Introduction to IMPACT

1. Introduction to IMPACT

2. Models • Models are logical constructs that represent systems • Models can: • Simplify a complex system • Provide insights to the inner workings of a system • Models cannot explain everything

3. Model Vocabulary • Agents: Actors within the system (consumers, farmers, governments) • Variables: Conditions defining the state of the agents (income, farmland, technology) • Exogenous Variables: Inputs to the model, defined by the designer (population, income) • Endogenous Variables: Outputs of the model (food demand, commodity prices) • Assumptions: Rules about interactions between agents and variables (equilibrium, max climate change yield reductions)

4. Economics • Study of the allocation of scarce resources • There are many allocation methods • In Trade Theory the market is predominant • A market is the process of negotiation between buyers and sellers, which determines the prices for goods and services

5. Economic Trade Models • Many types of trade = Many trade models • Defining Model Scope • What is traded (general vs. partial equilibrium) • Who are the agents (micro vs. macro) • Market location (local, regional, global) • Types of analysis (normative or positive) • IMPACT’s scope: • Partial equilibrium focused on Ag. Sector • Macro Agents • Global markets • Both normative and positive analysis

6. Defining IMPACT: Agents • 159 geopolitical regional governments • Consumers are region level agents and are defined as either urban or rural • Farmers are FPU-level agents and are defined by production technology (irrigated, rainfed, etc.) • FPUs (Food production units) are subnational geospatial units

7. Defining IMPACT: Exogenous Variables • Socio-demographic change (Population, GDP) • Consumer and producer preferences (elasticities) • Productivity and technology change (IPRs) • Climate change and yield response • Starting Point (base values) and time horizon

8. Defining IMPACT: Endogenous Variables • Agriculture Sector Projections for: • Commodity Prices • Commodity Production and Demand • Crop Areas and Yields • Food Availability

9. Defining IMPACT: Assumptions • Equilibrium (supply=demand) • Demand is a function of consumer preferences, commodity prices, and budgetary constraints • Supply is derived from area-yield functions and is a function of existing land, crop prices, changes in technology, and the availability and cost of inputs • Suppliers are profit maximizers and consumers are utility mazimizers

10. Explaining Demand • The products and services consumed at a given price

11. Explaining Demand • The products and services consumed at a given price • Consumers face budgetary constraints

12. Explaining Demand • The products and services consumed at a given price • Consumers face budgetary constraints • Must make trade offs based on preferences (elasticity)

13. Explaining Supply • The products and services supplied at a given price

14. Explaining Supply • The products and services supplied at a given price • Suppliers must determine how to best utilize inputs for profit maximization. Maize Wheat

15. Explaining Supply • The products and services supplied at a given price • Suppliers must determine how to best utilize inputs for profit maximization. • Production Possibility Frontier – Set of possible outputs from available inputs and technology Maize Maize Maize Wheat Wheat Wheat More Arable Land Better Wheat Fertilizers

16. Explaining the Market • Markets are where consumers and producers negotiate prices. Prices will fluctuate until equilibrium is reached (supply=demand) • Why assume equilibrium? • What happens at price P2? • Consumers want Q1 • Producers produce Q2 • There is a surplus of Q2-Q1

17. Explaining the Market • Markets are where consumers and producers negotiate prices. Prices will fluctuate until equilibrium is reached (supply=demand) • Why assume equilibrium? • What happens at price P2? • Consumers want Q1 • Producers produce Q2 • There is a surplus of Q2-Q1 • Producers will have to lower prices to sell excess production

18. Explaining the Market • Markets are where consumers and producers negotiate prices. Prices will fluctuate until equilibrium is reached (supply=demand) • Why assume equilibrium? • What happens at price P2? • Consumers want Q1 • Producers produce Q2 • There is a surplus of Q2-Q1 • Producers will have to lower prices to sell excess production

19. Explaining the Market • Markets are where consumers and producers negotiate prices. Prices will fluctuate until equilibrium is reached (supply=demand) • Why assume equilibrium? • What happens at price P1? • Consumers want Q2 • Producers will produce Q1 • There is now a shortage Q2-Q1

20. Explaining the Market • Markets are where consumers and producers negotiate prices. Prices will fluctuate until equilibrium is reached (supply=demand) • Why assume equilibrium? • What happens at price P1? • Consumers want Q2 • Producers will produce Q1 • There is now a shortage Q2-Q1 • Excess demand will push prices up till production meets demand

21. Explaining the Market • Markets are where consumers and producers negotiate prices. Prices will fluctuate until equilibrium is reached (supply=demand) • Why assume equilibrium? • What happens at price P1? • Consumers want Q2 • Producers will produce Q1 • There is now a shortage Q2-Q1 • Excess demand will push prices up till production meets demand

22. Activity-Commodity Framework • IMPACT 3 is a structural model • Describes the production process in a reduce form • Activities • Represent production processes • Farms, ranches, processing plants • Demand factors of production • Produce commodities

23. Activity-Commodity Framework • Commodities are: • Produced • Traded • Consumed • Can be endogenousor exogenous • Maize has endogenous production and demand • Oilseeds have endogenous production and both endogenous and exogenous demand (biofuels) • Fertilizers could be considered an exogenous commodity

24. Crop Example • Activity • Soybean Farm(jsoyb) • Demands land, fertilizer, labor • Activity Output • Soybean Commodity(csoyb)

25. Processed Commodity Example • Activity • Soybean Processing (jsbol) • Demands soybeans (csoyb) at market price • Processed Commodities • Soybean Oil (csbol) • Soybean Meal (csbml)

26. Complete Oilseed Activity-Commodity Chain • Activity • Soybean Processing (jsbol) • Demands soybeans (csoyb) at market price • Processed Commodities • Soybean Oil (csbol) • Soybean Meal (csbml) • Activity • Soybean Farm(jsoyb) • Demands land, fertilizer, labor • Activity Output • Soybean Commodity(csoyb)

27. IMPACT Prices • Prices are Endogenous • Ensure Global Supply = Global Demand • Each country has three markets: • Farm gate • National • International • Price wedges (marketing margins, taxes, subsidies) between markets

28. Producer Prices • Producer Price • Price at Farm/Factory Gate • Prices that are paid by traders for activity outputs • Price at farm or factory gate • Equal to the sum of input costs of an activity and any ad valorem producer subsidy (PSE) • PSEs originally are from OECD sources and have been adjusted and mapped to IMPACT countries and activities

29. Consumer Prices • Producer Price • Price at Farm/Factory Gate • Prices consumers pay in national markets for commodities • Includes transportation costs, as well as taxes and tariffs • Consumer Subsidies are targeted and applied in the demand equations • Consumer Price • Commodity prices consumers face • Marketing Margin

30. Consumer Prices • Producer Price • Price at Farm/Factory Gate • Consumer Price • Commodity prices consumers face • Marketing Margin • Marketing Margin • World Price • Trade Regime

31. Consumer Prices To trade or not to trade? • Consumer prices are set to either the country’s export price or its import price • This switch allows commodities to change from globally traded to non-traded endogenously

32. Tradability in IMPACT • Commodities can be globally traded or non-traded • This option can be set exogenously • E.g. sugar beets • Or endogenously through the followinginequality • Export Price • Import Price < < PC • PE • PM