MODELING THE IMPACT OF CLIMATE VARIABILITY ON LOCAL FOOD PRICES - Food Security, Food Prices and Climate Variability - page 138

transportation costs is the rule, rather than the exception. Crime and/or civil conflict could
also raise trading costs to a prohibitive level (Turner, 1999).
Figure 7.1 captures the essential elements of local food price formation in food deficit
areas. In equilibrium, on average, local food prices are not determined by local food supply
shocks, but rather by changes in the price at which local consumers can buy food imported
from elsewhere. Changes in this “import parity price” are largely determined by changes in
transport costs including changes in crime, civil unrest and fuel prices, food aid, ad hoc gov-
ernment policies, world prices if the local market is connected and/or supply shocks to the
national or sub-national food surplus areas.
Will a positive supply shock (e.g., favorable rainfall) in a food surplus location influence
local prices? No food supplier is going to choose to supply goods at a price lower than the
cost of goods purchased elsewhere. Consequently, this export parity price represents a price
floor. However, particularly for isolated markets, the export parity price could be quite low.
In these markets, local supply shocks will influence local prices. The extent of the influence
depends, in part, on trade costs. Figure 7.2 shows the elements of local food price formation
in isolated food surplus areas. The influence of a given weather shock on local prices will
depend on the magnitude of the shift in the local supply curve, but also on the relative elas-
ticities of local demand and supply. If supply is completely inelastic, prices will fall sharply
when the location receives favorable weather. This is particularly true in regions where most
farmers grow the same crop and have limited ability to move their goods beyond the local
market. The ability to store grains during large harvests will help mitigate the adverse con-
sequences of large local surpluses (Shepherd, 2012; Jones et al ., 2011).
Figure 7.3 captures the essential elements of local food price formation in a food surplus
area connected to urban areas with efficient transportation networks. While shocks to local
supply do exert an influence on local prices, the magnitude of this influence will be small and
will depend on locally determined trade costs. For these markets, increases in world food
prices and domestic fuel prices have opposing effects on local prices. An increase in world
food prices raises the export parity price, while an increase in domestic fuel prices lowers the
export parity price. The net effect will depend on the distance to a major market, and the
availability and quality of infrastructure.

Local cereal price

Local supply (always low)

Equilibrium

Local import parity price

Equilibrium price

Local
deficit

Local export parity price

Local demand

Quantity

Qty Supply Qty Demand

FIGURE 7.1 Local supply shocks do not determine equilibrium of local prices in a food deficit
market (inelastic supply curve) (source: Kshirsagar, 2012).