MODELING THE IMPACT OF CLIMATE VARIABILITY ON LOCAL FOOD PRICES - Food Security, Food Prices and Climate Variability - page 133

the expectations of traders, the volume of food in storage and any other unobservable factor
that affects how markets function. When the prices in a single market are much higher than
usual, an observer may ask if it is an artifact of the data, a reflection of unusual conditions in
a single market and thus be an isolated incident or event, or reflective of a broader crisis
emerging due to widespread problems of access. In order to answer these questions, a food
security analyst must know how markets usually interact and their usual behavior at that time
of the year. Understanding market price dynamics is an important part of food security
analysis.
Markets are diverse, informal institutions that are complex, hierarchical and interlinked
across space and time (Barrett and Santos, 2013). They function through complex relation-
ships among many different individuals who work together to bring goods to a location for
sale. This includes individual farmers, communities, public and private institutions and com-
mercial traders who purchase food from farmers by visiting their farms in trucks, or may
purchase the food grain from individuals at their farms or in smaller markets and then trans-
port that grain to larger markets (Dorward et al ., 2004). When markets function well, the
price of the same good between two nearby markets are highly correlated, with the difference
between the two reflecting only transaction and transport costs that the traders incur (Ihle et
al ., 2011; Minot, 2011; Jayne and Rashid, 2010).

The integration of prices in a market with those around it, and with the larger interna-
tional market, depends on traders' ability to move goods into and out of the area, and the cost
of these movements. In a competitive market, price integration is the outcome of an arbitrage
process: trade between actors in different markets who aim to take advantage of price differ-
ences that exceed transaction costs (Lutz et al ., 1995). When prices in one market respond to
a weather shock, but the prices in surrounding markets do not change, the market can be said
to be isolated from the others. This lack of integration can be caused by a number of factors:

The integration of prices in a market with those around it, and with the larger interna-

• Marketsareisolatedbecausetransportsystemsarepoorlyfunctioning,becauseofpublic
market protection, or for some other unknown reason.
• Thereareimpedimentstoeficienttrading,suchaspoormarketinformation,riskaver-
sion or trade barriers.
• Thereisimperfectcompetitionbecauseofcollusionorpreferentialaccesstoscarce
resources (i.e., transport, credit) that may lead to higher price differences between markets
than transport costs can justify (Lutz et al ., 1995).

Market integration is a way of diagnosing a problem with a market that may impact food
security and access to food during times of crisis. Measuring market integration involves the
analysis of the co-movement of prices through time, but it requires not just the price of goods
in the two markets during the same period, but also specific temporal information on transac-
tion costs and trade flows between the two locations. In developing countries this information
is rare, usually only price information is used to estimate changes in integration. Co-movements
cannot be separated from long-run trends and seasonality effects that are caused by factors not
related to the level of integration between two markets, such as trends in food production due
to climate, changes in energy costs and the cost of the good in the international commodity
market (Goletti and Christina-Tsigas, 1995). Other factors that may affect integration are
marketing infrastructure, government policy, differences in demand and dissimilarities in
supply pathways to the market (Chamberlin and Jayne, 2013).