Global Crude to Local Food:
An Empirical Study of Global Oil Price Pass-through to Maize
Prices in East Africa
Brian Dillon
University of Washington
Christopher B. Barrett
Cornell University
IMF/OCP/NYU International Conference on Food Price Volatility
Rabat, Morocco
February 26, 2014
Motivation
Motivation: Global commodity price spikes in 2008 and 2011
• Widespread, high-level concern about the impact of global
commodity market price shocks on developing countries
• Considerable press and scholarly focus on oil-food price
links, especially due to ethanol production and fertilizer
prices
• Yet the relevance of those links is questionable in poor
countries that use little fertilizer or biofuels
Key question in this paper
Motivation
Do global oil price shocks impact food prices in local (subnational) markets in low-income countries where subsistence
food production is widespread?
If so, how much and by what mechanisms?
We focus on maize markets in Ethiopia, Kenya, Tanzania
and Uganda
Newly assembled data set of local, monthly average maize
and petrol prices (at the pump) from 17 sub-national markets,
January 2000 – November 2012.
Motivation
Global oil prices and local maize prices: 3 potential links
1. Production costs
•
•
Fuel for tractors and irrigation pumps
Fertilizer costs
2. Structural link through biofuels markets
3. Transport costs
1. Production costs: we can reject
Motivation
In theory
Production costs should not matter for prices in wellintegrated, price-taking economies
Higher costs affect output and profit levels, but not long-run
equilibrium prices
Empirically
Very low use of tractors and irrigation pumps in study
countries
Fertilizer use high but variable in Kenya, low in the other
three countries
We show that local maize prices are not responsive to
changes in global fertilizer price after controlling for global
maize price
Motivation
2. Linkage through biofuels: detectable in global price series?
Motivation
2. Linkage through biofuels: not a part of this paper
Clear theoretical link (de Goorter et al. 2013)
And correlation is clear (Baffes 2007, Baffes and Dennis
2013)
Recent literature: no evidence of a causal link from oil prices
to maize prices (Zhang et al. 2007, 2009, 2010, Gilbert 2010,
Serra et al. 2011, Enders and Holt 2012, Zilberman et al.
2013)
We find no evidence of cointegration at the global level
To be conservative: we assume no causation between global
prices of oil and maize
3. Transport costs: the focus of this study
Motivation
Prospectively important because of:
- Rudimentary transport infrastructure
- Heavy dependence on truck/lorry service
- Long distances to some markets
We find global oil prices indeed influence subnational, local
market maize prices through fuel prices.
Preview of findings
Motivation
1. Effects are substantial: across 17 markets, average long
run elasticity of local maize price to global oil price is 0.26
2. Global oil price matters more than global maize price in
markets farthest from coast
3. Global oil price shocks transmit much more rapidly than
global maize price shocks
Key implication for policy: when global commodity prices comove, short-run effects on food grain prices at sub-national
markets could be due as much or more to rising transport
costs as to changes in the world market price of grain
Motivation
Empirical approach: stepwise estimation of error correction
models
3
Global oil
price
1
?
POE petrol
price
Petrol price
in market j
Includes
exchange
2
rate
4
Global maize
price
POE maize
price
Maize price
in market j
Identifying assumptions
Motivation
1. Study countries are price-takers on international markets
2. Within region, no feedback from maize prices to fuel prices
3. Within countries, disequilibrium between POE price and
market j price is resolved through adjustment in market j
4. Exchange rates weakly exogenous to global price changes
(verified in Appendix)
Data
Motivation
Monthly average prices, 2000-2012
Petrol and maize for each of 17 subnational urban
markets, which we assembled from various sources
Global oil, maize, and fertilizer price data from World
Bank
CPI and USD exchange rate data from IMF IFS
Study markets
Data
Global crude oil –
Kenya
nationalMombasa,
petrol
prices
Step 2: Global oil prices and Port-of-entry (POE) fuel prices
Addis Ababa, Ethiopia
Dar es Salaam, Tanzania
Kampala, Uganda
Global crude oil –
Kenya
nationalMombasa,
petrol
prices
Step 2: Global maize prices and Port-of-entry (POE) maize prices
Addis Ababa, Ethiopia
Dar es Salaam, Tanzania
Kampala, Uganda
Motivation
Step 3: POE fuel price and fuel prices in other markets
Step 4: POE maize price and maize prices in other markets
Results:
Cumulative
pass-through
elasticities
Results: Elasticity of local maize price to global prices
Results: Magnitude of oil price elasticity is increasing in distance
from POE
Results: Speed of adjustment
(number of months for 80% pass-through)
Results: Speed of adjustment (80% pass-through)
Summary of findings
Motivation
1. Oil prices matter because of their effect on transport costs
2. Across 17 markets, average long run elasticity of local
maize price to global oil price is 0.26
3. Global oil price matters more than global maize price in
markets farthest from coast
4. Global oil price shocks transmit much more rapidly than
global maize price shocks
Next step: look at more foods and more countries to evaluate
generality of findings
Motivation
Thank you for any comments, ideas, feedback
Brian Dillon: bdillon2@uw.edu
Chris Barrett: cbb2@cornell.edu