PAT

How Markets Work

Session 1.4

WFP Markets Learning Programme 1.4. 1Price Analysis Training

Learning Objectives

After this session, participants should be able to:

Identify and explain the key elements of market functioning, including market structure, conduct and performance

Explain the relevance of structure, conduct and performance in anticipating market response to shocks

WFP Markets Learning Programme 1.4. 2Price Analysis Training

Supply: understanding food production and trading patterns (especially for most important staple foods)

Demand: factors that affect household demand (e.g. changes in incomes, purchasing power, preferences)

Prices: levels, trends, seasonality

…and…

Key elements of market analysis

WFP Markets Learning Programme 1.4. 3Price Analysis Training

Markets: environment & functioning (structure-conduct-performance of “SCP”) - factors influencing trader decisions and behaviour

Why focus on “SCP”?

Sound SCP analysis can help:

analysts anticipate market response, define relevant scenarios, formulate expectations about the season to tell more complete food security story

decision makers with info needed to make better responses

orient timing of humanitarian response, complementing, compensating for markets rather than replacing them

WFP Markets Learning Programme Price Analysis Training 1.4.4

e.g. Traders plan to import cereals using prices from regional & international markets.

They have strategies for dealing with production shortfalls in their market areas.

Learning about trader behaviors helps identify market indicators to follow, analyze implications of market phenomena, project likely supply responses, and ultimate market outcomes.

Market Structure

Refers to stable market features that influence buyers & sellers:

Number of buyers & sellers

Market environment aspects: public policies, regulations, barriers to entry (e.g. license fees, taxes, credit access, kinship ties)

Nature of trading relations: vertical coordination mechanisms (how transactions are conducted between market participants: spot market transactions, contracts, cooperatives, strategic alliances among farmers, traders, transporters, processors & consumers)

WFP Markets Learning Programme 1.4. 5Price Analysis Training

Structure: Surplus/Deficit Areas - Example

-40000

-35000

-30000

-25000

-20000

-15000

-10000

-5000

0

5000

10000

2003 2004 2005 2006

District level cereal balances in Timor Leste (2003-2006)

WFP Markets Learning Programme 1.4. 6Price Analysis Training

Structure: Commodity Flows Wheat & wheat flour flows in Caucasus Region

WFP Markets Learning Programme 1.4. 7Price Analysis Training

Structure: Vertical Coordination/IntegrationMarketing Chain

WFP Markets Learning Programme 1.4. 8Price Analysis Training

Market Conduct

The patterns of behaviour that traders follow to affect or adjust to changing market conditions:

Price-setting behaviour

• Level of competition

Buying and selling practices

• Weights and measures

• Grades and standards

WFP Markets Learning Programme 1.4. 10Price Analysis Training

WFP Markets Learning Programme 1.4. 11Price Analysis Training

Cas

hew

Nut

Pric

es (

FC

FA

)

Collection (5), local transport (20) & wholesaler fees (5) , wholesaler margin

(25), transport to Bissau (10)

170- <-Wholesale Price

Tax (14) Exporter Fees (5) & Port Fees (10), Export Tax (47)

246- <-FAS Guinea Bissau

Margin – International Trade (92)

338- <-FOB Guinea BissauTransport Insurance (53)

391- <-CIF Cochin, India

Producer costs and profit (105)

105- <-Producer Price in Guinea Bissau

Conduct: Market Actor’s Margin Breakdown: from Rural Guinea Bissau to India

Market Performance

Extent to which markets produce outcomes deemed good or preferred by society: regular, predictable availability of basic foods at affordable prices

Price levels and stability over time and space

Margins and costs

Volumes

Profits: excessive or not

Product quality

Food distribution within market

WFP Markets Learning Programme 1.4. 12Price Analysis Training

Market Functioning:

The logical conclusion drawn from analysing market structure, conduct and performance

Market functioning should not be equated simply with market performance: all three market aspects (S-C-P) must be analysed

Understanding market structure & the conduct of traders, other actors in the market system helps us understand how traders may respond to a shock: i.e. whether they will hoard – or move – commodities when price differentials sky rocket.

WFP Markets Learning Programme 1.4. 14Price Analysis Training

Application and Interpretation of S-C-P and Market Functioning

Helps us anticipate how the market is likely to respond to shocks

Can help us anticipate price changes (seasonal impacts, etc.)

Informs response decisions: helps identify risks (e.g. corruption, inflation, trader response capacities) confronting various response options

WFP Markets Learning Programme 1.4. 15Price Analysis Training

Please turn to Workbook Exercise 1.4.

The Marketastan File: Market Environment in Northern Province

WFP Markets Learning Programme Price Analysis Training 1.4.16

Small Group Work

Exercise 1.4. Debriefing

1. Market environment in Northern Province?

2. Likely implications for market functioning and for HH food security in Northern Province?

WFP Markets Learning Programme Price Analysis Training 1.4.17