Stage Estimation
Total cereals kcal
consumption (per AE)
Share of cereals kcal consumption over total cereals kcal
consumption - predicted
Log avg. price (weighted with predicted shares)
Log HH size in AE
Log age of HH head
Dummy HH head has no education
Dummy for female HH head
Log nb of children in the HH
Log draft animals per AE
Dummy HH is poor
Log HH minimum cereals kcal requirement
Month of interview
Constant
Observations
Number of groups
Wald chi2(13)
Prob > chi2
t statistics in parentheses p<0.05 ** p<0.01 *** p<0.001
-1.450***
(-21.28)
-0.0689*
(-2.44)
-3.681***
(-8.36)
0.0660
(1.60)
-0.00725
(-0.28)
0.0627*
(2.11)
-0.0452
(-1.54)
-0.0823***
(-4.39)
-0.753***
(-26.33)
3.131***
(6.98)
0.0161**
(2.85)
-27.36***
(-4.53)
4,586
1,235
2,803.9
0.0000
Comparison of Welfare Effects
using Two Prices
Quintiles of
cereals
consumption
per AE
1
2
3
4
5
Average
DIRECT WELFARE EFFECT (as % of total HH real income)
Two prices
1994/1999
1999/2004
2004/2009
Net
Net
Net
Net
Net
Net
Consumers
Producers
Consumers
Producers
Consumers
Producers
-68.2
-52.4
8.4
12
8.6
28.4
-54.5
-28
13.7
21.4
17.5
35
-54.5
-11.6
19.5
32.5
22.9
32.8
-44.3
23
28.7
2
35.3
-44.3
22.7
27.4
25
37.9
-53.2
-30.7
17.4
24.4
19.8
33.9
Quintiles of
cereals
consumption
per AE in
caloric terms
1
2
3
4
5
Average
DIRECT WELFARE EFFECT (as % of total HH real income)
IN CALORIC TERMS
Two prices
1994/1999
1999/2004
2004/2009
Net
Net
Net
Net
Net
Net
Consumers
Producers
Consumers
Producers
Consumers
Producers
-3.3
-1.5
2.2
3.7
-2.3
1.5
-9.3
0
3.9
4.7
-1.7
1.5
-13.2
-0.3
5.2
14.2
-0.3
13.5
-9.2
-0.2
5.6
7.6
-1.4
1.1
-12.2
-0.4
9.2
46.7
-0.6
4.1
-9.4
-0.5
5.2
15.4
-1.3
4.3
Comparison of Welfare Effects
using a Single Price
Quintiles of
cereals
consumption
per AE
1
2
3
4
5
Average
DIRECT WELFARE EFFECT (as % of total HH real income)
Single prices
1994/1999
1999/2004
2004/2009
Net
Net
Net
Net
Net
Net
Consumers
Producers
Consumers
Producers
Consumers
Producers
-31.3
-16.3
11.4
16.2
-4.9
-1.9
-23.3
3
17.4
25.9
-4.7
-1.7
-24.6
9.9
25.4
44.3
-4.5
-3.4
-13.1
29.6
43
-4.9
-0.7
-12.1
29.5
39.6
-3.7
-1.6
-20.8
-1.1
22.7
33.8
-4.5
-1.9
Quintiles of
cereals
consumption
per AE in
caloric terms
1
2
3
4
5
Average
DIRECT WELFARE EFFECT (as % of total HH real income)
IN CALORIC TERMS
Single prices
1994/1999
1999/2004
2004/2009
Net
Net
Net
Net
Net
Net
Consumers
Producers
Consumers
Producers
Consumers
Producers
-1.8
-1
1.9
1.9
-1.5
1.1
-6.4
0.4
2.3
-0.7
-1.8
1.1
-6
0.1
0.8
0.4
-1
5.7
-6.9
0.9
3.7
-4.6
-0.9
1.2
-5.8
-0.7
6.1
28.6
0
3.5
-5.4
-0.1
2.9
5.1
-1
2.5
Conclusions
• Allocation of an optimal share of production to own
consumption is significantly affected by the consumerproducer price ratio.
• Total consumption instead depends on a weighted
average of both prices.
• Once this mechanism is taken into account and calories
rather than cereals are considered, the welfare effects of
even large price changes are relatively small.
• Thus households appear to be able to maintain a
reasonably constant energy intake even under adverse
price changes.