MODELING THE IMPACT OF CLIMATE VARIABILITY ON LOCAL FOOD PRICES - Food Security, Food Prices and Climate Variability - page 135

transaction costs are both a cause and a consequence of thinly traded, volatile markets. Thinly
traded markets keep the difference between produce and consumer prices high, further
reinforcing households' incentives to minimize their reliance on markets (Tschirley and
Weber, 1994; Kelly et al ., 1996).
Efforts to decrease transaction costs and improve market functioning and integration
remain at the forefront of the effort in poverty alleviation and economic growth (USAID,
2012). A high degree of market integration implies a well-functioning market and smooth
trade flows from areas of surplus to those of deficit, improved transmission of price signals, less
price volatility and production decisions that are made according to information that is
accurate (Zant, 2013). Market integration is also still regarded as central to issues of food
security, since climatic hazards and local food production declines are becoming more likely
in many food insecure semi-arid agricultural regions (Rojas et al ., 2011). Well-integrated
markets for staple foods potentially offer a mechanism to reduce the impact of weather-related
shocks, efficiently moving food from areas of surplus to those of deficit.
However, recent research has found that markets that are integrated and function well
during normal or good years may be completely unable to function in poor production years.
This can be due to the lack of supply of food and although there is demand in areas with poor
supply, there may be a reduced capability by actors in the market to purchase food even when
it is needed. Traders may avoid the cost of grain transport into these regions for fear of not
finding enough buyers. Zant (2013) found that in Malawi,
trade is seldom profitable, with prices similar and close to production costs in most
districts in average and good years. . . . In periods of food shortage, districts are forced to
trade with each other in an environment that lacks an adequate trading infrastructure
for larger volumes, to make large outlays on transport, and to embark on uncommonly
practiced and expensive district-to-district trade to remote rural areas.
In this context, food prices tend to become extremely high and access to food will become
difficult. This potential for market collapse is a common reason for bringing in external food
assistance from the humanitarian community. If the markets cannot supply food through
normal channels then food availability can become a serious problem during a crisis.
Analysis can show how weather shocks affect food prices in a market or region. Previous
work has used several different approaches to estimating the transmission of price shocks
in markets, but there is no easy way to do so because of the lack of spatially and tempor-
ally explicit information often required by these analyses. Summarizing the rather large
literature on spatial price transmission, Barrett (2008) offers a rather pessimistic
perspective:
Given limited data, in particular a paucity of data on transactions costs and trade
volumes, and the intrinsic limitations of existing empirical methods, economists still
have only a fragile empirical foundation for reaching clear, strong judgments about
spatial market integration as a guide for corporate or government policy.
Given these challenges, a successful empirical technique linking weather shocks to food prices
will need to work well in a small sample, be flexible and allow for temporary shocks and
finally be able to explicitly model local price dynamics (Kshirsagar, 2012).