AAMP Training Materials
Module 4.2: Import & Export Parity Pricing
Steven Haggblade (MSU)
blade@msu.edu
Module Contents
•
•
•
•
Objectives
Background material
Exercises
Conclusions
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
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
Domestic Price
Price
$ / ton
D
S0
300
200
100
Quantity
Scenario 1: Drought
Price
$ / ton
D
S1
S0
300
200
100
Quantity
Drought + Closed Borders
Price
$ / ton
D
S1
S0
300
200
100
Quantity
Drought + Open Borders
Price
$ / ton
D
S1
S0
300
Pm
200
100
Quantity
Domestic Price
Price
$ / ton
D
S0
300
200
100
Quantity
Scenario 2: Bumper Harvest
Price
$ / ton
D
S0 S2
300
200
100
Quantity
Bumper Harvest + Closed Border
Price
$ / ton
D
S0 S2
300
200
100
Quantity
Bumper Harvest + Open Border
Price
$ / ton
D
S0 S2
300
200
Pe
100
Quantity
Border Prices Reduce Price Volatility
Price
$ / ton
D
S1
S0 S2
300
Pm
200
Pe
100
Quantity
Discussion Questions
• When will IPP influence domestic price?
• When will EPP influence domestic price?
South Africa domestic and border prices for
white maize, 1992 - 2006
300
200
100
SAFEX Price
Import Parity Price
Export Parity
06
20
05
20
04
20
03
20
02
20
01
20
00
20
99
19
98
19
97
19
96
19
95
19
94
19
93
19
19
92
0
price ($/ton)
Zambia, domestic & border prices for white
maize, 2000 - 2006
$400
$350
$300
$250
$200
$150
$100
$50
$0
Drought
Lusaka wholesale price
import parity
Saudi Arabia, domestic and border prices
for wheat, 1980 - 2008
$1,750
$1,500
$1,250
$1,000
$750
$500
$250
$0
import parity price
domestic price
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
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
To Calculate IPP, Need to Include
Price in Country X
=
Transport to Country 1
+
Duties and Fees
+
Handling Costs
+
IPP from Country X to
Country 1
=
For example…
Price in Country X
=
$200
Transport to Country 1
+
$100
Duties and Fees
+
$ 50
Handling Costs
+
$ 34
IPP from Country X to
Country 1
=
$ 384
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
To Calculate EPP, Need to Include
Price in Country M
=
Transport to Country 1
-
Duties and Fees
-
Handling Costs
-
EPP to Country M from
Country 1
=
For example…
Price in Country M
=
$275
Transport to Country 1
-
$ 60
Duties and Fees
-
$ 0
Handling Costs
-
$ 25
EPP to Country M from
Country 1
=
$190
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
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?
Empirical Conclusions
• Open borders reduce price volatility
– IPP becomes the upper limit to price fluctuations
– EPP becomes lower limit to price fluctuations
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
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 SubSaharan 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):7687.