Brian Dillon University of Washington Christopher B. Barrett Cornell University IMF/OCP/NYU International Conference on

1. 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

2. 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

3. Motivation Key question in this paper Do global oil price shocks impact food prices in local (sub-national) 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.

4. Motivation Global oil prices and local maize prices: 3 potential links • Production costs • Fuel for tractors and irrigation pumps • Fertilizer costs 2. Structural link through biofuels markets 3. Transport costs

5. Motivation Production costs: we can reject In theory Production costs should not matter for prices in well-integrated, 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

6. Motivation 2. Linkage through biofuels: detectable in global price series?

7. Motivation 2. Linkage through biofuels: not a part of this paper Clear theoretical link (de Goorter et al. 2013) And correlation is clear (Baffes2007, 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

8. Motivation 3. Transport costs: the focus of this study 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.

9. Motivation Preview of findings • Effects are substantial: across 17 markets, average long run elasticity of local maize price to global oil price is 0.26 • Global oil price matters more than global maize price in markets farthest from coast • Global oil price shocks transmit much more rapidly than global maize price shocks Key implication for policy: when global commodity prices co-move, 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

10. Motivation Empirical approach: stepwise estimation of error correction models Global oil price POE petrol price Petrol price in market j Includes exchange rate ? Global maize price POE maize price Maize price in market j 2 4 3 1

11. Motivation Identifying assumptions • Study countries are price-takers on international markets • Within region, no feedback from maize prices to fuel prices • Within countries, disequilibrium between POE price and market j price is resolved through adjustment in market j • Exchange rates weakly exogenous to global price changes (verified in Appendix)

12. Motivation Data • 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

13. Data Study markets

14. Global crude oil – national petrol prices Step 2: Global oil prices and Port-of-entry (POE) fuel prices Mombasa, Kenya Addis Ababa, Ethiopia Dar es Salaam, Tanzania Kampala, Uganda

15. Global crude oil – national petrol prices Step 2: Global maize prices and Port-of-entry (POE) maize prices Mombasa, Kenya Addis Ababa, Ethiopia Dar es Salaam, Tanzania Kampala, Uganda

16. Motivation Step 3: POE fuel price and fuel prices in other markets Step 4: POE maize price and maize prices in other markets

17. Results: Cumulative pass-through elasticities

18. Results: Elasticity of local maize price to global prices

19. Results: Magnitude of oil price elasticity is increasing in distance from POE

20. Results: Speed of adjustment (number of months for 80% pass-through)

21. Results: Speed of adjustment (80% pass-through)

22. Motivation Summary of findings • Oil prices matter because of their effect on transport costs • Across 17 markets, average long run elasticity of local maize price to global oil price is 0.26 • Global oil price matters more than global maize price in markets farthest from coast • 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

23. Motivation Thank you for any comments, ideas, feedback Brian Dillon: bdillon2@uw.edu Chris Barrett: cbb2@cornell.edu