AAMP Training Materials
Module 3.3: Household Impact of Staple
Food Price Changes
Nicholas Minot (IFPRI)
n.minot@cgiar.org
Why are we interested in the household-level
impact of food price changes?
• Food policies  food prices  well-being of people
• It is not enough to know the total costs and total benefits
of alternative food policies
• Policy-makers are also interested in equity
– So they want to know impact of food policy on poor households,
on vulnerable groups, on poverty rate, on inequality
• Policy-makers also take into account political economy
– So they want to know impact of food policy on households in
rural vs urban areas, different regions, different occupations,
different ethnic groups, different farm-size categories, etc.
• Thus, need to estimate impact of food price changes on
different types of households
Objectives
• Understand how staple food price changes affect
households
• Measure the welfare impact of price changes
• Calculate the net benefit ratio (NBR)
• Use NBR to understand the welfare impact of price
changes
• Identify the characteristics of net buyers and sellers in
sub-Saharan Africa
How do price changes affect households?
• Higher prices of consumer goods hurt households
• Higher prices of crops benefit farm households
• But:
– What about households that are mostly self-sufficient?
– How about households that buy and sell the same good?
– And how much do they gain or lose?
• Economics helps us measure the size of the benefit or
loss in income
How price increases affect households
Price
Case of consumers
• Blue area represents cost to
consumers
• Blue + green area is
approximation and easier to
measure
• Welfare effect ≅ negative
demand
Δ price x quantity consumed
Quantity
• Amount of additional
income that would allow you
to consume as much as
before the price increase
How price increases affect households
Case of producers
Price
supply
• Blue + green area
represents benefit to
producers
• Green area is approximate
and easier to measure
• Welfare effect ≅ positive
Δ price x quantity produced
Quantity
• Amount of additional
income that producer would
get if there was no change
in output
How price increases affect households
Y=income, P=price, Qd=demand, Qs=supply
• Δ y ≅ ΔP Qs – ΔP Qd
Price
• = ΔP (Qs – Qd)
• = ΔP (PQs - PQd)
P
• Δy ≅ ΔP (PQs - PQd)
y
P
y
Quantity
What is the net benefit ratio (NBR)?
The percentage change in real income
is approximately equal to
the percentage change in price multiplied by
the value of net sales of a crop divided by
income.
ΔY ≅ ΔP (PQs - PQd)
Y
P
Y
Net benefit ratio (NBR)
The NBR is usually calculated for a crop (e.g. maize) or a crop category
(e.g. cereals).
Using the NBR to understand
the welfare impact of price changes
Example
A farmer sells 4 tons of maize at $200/ton and
the household income is $2000.
A farmer produces 500 kg of maize and
consumes 900 kg. The price is $200/ton and
his income is $1600.
An urban household spends 30% of its budget
on rice.
NBR
Effect of 50%
increase in
price on income
Using the NBR to understand
the welfare impact of price changes
Example
NBR
Effect of 50%
increase in
price on income
A farmer sells 4 tons of maize at $200/ton and
the household income is $2000. So his NBR
for maize = (4x200)/2000 =800/2000=
0.40
+20%
-0.05
-2.5%
-0.30
-15%
A farmer produces 500 kg of maize and
consumes 900 kg. The price is $200/ton and
his income is $1600. The maize NBR is
200x(0.5-0.9)/1600 = -80/1600 =
An urban household spends 30% of its budget
on rice. The rice NBR = - 30%
What are the characteristics of
net buyers and net sellers?
Type of
household
Zambia
maize
Mozambique maize
Kenya
maize
Only seller
19
13
18
Net seller
5
*
12
No trade
39
24
8
Net buyer
3
*
7
Only buyer
33
51
55
Total
100
100
100
Ethiopia
cereals
Madagascar
rice
44
26
1
14
54
61
100
* Net sellers and net buyers together are 12%
Source: Jayne et al, 2005, Tefera and Seyoum, 2008, Dorosh and Minten, 2006.
What are the characteristics of
net buyers and net sellers?
Types of households
Role in staple grain
markets
Net sellers
Medium and large farmers Small percentage of
net sellers account
for bulk of sales
No trade
Farmers in remote areas
or farmers growing other
staple crops
No role
Net buyers
Urban households, cash
crop farmers, rural
agricultural laborers, very
small farmers
Rural demand
exceeds urban
demand in some
cases
What are the characteristics of
net buyers and net sellers?
Generally, NBR rises with income, that is, net sellers are richer
than net buyers
Net benefit ratio,overall: bw=0.5
Benefit,overall: bw=0.9
Net buyers
.2
0
.02
-.2
.03
Benefit/expenditure
.04
.4
.05
Net sellers
3
4
lnpctexpm (in Birr)
5
6
3
4
lnpctexpm (in Birr)
5
Source: Tefara and Seyoum, 2008
6
Exercise 1
1. If a farmer produces $800 of maize and consumes $300
and household income is $1000, what is the maize NBR
for this household?
2. If maize prices fall 20%, what is the approximate
percentage fall in this farmer’s income?
3. Suppose a farmer produces cassava for own
consumption, but does not buy or sell it. What is the
cassava NBR?
4. If cassava prices rise 20%, what is the change in
income for this household?
Exercise 2
1. Open the file:
–
Module 3.4 – household impact of food price changes.xls
2. Calculate household expenditure as per capita
expenditure x household size
3. Calculate the NBR for maize for each household as
(sales – purchases)/household expenditure
4. Calculate the % change in income as the NBR x the
percentage increase in maize price (cell C4)
5. Calculate the new expenditure per capita as original
per capita expenditure x (1+% change in income)
Exercise 2 (continued)
6. In column L, calculate a dummy variable indicating
households that were poor before the price change
using =if(e9<$C$5,1,0)
7. In column K, calculate dummy variable indicating
households that will be poor after the price change
using =if(k9<$c$5,1,0)
8. Calculate indicator for changes in poverty status as
poor after minus poor before.
9. Calculate average poverty rate before and after price
change by calculating average of columns L and M
Exercise 2 Discussion
• After a very large (80%) increase in price, there is only a
very slight (1%) increase in poverty
– What does this say about people in this country?
– How can policy makers use this information?
Conclusions
• NBR is a useful tool for understanding the effects of food
price changes on households
• High grain prices usually generate benefits for rural area
overall …
• … but benefits are concentrated among small number of
net sellers, particularly large farmers
• Many (most) rural households are net buyers of the main
staple crop
• Virtually all urban households are net buyers of staple
crops
• Poor urban households have largest negative NBR for
staples and are hardest hit by food price increases
References
• Deaton, A. 1989. Rice prices and income distribution in
Thailand: a non-parametric analysis.” Economic Journal.
99(Conference): 1-37.
• Minot, N. and Goletti, F. 2000. Rice market liberalization and
poverty in Viet Nam. Research Report 114, International Food
Policy Research Institute, Washington DC.
• Ivanic, M. and W. Martin. 2008. Implications of higher global
food prices for poverty in low-income countries. Policy
Research Working Paper No 4594. World Bank, Washington,
DC.