import/export parity pricing

8/14/2019 import/export parity pricing

1/28

FEWS NET Washington1717 H St NWWashington DC [email protected]

FEWS NET is a USAID-funded activity. This publication was authored by Athur Mabiso. The authors views expressedin this publication do not necessarily reflect the view of the United States Agency for International Development or the

United States Government.

Import/Export Parity Price Analysis

FEWS NET Markets Guidance, No 1May 2008INTRODUCTION

Importandexportparitypricesareusedtoassesstheincentivestotrade

aswellastheincentivestoproducewherelocalproducersarein

competitionwithproducersandsuppliersfromoutsidethecountryor

acrosstheborder.Paritypriceanalysisisanimportanttoolforfood

securityandearlywarninganalystsinthatitcanbeusedtodeterminethe

incentivestoproducefoodandthepotentialforprofitableimportationof

foodandagriculturalinputsthroughprimaryportsofentryoracross

internalregionalborders.Paritypricesareusedtocomparepricesofa

commodityintwodifferentlocations,whenthetwolocationsarein

differentcountries.

www.fews.net

Acompletefoodsecurityanalysisrequiresthatanalystsaccountfor

eventsthathavepotentialfoodsecurityimplicationswhethertheyoccur

withinoroutsidetheircountry.Marketsandtradeactasimportant

transmissionmechanismsfortheseexternaleventsandare,therefore,

essentialtounderstandingfoodsecurity.Eventscanberelatedto

commercialmarketactivityaswellasgovernmentpoliciesandprograms

thataffectmarketsandtrade,whichinturnaffectsfoodsecurity.

Foodsecuritymonitoringandanalysisforearlywarningpurposesentails

forecastingor

setting

expectations

about

significant

events

that

may

happeninthecomingmonthsandtheirimplicationsonfoodsecurity;

regularlymonitoringtheconditionsthatunderlietheexpectations,andperiodicallyvalidating,updatingormodifyingthe

expectations.Formingexpectationsinvolvesaskingquestionsaboutwhatwilllikelyhappeninthenearandmediumterm

suchaswhatwilltherainfallpatternlooklikeoverthecominggrowingseason,willtherebeadequateavailabilityoffood

commoditiesinvariouspartsofthecountryandthroughoutabroaderregion,andhowwillpricesbehaveoverthepending

hungerseason.

TABLEOFCONTENTSIntroduction................................................ 1

Whatisparitypricing?................................ 2

Calculatingtheparityprice......................... 2

Howisparitypriceanalysisrelevanttofood

security

analysis

and

early

warning? .......... 2

Twotypesofparityprices........................... 3

Choosingtherightparityprice ................... 6

Importanteconomicconceptsand

assumptions................................................ 8

ExamplesofuseforFEWSNETwork........ 10

Someimportantaspectsofparityprice

calculations............................................... 12

Dataneedsandsourcesforcomputing

parityprices .............................................. 20

Conclusions............................................... 24

References................................................ 25

Usefulwebsites......................................... 26

Glossary .................................................... 27

Sometypicalquestionsafoodsecurityandearlywarninganalystmightaskregardingmarketsinclude:

WilltradersholdinglargestocksofmaizeandmilletinKano,NigeriareleasetheirstockstoprovisionmarketsinNigerwherepricesarecurrentlyelevatedandconsequentlyimproveavailabilityandrelievetheupwardpressure

onprices?

WillAfghanfarmershaveincentivestoinvestinandexpandwheatproductiongivenaparticularlylowwholesalepriceforwheatflouracrosstheborderinPakistan,fromwhere70to80percentofallimportedwheatflourto

Afghanistanoriginates?

WillplummetingbeefpricesinNairobicreatedisincentivestotradeforTanzanianpastoralistswhotypicallyselltheirlivestockinNamangaMarketacrosstheborderinKenya?

GivenHaitianbakersrelianceonforeignmarketsforwheatflour,willthesoaringinternationalpricesleadtoashortageofbreadinPortauPrince?


2/28

FEWS NET Markets Guidance, No. 1 May 2008

Famine Early Warning Systems Network 2

Paritypricecalculationsandanalysiscanhelpanswerthesetypicalandveryimportantfoodsecurityandearlywarning

questions.

Thisguidancecoverswhatparitypricesare,howtheyrelatetofoodsecurityanalysisandearlywarning,howtocalculate

importandexportparitypricesusingseveralexamples,andadditionalliteratureandsourcesofinternationalcommodity

prices.

WHATISPARITYPRICING?Paritymeansequalorequivalent.Paritypricingismakingthepriceofaparticularcommodityequalorequivalenttoa

referencepriceforthesamecommodityinanotherlocation(e.g.,makingthepriceofonetonofwheatinMaputo,

MozambiqueequivalenttothepriceofanidenticaltonofwheatinDurban,SouthAfrica).

Anotherwaytolookatparitypricingisthatitisawayofaccountingfordifferencesinpricesofaparticularcommodityin

twodifferentlocations.Inthissense,paritypricinghelpsusexplainwhythepriceofacommodity(e.g.,maizemeal)inone

marketisdifferentthanthepriceofthesamecommodityinanothermarket.Byattributingthedifferenceinpricestocosts

liketransport,taxesandsoforth,wecanthensaythepricesareequivalentoratpar.Inaccountingterms,theprices

balance(notequal)afterconsideringallrelevantadjustments.

CALCULATINGTHEPARITYPRICECalculatingaparitypriceinvolvestakingthepriceofacommodityataborderpostorportofentryandadjustingitforthe

transport,marketingandtransactioncosts1thatareincurredwhenbringingthecommoditytothegeographiclocation

underconsideration.Policyeffectssuchastaxes,subsidiesandtariffsonthecommodityarealsoincludedinthese

adjustments,andifweareinterestedinexpressingtheparitypriceinlocalcurrencyterms,acurrencyconversionmustbe

madeusingtheappropriate2foreignexchangerate.Theendresultisaunitpricereferredtoastheparityprice,which

reflectsthecashorfinancialvalueofthecommodityinthelocationunderconsideration.

HOWISPARITYPRICEANALYSISRELEVANTTOFOODSECURITYANALYSISANDEARLYWARNING?1.

Parity

prices

measure

the

incentives

3

or

disincentives

for

agricultural

production,

given

competition

from

international

tradeand/orcrossborderflows

2. Paritypricesmeasuretheincentivesordisincentivesformovingcommoditiesfromonelocationtoanother,specificallyacrossborders

3. Paritypricescanhelpdetectunfaircommoditypricing4. Paritypricescanbeanalyzedovertimetoassessthedynamicsoffoodsecurityinagivenlocation(1) Paritypricesmeasureincentivesordisincentivesforagriculturalproduction,givencompetitionfrominternationalor

crossbordertradeParitypricesinformusaboutthemarketincentivesand/ordisincentivesforlocalproductionoffoodcrops,cashcrops

andlivestockparticularlyforagriculturalexports.Incentivesforlocalproductionareimportanttoanalyzebecause

theygiveanindicationoflikelyfoodavailabilityandfarmincomederivedfromexportmarkets.Farmincomeis

subsequentlyusedbyhouseholdstobuyfoodand/orfarminputsinsupportofthenextseasonsproduction.

Relatedtothis,wecananalyzeparitypricesoffarminputssuchasfertilizerandseedjustaswedoforoutputslike

maizeandwheat.Thiscanbeusefulininstancesofinputshortagesinacountrybecauseitgivesusanindicationofthe

likelyproductionforthenextseason.Forexample,iffertilizermanufacturersinMalawifaceaprobleminmeetingthe

1Transactioncostsarethosechargesincurredinordertofacilitateatrade,e.g.ifnegotiationtookplacebeforethetradedealwasreachedandtherewere

administrativecoststhatthebuyerhadtopayorbrokerprocessingfees.2Appropriateinthesensethatitistheexchangerateexportersandimportersfacewhenchangingcurrenciesintheirdaytodaybusinessortheeffective

exchangerate(EER).Sometimesofficialexchangeratesarenottheeffectiveexchangerates.3Anincentiveissomethingthatincitesanaction;itprovidesamotive.Inthecontextofthisguidanceitwillmeanpotentialprofitsorgainfromperforming

acertaineconomicactivitye.g.transportingfoodforsalefromoneplacetoanother.Inthissenseanincentiveisameasureofwhetherdoingsomethingis

worthwhileornot.


3/28



countrysfertilizerrequirementsforthegrowingseason,farmersmayhavetorelyonimportedfertilizer.However,this

canonlyhappenifimportparitypricesoffertilizerarenottoohigh,otherwisefarmersmaynotbeabletoaffordit.

Therefore,ifwecalculateparitypricesofimportedfertilizeranddeterminethattheyareveryhigh,itmightmean

farmerswillgrowcropswithlessornofertilizerandinturngetloweryields.Thisisclearlysomethingthatcanaffect

foodsecurityinacountryandis,therefore,importanttoanalyze.

(2) ParitypricesmeasureincentivesordisincentivestomovefoodParitypricesprovideinformationabouttheincentivesordisincentivestomovefoodacrossborders(asmeasuredfrom

theborderpost).Bycomparingcalculatedparitypricesatthelocalmarkettotheprevailingpricesattheborder,food

securityanalystscantellhowdivergentthetwopricesareandattributethedivergencetovariouscostcomponents

basedontheadjustmentstheymadewhencalculatingtheparityprice.Thisgivesricherinformationaboutthesources

ofincentivesordisincentivestomovefoodfromaborderposttoalocalmarket.

Asanexample,ifwecalculatetheparitypriceofatonofwheatinMaputo,Mozambiquetobe10,000Meticalswhile

thepriceofthesametonofwheatinDurban,SouthAfricais6,000Meticals(afterforeigncurrencyconversion);we

mightaskwhatconstitutesthe4,000Meticalsdifference.Itcouldbethattransportcostsaretoohighandconstitutes

80percentofthedifference,thattherearehighinsurancecostsinvolved,orthattheexcisetaxonimportedwheatis

toohigh.Computingparitypriceshelpsuncoverthecause(s),andallowsustomakeabetteranalysisoftheincentives

tofood

inflows.

(3) ParitypricescanhelpdetectunfairpricingCalculatingparitypricescanhelprevealwhethermarketparticipantssuchastradersareextractingexcessiveprofits

andlimitinghouseholdsaccesstofood.Forexample,suppliersoflocallyproducedmaizemealcansellatpricesbelow

orequaltotheparitypriceforimportedmaizemeal(apracticealsoknownasimportparitypricing).Ifthecostof

producinglocally,plusmarketingthemaizemealismuchlowerthanthatofimportingthemaizemealthenthe

supplierswouldbeovercharging.Thiswouldmakebuyerslesscapableofaccessingthemaizemeal.Itshould,however,

benotedthatjustbecauseatraderispracticingparitypricingdoesnotnecessarilymeans(he)makesexcessiveprofits

(Parr,2005).Oneneedstocomparethecostsofproducinglocally,plusmarketingtothecostsofimportinginorderto

assessifthepracticeofimportparitypricingislimitingfoodaccessandavailability.

(4)

Assessing

dynamics

in

incentives

or

disincentives

Anotherreasonwhywemightwanttoknowaboutparitypricesistoanalyzechangesinincentivestomovefood4or

farminputsovertime.Bycalculatingparitypricesforseveraltimeperiodsandgraphingthemwithtimeonthe

horizontalaxis,wecantrackchangesandtrendsintheparityprices.Wecanalsoforecastchangesbasedonhistorical

trends5

.Whenwetrackthedifferencesinimportparitypricesacrossdifferentregionsovertime,changingincentives

forfoodmovementbetweendifferentlocationscanbeseen.Thisallowsustosaysomethingaboutwhatislikelyto

happentoregionalmarketsupplyandmarketpricesinfuture.Suchinformationisvitalinmonitoringlikelyfood

availabilityandaccessibilityfordifferentregionsinacountry.

TWOTYPESOFPARITYPRICES:(i) Importparityprice(IPP)thevalueofaunitofproductboughtfromaforeigncountry,valuedatageographic

locationofinterestintheimportingcountry.

(ii) Exportparityprice(XPP)thevalueofaproductsoldataspecificlocationinaforeigncountry,butvaluedfromaspecificlocationintheexportingcountry.

Importparityprice(IPP)Theimportparitypriceisthevalueofaunitofproductboughtfromaforeigncountry,valuedatageographiclocationof

interestintheimportingcountry. SupposeweimportwheatintoGaalkacyo,SomaliafromtheUnitedStates.Theimport

4Typicallyfoodwillbemovedbymarketparticipantssuchastradersfromasurplusareatoadeficitarea.Howeverthisoccurswhenitisprofitablefor

tradersandmarketparticipantstomovethefood.5Anexampleofthisisshowninthesectiontitledillustrativepricegraphsandtables.


4/28


Famine Early Warning Systems Network

paritypriceofwheatinGaalkacyowouldconsistofthepriceofwheatattheportofexitintheUnitedStates(i.e.attheGulf

ofMexico)plusthetransportcostspaidtoshipthewheattotheportofMogadishu(commonlyreferredtoasfreight

charges),plusinsurancecostsandporthandlingcharges,plustariff/excisedutycharges,plustheinlandtransportcostspaid

tomovethewheatfromtheportofMogadishutoGaalkacyo6

.Figure1showsanillustrationofthisexamplebyfollowing

theroutetakenbythewheatandconsideringthevariouscostcomponentsinvolvedinshippingthewheat.

Inthisexample,thepriceofwheatonceloadedontoacarrierattheportofexitintheGulfofMexicoiscalledthefreeon

board(FOB)price.Thisisbecausethewheathasbeenloadedonboardthecarrierforfreefromtheimporterspointofview

sincetheimporterdoesnotpayanythingyet.Now,ifweaddtotheFOBthetransportandmarketingcosts,whicharepaid

bytheimportertobringthewheattoMogadishu,wearriveattheMogadishuborderpriceofwheat.Thispriceattheentry

portofMogadishuiscalledthecostinsurancefreight(CIF)priceofwheat,sinceitincludesthecostofinsuranceandfreight

charges.Itcanalsobecalledtheimportparityprice(IPP)attheimportingcountrysdock.Table1liststhevarious

componentpiecesofCIFandFOB.

Figure1.Illustrationofimportparitypricing

Mogadishu

CIF

Port-handling

charges +

Tariff char e

Freight charges + insurance

costs paid to move product

to Mogadishu must be

included

Gu f ofMexico

FOB

Gaalkacyo

IPP+ Transport

cost from

Mogadishu

AdaptedfromCrawford(2007),MichiganStateUniversitycoursenotesforAgriculturalCostBenefitAnalysis(AEC865)

6Insomecases,transportcostswillbesubtractedinsteadofaddeddependingonwhetherwearecalculatingaparitypriceforanimportsubstituteor

exportandwhetheritisaninputoroutputunderconsideration.Thesenuanceswillbeexplainedindetaillater.

4


5/28



Table1.ComponentsofCIF(CostInsuranceFreight)andFOB(FreeonBoard)

Item Element

CIF Includes:

FOBcostatpointofexport

Freightcharges

to

point

of

import

Insurancecharges

Unloadingfromshiptopieratport

Excludes:

Importdutiesandsubsidies

Portchargesatportofentryfortaxes,handling,storage,agentsfees,andthelike

FOB Includes:

Allcoststogetgoodsonboardbutstillinharborofexportingcountry:

Localmarketingandtransportcosts

Localportchargesincludingtaxes,storage,loading,fumigation,agentsfeesandthelike

Exporttaxesandsubsidies

Projectboundary

price

Farmgateprice7

Source:WilliamA.Ward,CalculatingImportandExportParityPrices,TrainingmaterialoftheEconomicDevelopmentInstitute,CN3(WashingtonD.C.:

WorldBank,1977),p.8.

ExportParityPrice(XPP)LetusnowconsidercottonbeingexportedfromOuagadougou,BurkinaFasotoLiverpool,England. TocalculatetheXPPin

OuagadougouwestartwiththeCIFpriceinLiverpool(whichistheselectedworldprice)andsubtractfreightandinsurance

chargesthatimporterswillhavetopaytoshipcottontoLiverpool.Wemustthenconverttheresultingpriceintolocal

currencytermsusingtheexchangeratecottonexporterswillactuallyfacewhenchangingtheirforeigncurrencyearningsto

localcurrency;thisforeignexchangerateisreferredtoastheEffectiveExchangeRate(EER)whichisdifferentfromthe

OfficialExchangeRate(OER)whichistheexchangeratequotedbythegovernmentbutmaynotnecessarilybetheactual

rate

that

foreign

currency

is

exchanged

in

day

to

day

business

transactions.

After

converting

the

resulting

price

to

the

local

currency,wemustsubtractlocalportcharges(sayattheportinCotedIvoire)butmustthenaddanyexportsubsidies.

WhyarewedeductingandnotaddingsomeofthecostsassociatedwithtradewhenwecalculatetheXPP?

Theanswerliesinthepurposeoftheparitypricecalculationandtheperspectivewetake.

Intheexamplejustdiscussed,therecanbetwodifferentperspectivesregardingthecottonparityprice:

FromtheperspectiveofanimporterinLiverpool,theIPPofcottonisthelocalpriceofcottoninOuagadougouplusalltransportandinsurancecoststoshipthecottontoLiverpoolplusunloadingchargesattheport.Inthisperspectivewe

addanddonotsubtractthecostswhenmakingtheparitypricecalculationbecausetheimporterwillhavetopayfor

them.

However,fromtheperspectiveofanexporterinBurkinaFasositismoreusefultocalculatetheXPPvaluedatOuagadougou,becauses/hewantstocompareitwithothercottonpricesinLiverpoolandseeifhis/herexportpriceis

competitive,afteradjustingforshippingcosts.Also,theexporterwantstocompareitwithdomesticpricesand

determineifitismoreprofitabletoexportcottontoLiverpoolthantosellinthedomesticmarket.Notethatthe

transportandinsurancecostsareneitherincurredbytheexporternorpaidtotheexportersotheydonotshowupas

7Thefarmgatepriceisthepricethatthefarmerorproducerreceivesatthefarmorlocationofproduction.Itisthepriceoftheproduct

availableatthefarm,excludinganymarketingcostsortransportanddeliverycharges.


6/28



benefitsorcoststotheexporter.ThisiswhywesubtractthemfromtheCIFwhencalculatingtheXPP(thesameapplies

fortheportcharges).Howevertheexportsubsidiesareabenefittotheexporterandthisiswhyweaddthem.

CHOOSINGTHERIGHTPARITYPRICEThe

appropriate

parity

price

used

depends

on

the

situation

at

hand

and

the

perspective

taken

by

the

individual,

as

it

relates

totheirinterestand/orbusiness.

FORIMPORTERS:theywilltendtobeconcernedabouttheIPPbecauseithelpsthemfigureoutthecostsofimportinggoods.TheIPPhelpsimportersfindoutifitwillbeprofitabletoimportandresellgoodsinthedomesticmarket.Italsohelps

importersassesspotentialbusinesscompetitionfrombothlocalsandforeignerswhomayalsowanttosellinthedomestic

market.

Shouldcottonbeimported?

Regardingthecottonexamplepreviouslydiscussed,cottonshouldbeimportediftheIPPislowerthanthedomesticprice.

Forthecottontobecompetitivelypriced,animporter,afterpayingshippingcosts,mustfinditcheaperthanalternative

cottonimportsinLiverpool.TheimporterinLiverpoolmustalsofinditprofitabletothenresellthecottontotextile

companies.ThustheimporterwillbeinterestedinknowingthecostcomponentsoftheIPPthatweaddwhencalculating

theIPP.

FOREXPORTERS:theyaremorelikelytobeinterestedintheXPPbecausethistooallowsthemtofigureoutprofitabilityintermsofsellingaproductinaforeignmarket. Itallowstheexporterstogaugethebenefitsofexportingversussellinginthe

domesticmarketandenablesthemtocomparedifferentexportmarketsanddeterminethemostlucrativeone.IftheXPPis

higherthanthedomesticpricethenitmakessensetoexportandmakeahigherprofit.

Shouldcottonbeexported?

InthecottonXPPexample,iftheXPPinOuagadougouishigherthanthelocalpriceofcottonthenitisworthwhile

exportingtoLiverpool,otherwisetheexportermightaswellsellthecottonlocally.Sincewearetakingtheexporters

perspectiveandassessingifitisprofitablefortheexportertoshipcottontoLiverpool,wehavetosubtracttheshipping

costs(thatanimporterwillpay)fromtheCIFatLiverpoolwhencalculatingtheXPPatOuagadougou.

FORFOODSECURITYANALYSTS:bothperspectivesareimportantbecausebothdeterminewhetheraparticularfoodproduct/commoditywillbeavailableandaccessibleforconsumptioninaspecificlocationinthecountry.However,when

calculatingaparitypriceoneperspectivehastobetakenatatimeandthatperspectivewilldictatewhetherwehavetoadd

orsubtractdifferentcomponents/items.WheneverwecalculateXPPorIPPinthecontextoffoodsecurityanalysis,itis

criticaltofirstdeterminewhosefoodsecurityweareanalyzing(i.e.theimportingorexportingcountry)andthentakethis

perspectiveastherelevantperspective.

Ifthecountryexportscotton,itisimportanttodeterminethecottonXPPandestablishiftheexportmarketislucrative

enoughtoprovidehigherincomestodomesticfarmerstherebyallowingthemtopurchaseothergoodsthattheydonot

produce.WhencalculatingtheXPPthetransportcostshavetobesubtractedbecausethetransportcostisnotincurredby

theexporter(seetable2).

Ifacountry

imports

wheat,

for

example,

it

will

be

important

to

establish

the

wheat

IPP

to

determine

ifthere

are

incentives

forimporterstomakewheatavailableinthelocalmarketbybuyingfromforeignmarketsandtherebyavertpotential

wheatshortages.Now,whencalculatingthisIPP,transportcostswillhavetobeaddedtotheFOBsincetheimporterviews

theseasacosttheypaytobringthewheattothedomesticmarket.Inbothcases,calculatingXPPandIPPwouldallowthe

analysttodeterminethecostsoftransportandprofitmarginsassociatedwiththegoodinquestiontherebyfurther

elucidatingthepricestructure;thispricestructureiscriticalbecauseitaffectsfoodsecurityinalocation.Table2givesa

summaryoftheexporterandimporterperspectivesvisvistheparitypricesofcotton.


7/28



Table2.ExporterversusImporterperspectivesoncostcomponentsofparityprices

Description Exportersperspective Importersperspective(interestedinXPP) (interestedinIPP)

CIFinLiverpool(IPP) $1.16perkg $1.16perkg

7

CottontariffchargesatLiverpool Deduct$0.21perkg Add$0.21perkg

Seafreight

charges:

(port

of

Abidjan,

Cote

dIvoire

to

portofLiverpool,UK)Deduct

$0.17

per

kg

Add

$0.17

per

kg

Insurancecharges Deduct$0.09perkg Add$0.09perkg

FOBinAbidjan,CotedIvoire $0.69perkg $0.69perkg

Inlandtransport&marketingcosts Deduct$0.31perkg Add$0.31perkg

XPPatOuagadougou,BurkinaFaso $0.38perkg $0.38perkg

Asthetableillustrates,theexporterisconcernedabouttheXPP($0.38perkg)becausethisistheeffectivepricethats/he

cangetwhensellinghis/hercottoninLiverpool.Conversely,theimporterinLiverpoolismoreconcernedabouttheIPP

($1.16perkg)becausethisisthecharges/hemustpaytobuythecottonfromOuagadougou.

Importsubstitutionexample:Afghanistan

SupposetheAfghangovernmentplanstosubstituteimportedwheatwithlocallyproducedwheattoattainselfsufficiency.

Wecancalculatetheparitypriceofwheatthatwouldinducelocalfarmerstomeettotaldomesticdemand(e.g.inKabul),butourperspectivehastochangeslightly.ForfarmersinKunduz,Afghanistantomeetthedomesticdemandforwheat,the

wheatpricetheyreceiveinKabulmustbehigherthanthecurrentpricetostimulateincreasedproductionbutitmustbe

toolowforforeignexporters(e.g.,inPakistanorKazakhstan)sothattheydonotfinditworthwhiletocompetewithlocal

farmersfortheKabulmarket.

Inordertogetsuchapricethatmeetstheaboverequirements,theAfghangovernmentmightchargeahighimporttariffor

subsidizetheKunduzfarmers.ThesewouldconstitutecostcomponentsthatweneedtoincludeinourwheatIPP

calculation.NotethattheIPPherewouldbeforanoutputandisthusanincentiveforproductiontotheKunduzfarmers,

notacost(besuretocontrastthiswiththenextexample).ThecalculatedIPPwouldgiveusanindicationofthelikely

supplyofwheatanditsorigins.Table3illustratesthefarmersperspectivetakeninthisexample.

Table3.

Perspective

of

afarmer

producing

wheat

as

an

import

substitute

Description WheatFarmersperspective(interestedinIPP)IPPofwheatinKunduz,Afghanistan $0.19perkgIncountrytransportcostKunduztoKabul Deduct:$0.04perkg

IPPofwheatinKabul $0.23perkg

IncountrytransportcostTorkhamtoKabul Add$0.02perkg

IncountryInsurancecharges Add$0.01perkg

FOBatTorkhamborderpost $0.20perkg

WheatImportTariffchargeatTorkhamborder Add$0.06perkg

Transport&marketingcostsIslamabad,Pakistanto

Torkham

Add$0.03perkg

XPPatIslamabad,Pakistan $0.11perkg

NOTE:Kunduz

is

aprimary

wheat

producing

province

in

Afghanistan,

and

Torkham

is

the

name

of

the

border

crossingtownbetweenAfghanistanandPakistanontheroadfromKabultoIslamabad,intheNangarharProvinceof

Afghanistan.

ItislinkedbyahighwaywithJalalabadtothewest,Peshawartotheeast,andislinkedtotheN5

NationalHighwaytoKarachi thetownisonlyfivekilometreswestofthesummitoftheKhyberPass.Torkhamis

thebusiestportofentrybetweenAfghanistanandPakistan;amajortransporting,shipping,andreceivingsite

betweenthetwoneighboringcountries.

EventhoughthefarmerswillbepaidthepriceinKabul($0.23perkg)whentheymarkettheirwheatinKabul,itismore

importantforthemtoconsidertheIPPinKunduz($0.19perkg)asitaccountsfortransportcostswhichtheymustpaytotakethewheattotheKabulmarket.
http://en.wikipedia.org/wiki/Jalalabadhttp://en.wikipedia.org/wiki/Peshawarhttp://en.wikipedia.org/wiki/N-5_National_Highwayhttp://en.wikipedia.org/wiki/N-5_National_Highwayhttp://en.wikipedia.org/wiki/N-5_National_Highwayhttp://en.wikipedia.org/wiki/N-5_National_Highwayhttp://en.wikipedia.org/wiki/N-5_National_Highwayhttp://en.wikipedia.org/wiki/N-5_National_Highwayhttp://en.wikipedia.org/wiki/N-5_National_Highwayhttp://en.wikipedia.org/wiki/Karachihttp://en.wikipedia.org/wiki/Khyber_Passhttp://en.wikipedia.org/wiki/Khyber_Passhttp://en.wikipedia.org/wiki/Khyber_Passhttp://en.wikipedia.org/wiki/Port_of_entryhttp://en.wikipedia.org/wiki/Port_of_entryhttp://en.wikipedia.org/wiki/Port_of_entryhttp://en.wikipedia.org/wiki/Port_of_entryhttp://en.wikipedia.org/wiki/Port_of_entryhttp://en.wikipedia.org/wiki/Port_of_entryhttp://en.wikipedia.org/wiki/Khyber_Passhttp://en.wikipedia.org/wiki/Karachihttp://en.wikipedia.org/wiki/N-5_National_Highwayhttp://en.wikipedia.org/wiki/N-5_National_Highwayhttp://en.wikipedia.org/wiki/Peshawarhttp://en.wikipedia.org/wiki/Jalalabad


8/28



TheothercostcomponentsbetweentheXPPinIslamabad,PakistanandtheIPPinKabulareaddedbecausethesearegoing

tobecoststhatpotentialforeignexporterswouldhavetopayiftheywantedtocompetewithKunduzfarmersintheKabul

market.

Importedfarminputsexample:Afghanistan

If

we

were

calculating

the

parity

price

of

an

imported

agricultural

input,

the

calculation

may

also

differ

slightly

from

the

previouscasejustdiscussed.Thereasonagainisachangeinperspective.Inthiscasetheperspectivetakenisstillthatofa

farmer,butonewhousesthefertilizerasaninputinfarmproduction.Thus,thefertilizerpricenowconstitutesacostor

disincentivetothelocalfarmer(theoppositeofthepreviousexample).Inthisperspectiveitbecomesapparentthatwe

mustaddinsteadofdeductthiscosttoarriveattheIPPoffertilizerfacedbythefarmer.Table4givesanillustration.

Table4.IllustrationofthefarmersperspectivewhencalculatingIPPforaninputlikefertilizer

Description WheatFarmersperspective(interestedinIPP)8

IPPofKCL fertilizerinKunduz,Afghanistan $0.14perkgIncountrytransportcostKunduztoKabul Add:$0.04perkg

IPPofKCLinKabul $0.10perkg

IncountrytransportcostTorkhamtoKabul Add$0.02perkg

IncountryInsurancecharges Add$0.01perkg

FOBat

Torkham

border

post

$0.7

per

kg

Transport&marketingcostsIslamabad,Pakistanto

Torkham

Add$0.03perkg

XPPatIslamabad,Pakistan $0.04perkg

8

IMPORTANTNOTES: Generally,theimportantthingistoalwayskeepinmindtheperspectiveyouareadoptingwheneveryoucalculatea

parityprice.Thisisveryimportantbecauseitallowsyoutocalculateparitypricesinrelationtoanyindividualor

groupofindividuals,whosefoodsecurityyouwanttoanalyze.Someofthesenuancesshouldbecomeclearerwhen

welookattheapplicationssectionofthisguidance.

AnotherimportantnoteisthattheIPPandXPPcanbecalculatedatvariousgeographiclocations/stagesoftherouteofmovementofthecommodity.Incontrast,theFOBandCIFareonlycalculatedatportsofentryorexittoacountry.Bydefinition,CIFisaspecialtypeofIPPonlycalculatedataportofentryandFOBisaspecialtypeofXPP

IMPORTANTECONOMICCONCEPTSANDASSUMPTIONSThereareseveraleconomicconceptsthatarehelpfulinunderstandingparitypricingandhowitrelatestofoodsecurity

analysis.Theglossaryattheendofthisguidancegivesarelativelycomprehensivelist,butashortdiscussiononafewkey

conceptsishelpful:

Pricetransmissionrateisbasedontheassumptionthatpriceinformationindifferentlocationsistransmittedefficientlytoallmarketparticipantsspreadoverdifferentlocations.Inotherwords,tradersinoneplacereceiveprice

informationfromotherplacesquicklyalmostimmediately(i.e.thepricetransmissionrateishigh).Whenthis

conditionholds,

calculating

parity

prices

by

taking

prevailing

prices

at

different

locations

at

the

same

period

of

time

is

acceptable.Thismeansthateventhoughthecommoditypassesthroughthedifferentlocationsatdifferenttimes,the

priceofthecommodityatdifferenttimeperiodsisdisregardedandpriceinformationatthesametimeperiodbutin

differentlocationsisusedinstead.

Typicallyittakestimeforacommoditytomovefromoneplace(orstagewithinthemarketorvaluechain)toanother.

Thus,thecommoditywillbephysicallylocatedattheportofexitatonetimeandwillarriveattheportofentryinthe

importingcountryatalatertime.Itwillthenarriveinacityforconsumptionatanevenlatertime.Therefore,in

8KCLfertilizerisafertilizerthatcontainsPotassiumChloride,whichisachemicalcompoundcontainingnutrientsthatplantcropsneedto

growandincreaseyields


9/28



principle,calculationsofparitypricesbasedonprevailingpricesandcostsobservedatonetimepointaresomewhat

unrealisticandinaccurate.Ifitwerepossible,oneoughttotracebackthemovementofthecommodityovertimeand

throughdifferentstagesinthesupplychainandusecorrespondingpricesforthedifferentlineitemsintheparityprice

calculation.However,thiscanbetediousandverydifficult,especiallyifdataarehardtocomeby.Thisiswhymost

calculationssimplyassumeahighrateofpricetransmission.Therefore,itisstandardtoassumeahighprice

transmission

rate

unless:

pricesandexchangeratesfluctuatealotwithinaveryshortperiodoftime thecountryunderconsiderationhasveryhighlevelsofinflation priceinformationisnoteasilycommunicatedfromonelocationtoanother.

Therealityonthegroundcanbeverydifferentdelayscanbesubstantial(e.g.,clearingcustomscantakeseveraldays,

badroadsandsevereweatherconditionssuchasfloodsandstormcancausedelays).Becauseofthis,theprice

transmissionrateshouldalwaysbeassessedbytheanalysttodeterminethevalidityofhis/herparitypricecalculations.

Togainasenseofhowhighorlowtherateofpricetransmissionis,onecancomparethechangesinpricesinone

locationtothoseinotherlocationsanddeterminewhethertheyaregenerallyincreasingordecreasingatthesame

timesandifthechangesbetweentimeperiodsareveryhighornot.Forexample,theborderpriceofwheatina

countryforthelast120dayscanbegraphedwiththepriceofwheatinamarketcenter.Itcanthenbeobservedifthe

pricechanges

more

or

less

coincide

with

when

the

border

price

changes

and

how

drastic

these

changes

were

over

a

shortspaceoftime).Thisisarelativelycrudebutrapidassessmentmethod.Thereareothermorecomplextechniques

thatcanbeusedtoanalyzepricetransmissionratesindetailbutthesetakemoretimeanddatatoexecuteandare

beyondthescopeofthisguidance.

Tradedversusnontradedgoods Tradedgoodsaredefinedasthoseproductsthatcanbeexportedorimported(e.g.,KCLfertilizerandagriculturalcommodities),whilenontradedgoodsarethosethatcannot(e.g.,domestictransport

services).Nontradedgoodscannotbetradedeitherbecauseoftheirnature(e.g.,iftheycannotbetransportedintoor

outofacountrysuchgrainmillingservices)orduetorestrainingproductionandmarketingcostsorduetorestrictive

tradepoliciesandregulations.

Inthecontextoffoodsecurityanalysis,itonlymakessensetocalculateimportandexportparitypricesfortraded

goods

because

non

traded

goods

can

only

be

made

available

in

a

country

through

local

production.

Ofcourse,somegoodsareofficiallynontradedonlybecauseofrestrictivetradepoliciesbutthroughsocalledblack

marketsthesegoodsmightstillbetraded.InsuchcasesitmaystillmakesensetocalculateIPPandXPP.Inaddition,

paritypricecalculationscanbemadefornontradedgoodsthatarefoundindifferentlocationswithinacountry.This

maybedonetocomparepricesindifferentareasinacountryandthusascertainincentivesordisincentivestomove

thenontradedgoodfromonepartofthecountrytoanother,eventhoughthegoodisnotmovedacrosscountry

borders.However,thesepartypricesarenotwhataretypicallyreferredtoasIPPorXPP,butratherrelevanttogeneral

spatialpriceanalysis,whichisimportantinfoodsecurityanalysisandcanbetiedinwithImportandExportParityPrice

Analysis.

Lawofoneprice Incalculatingparityprices,itisassumedthatpricesofthesamecommodityindifferentlocationsareonlydifferentbecauseoftransport,marketingandtransactioncosts.Thisissometimesreferredtoasthelawofone

price(LOOP).

It

is

assumed

that

no

individual

or

firm

can

persistently

earn

excessive

profits

just

by

buying

aproduct

in

onemarketandsellingitinanotherbecauseotherindividualswillseetheopportunityanddothesame,thereby

increasingthequantitysoldinthelucrativemarketandinturnloweringprices.

Thelawofonepriceisbasedontheassumptionthatdomesticcountrymarketsarecompetitiveandwellintegrated

withworldmarketsandpeoplecanfreelyenterthemarket.However,itispossible,andoftenthecaseinthereal

world,thatdomesticcountrymarketsarenotcompetitive(e.g.,amonopolycontrollingagrainmarket).Thuswhilethe

assumptionunderliesourcalculationsweoughttoassessthedifferentcomponentsofourcalculatedparityprices,and

seewhatproportionofthepricemightbeattributedtoexcessiveprofiteering.


10/28



Thiscanbedonebymarketanalystsandresearchersusingtechniquesthatarebeyondthescopeofthisguide.

Nevertheless,arudimentaryassessmentcanbedonebyfindingoutthenumberoffirmsormarketplayerswhobuy

andselltheproductbetweenthedifferentstagesinthesupplychainandassessingtowhatextentthesefirmsareable

towithholdmarketinformationandifthesefirmsormarketplayersareabletomakeexcessiveprofitsoverandabove

themarketingcost(includinglabor,processingandtransportetc.)foraprolongedtimeperiod(e.g.3months)without

facing

competition

that

will

drive

these

profits

down.

If

the

case

is

that

such

firms

are

few

and

are

able

to

control

marketinformationandmaintainexcessiveprofitsthentheseprofitmarginsmayhavetobeestimatedandincludedin

theparitypricecalculation.Thiscanbeverydifficultbecausesuchinformationisoftenprivateandconfidential.

However,profitmarginestimatesthatwecanrelyonareoftenbasedonestimatedcostsofinputsusedbythesefirms

lessthesellingpricesfortheirproducts.

Formoredetaileddiscussionsonotherimportanteconomicconceptsrelatedtoparitypricing,alistofreferencesand

websitesareprovidedintheannexesoftheguidance.

APPLICATIONS(EXAMPLESOFUSE)FORFEWSNETWORKThefollowingareexamplesofparitypricecalculationstoillustratehowyoumightgoaboutcalculatingparitypricesand

presentingthemtodecisionmakersandotherusersoffoodsecurityanalysis.Anefforthasbeenmadetomakethemas

realas

possible.

Nevertheless,

the

accuracy

of

the

figures

presented

here

is

not

the

important

point.

Rather

the

layout

used

andorderoflineitemspresentedincalculatingtheparitypriceisthemainfocus.Itisimperativethattheorderofline

itemsfromtoptobottomfollowthegeographicmovementofthecommoditywhoseparitypriceisbeingcalculated.

Ifyouarefamiliarwithaccounting,bookkeepingorbudgetingyouwillrealizesomesimilaritieswiththeparityprice

calculations. Inpractice,thecalculationsofparitypricesintheseapplicationscanbedoneinanExcelspreadsheetorany

budgeting/accountingframeworkorcomputerprogramthattheanalystisfamiliarwith(evenatableinawordprocessor).

Thisisdonesothatdifferentprices,costsandlineitemscanbeneatlyorganized,makingiteasyforthereadertofollow

andunderstandthecalculationsandnumbers.

Aspreadsheetofparitypricecalculationscanprovidesomeadditionaldetailandinsightsonthedifferentcostsoftrading

andmarketinggoodsandyoumaywanttokeeptrackofthisovertime. Thishasimplicationsonhowyousetupyour

spreadsheet

of

calculations.

So

you

might

have

a

row

above

the

two

rows

as

shown

in

table

5,

or

one

which

indicates

the

timeperiodforeachnumberasshownintable6.Thisisjustonewayoforganizingyourspreadsheets.Theimportantthing

isthattheyareeasytoreadandfollow.

Table5.Illustratingtheformatinaspreadsheet:

Words Currency NumberBorderpriceatLimpopo,SouthAfrica US$ 239

Table6.Illustratingtheformatinaspreadsheetforseveraltimeperiods

Dec15th Dec17th Dec20thWords Currency Number Number NumberBorderpriceatLimpopo,SouthAfrica US$ 239 217 224

Inthe

applications

that

follow,

only

one

time

period

is

shown

to

avoid

confusion.

The

applications

use

different

settings

to

showthevarietyofissuesthatmayarisefordifferentparitypricecalculations.Thedataandinformationneededto

calculatetheparitypricesisassumedtohavealreadybeencollectedthustheapplicationsstartbylistingthedataand

informationthenshowhowtoputthedatatogetherinthecorrectorder,tocalculatetheparityprices.Also,the

applicationsmakeuseofcityandportnamesfromdifferentpartsoftheworld.Ifthereaderisnotfamiliarwiththe

geographyoftheplacesornamesandlocationsalludedto,afewfootnoteshavebeenincludedatthebottomofeach

paritypricecalculationinordertoinformthereaderandhopefullyavoidconfusionaboutnamesandplaces.


11/28



APPLICATION1:CalculatingtheImportParityPriceforakeystaplecommodity

FollowingisanexampleofhowtocalculatetheIPPforonetonofricepaddyimportedfromBangkok,ThailandtoNiono,

Mali. Giventhefollowingdataandinformationwecanpresenttheparitypricecalculationasshownbelow.

Data

and

information

CommodityCostFOBpriceforpaddyinBangkok,Thailand US$269/ton

TransportCostsFreightchargesfromBangkoktoDakar,Senegal US$65/ton

RoadtransportchargesfromDakartoMaliborder(toKayes) CFA18,363/ton

TransportcostsfromKayestoBamako(317km) CFA14,726

TransportcostsfromBamakotoSegou,Mali(235km) CFA7,332

TransportcostsfromSegoutoNiono,bothinMali(104km) CFA3,244

InsuranceCostsFreightInsurancecharges US$15/ton

PortChargesPort

charges,

unloading

at

Dakar,

Senegal

CFA

12,937/ton

PortchargesattheMaliborder CFA9,600/ton

TaxesAdvaloremtaxonriceimportsatMaliborder 17.5%

CustomstaxonunloadingatKayes,Mali CFA49/ton

CustomspackagingtaxatMaliborder CFA392/tonpackage

AdditionalcustomstaxatKayes CFA290/ton

Storage,handling,andmarketingStorageandhandlingmarketingcostsinBamako CFA3,000/ton

MiscellaneousCostsMattraKayescomputerprocessingcost CFA494/ton

CurrenciesOfficial

exchange

rate

US$1

=

CFA

520

Paritypricecalculation

Lineitem CurrencyUnit FinancialTermsTake:FOBatportofexport(US$/toninBangkok,Thailand) US$ 269Add:Freightchargestoyourport(US$/tontoDakar) 65

Add:Insurancecharges 15

Add:Unloadingchargesatyourport(Dakar) 8

357

ConvertforeigncurrencytodomesticcurrencyatOfficialExchange

Rate(OER)9

[US$1

=CFA520]

CFA (357520)

Equals:CIFatyourport(Dakar) 185,640Add:Tariffs ___

Deduct:Subsidies ___

9SometimestheOfficialExchangeRate(OER)isnottheappropriaterateofexchangetouseparticularlyifitisafixedratethatisnotbasedonglobal

demandforlocalcurrency.Insuchcasesinquiriesmayhavetobemadetoascertainwhatexchangerateimportersandexportersarefacingwhendoing

business.Inthiscaseithasbeenusedbecauseinquiriessuggestedthatimportersdoactuallyexchangeforeigncurrencyfortheirdaytodaybusinessesat

theOER


12/28



Lineitem CurrencyUnit FinancialTermsAdd:LocalportchargesatDakar,Senegal 12,937

Add:Handling,transportandmarketingcosttoMaliBorder 18,363

BorderchargesatMaliborder 9,600

Add:

Tariff,

(17.5%

ad

valorem)

at

Mali

border

(17.5%

185,640)

32,487

Add:CustomstaxesatMaliborder 731

Deduct:ImportSubsidies ___

Add:ComputerprocessingcostsatKayes,Mali 494

Equals:MarketpriceatKayes 260,252Add:TransportfromMalibordertoBamako,thecapital 14,726

Equals:MarketPrice(Bamako) CFA 274,978Add:StorageandhandlingmarketingcostsinBamako 3,000

Add:TransportfromBamakotoSegou,Mali(235Km) 7,332

Add:TransportfromSegoutoNiono,bothinMali(104Km) 3244

Equals:ImportParityPriceatlocalmarket(Niono) CFA 288,554BangkokisthecapitalcityinThailandwherericeisexportedfrom.DakaristhecapitalcityofSenegalandthisisthefirstportof

entrythatthericearrivesatafterleavingBangkok,Thailand.KayesisanadministrativecenterandcityinMaliontheRiver

Senegallocatedabout510kmnorthwestofBamakothecapitalcityofMaliandisneartheSenegaleseMalianborder.Segouisa

cityinsouthcentralMalilocatedabout235kmnortheastofBamakothecapital.Nionoisatownlocated104KmNorthnorth

eastofSegouinMali.

Remember:Itisimperativethattheorderoflineitemsfromtoptobottomfollowthe

geographicmovementofthecommodity

SOMEIMPORTANTASPECTSOFPARITYPRICECALCULATIONSLevelofaggregation:Animportantconsiderationwhencalculatingparitypricesisthelevelofaggregationonewantstouseforeachlineitemor

adjustment.Bylevelofaggregation,wearereferringtotheextenttowhichdifferentcostcomponentsarelumpedtogether

andreferredtoasonecostcomponentorlineitem.Forexample,allcustomstaxesattheMaliborder,intheabove

example,havebeenlumpedtogethersothatfewerlineitemsappearinthefinalspreadsheet.Butthenumber(731)

includesthespecificcomponents/severaldistincttaxeswhichareshowninTable7.

Table7.CostcomponentsoftheCustomstaxesatMaliborderlineitem

UnitLineitem FinancialTermsCFACustomstaxesonpackaging 392

AdditionalCustomstax 290

CustomstaxonunloadingatKayes 49Totalcustomsduties 731

Theavailabilityofdatamayalsodeterminelevelofaggregation.Iftheonlydataavailableareaggregatedthenthereisno

choice(youmayhavetoreportalltaxestogether).However,ifdisaggregateddataisavailable,onecanpresent

disaggregatedinformation.Aggregationseemsappealingbecauseitmakestheparitypricecalculationrelativelyshorteras

ithaslessadditionsorsubtractions. However,itisimperativethattheorderoflineitemsfromtoptobottomfollowthe

12


13/28



geographicmovementofthecommodity.ThispreventslumpingthecustomschargesattheDakarporttogetherwiththose

chargedattheMaliborder,eventhoughtheyareallcustomsrelatedcosts.Thereasonyouwanttolistthecustomscharges

separatelyisthatitallowsyoutofollowthemovementofthecommodityandwhencostsareincurredandwhichcountry

hasleviedthetaxes.Asummarycalculationorspreadsheetofcostscanlistinformationabouttheparitypriceatdifferent

geographiclocations/levelsinthedeliverysystemofthecommoditywithoutgivingdetailsaboutwhatarethelargestcosts

and

where

are

they

incurred.

It

provides

a

simple

comparison

of

prices

between

two

points.

So,forthesummarizedspreadsheetexampleabove,wecantellthattheimportparitypriceofriceinSegouisthesumofall

lineitemsexceptthetransportcostbetweenSegouandNiono(i.e.CFA288,5543,244=CFA285,310).Thisallowsusto

saysomethingaboutthefoodsecuritysituationinvariousplacesusingthesameIPPorXPPcalculation(inthiscaseSegou

andNiono).Forexample,wecansaythattransportcostsbetweenSegouandNionoonlyconstituteabout1%ofthetotal

IPPofriceinNionosuchthatfoodsecurityinNionoislesslikelytodependonthattransportcost.FoodsecurityinNionois

moredependentontheworldFOBpriceofriceinBangkok,Thailandwhichconstitutesabout48%oftheIPPofricein

Niono.WecanalsousethisinformationaboutthecalculatedIPPtogetherwithotherinformationthatwemightcollect

fromNionotofindoutifThairiceisrelativelyaffordableornot,andwhichsegmentsofthepopulationswouldbeableto

affordit.ThiswouldgiveusanindicationofhowaccessibleimportedThairiceis.

Transportroutes:Traderscantransportthecommoditytoalocationusingmultipleroutes.Forinstancewemighthaveinformationthatthe

riceinourexampleisalsobeingtransporteddirectlyfromtheborderofMaliandSenegaltoSegou,ratherthanpassing

throughBamako:

Transport,bordertoSegou(viaSikasso&Koutiala)CFA12,342/ton

Insuchacasewehavetheoptionofcalculatingseveralparitypricesdependingontheroutewechoose.Itisgenerallymore

usefultocalculatetheparitypricebasedonthemostusedroutes,whichwilltendtobethecheapestforobviousreasons.

However,insomecasesaroutemaybeusedmoreofteneventhoughitisrelativelymoreexpensivebecauseitpasses

throughamajorcitywherealargeurbanconsumerpopulationresides.SoforourMalianexample(Table7),theIPPforrice

hasbeencalculatedbasedontheroutethatpassesthroughBamakobecauseBamakoisthecapitalcityofMali;hencemost

rice

imports

will

pass

through

this

route.

It

can

be

seen

in

our

example

that

had

we

calculated

the

IPP

based

on

the

direct

routethatdoesnotpassthroughBamakotheIPPwouldhavebeenlower.

ProcessingConversionFactor(PCF):TheIPPwewanttocalculatemayinvolveaprocessedproduct.SoforourMalianexample,wemightwanttocalculatethe

IPPforprocessedrice,notpaddy.Todothis,weneedtoknowwhatiscalledtheprocessingconversionfactor(PCF)10

for

processingpaddytorice

Definition:TheProcessingConversionFactor(PCF)isaratioofthequantityofaprocessedproducttothe

quantityoftheunprocessedproductthattheprocessedproductwasderivedfrom.Itbasicallytellsushow

muchoftheprocessedproductwillresultfromprocessingoneunitoftheunprocessedproduct.

Thisis

the

quantity

of

rice

that

1unit

of

paddy

will

yield

after

being

processed

(i.e.

after

taking

into

account

processing/refinerylosseshowmuchriceisleftfromthe1unitofpaddy).Inaddition,wewillneedtoknowtheactualcost

ofprocessingthepaddyintoriceinordertocalculatetheIPPfortheprocessedrice:

Processingconversionfactor(PCF)frompaddytorice:1kgpaddy=0.64kgrice

PaddyprocessingcostsinBamakoCFA50/kg

10TheProcessingConversionFactor(PCF)isusuallyanumberbetweenzeroandonebecausesomeoftheunprocessedgoodislostor

comesoutasabyproductduringtheprocessing(e.g.theroughpartsofthemaizegrainandchafftheprotectivecasingofthemaize

grain)

13


14/28



Giventhisinformation,wecantaketheIPPforonetonofpaddyinthelocationwhereitwillbeprocessedanddivideitby

0.64thenaddtheprocessingcosttogettheIPPforonetonofprocessedriceinthesameprocessinglocation.Toavoid

confusiononwhetherweshoulddivideormultiplybythePCF,alwaysaskyourselfifyouwouldexpectonetonof

processedricetocostmoreorlessthan0.64tonsofprocessedrice(whichisequivalenttoonetonofunprocessedpaddy).

The

answer

is

obvious;

one

ton

of

processed

rice

will

cost

more

than

0.64

tons

of

processed

rice.

So

the

parity

price

of

a

ton

ofprocessedriceshouldbehigheranditcanonlybehigherifwedividebyafraction(whichistheprocessingconversion

factor).

Sotoillustrate,iftheIPPofonetonofunprocessedpaddyinBamako,MaliisCFA274,978andtheprocessingconversion

factorforpaddytoriceis0.64thentheIPPforonetonofprocessedriceinBamako,Maliis:(CFA274,9780.64)+paddy

processingcost=CFA429,653.12+(CFA50/kg 1000kg)=CFA479,653.12.

14

Paradox ingtofindthatnotradeoccursforaparticularcommodityevenifpricessuggestthatitwould

t,

t

ICATION2:

Import

Parity

Price

Calculation

for

Inputs

ollowingisanexampleofhowtocalculatetheIPPforonetonofnitrogenfertilizerinMalawi.Giventhefollowingdataand

ataandinformation

icallack

of

trade:

Sometimesitcanbesurpris

beprofitablefortradetooccur.Therearevariousreasonswhythismayoccurandtheseincluderestrictivepolicies,conflic

climaticconditionsandrisk.Suchcasescanleadtounavailabilityoffoodinalocationandultimatelyfoodinsecurity.Insuch

cases,calculationofparitypricesisnotpossiblesincenoactualtradeoccursthoughhypotheticalparitypricescanstillbe

estimated.Suchcasesareusuallycommonunderextremeconditionsanditismoreimportantforthefoodsecurityanalys

toanalyzeandunderstandtheotherfactorsthatmaybecausingtheparadoxicallackoftrade.

PPLA

F

informationwecanpresenttheparitypricecalculationasshownbelow.

D

CommodityCostFOBpricefornitrogenfertilizerinDurban,SouthAfrica ZAR1028/ton

TransportCostsFreightchargesfromDurbantoQuelimane,Mozambique ZAR90/ton

RoadtransportchargesfromQualimanetoNsanjeborder MZN700/ton

RailwaytransportcostsfromNsanjetoSalima,bothinMalawi(439km) MK2960

Railwaytransport

costs

from

Salima

to

Lilongwe,

capital

of

Malawi

MK

980

TransportcostsfromLilongwetoMzuzu,Malawi MK2500

TransportcostsfromMzuzutolocalfarmsinUsisya,Malawi MK980

InsuranceCostsFreightInsurancecharges ZAR24/ton

RailinsurancecostsfromNsanjetoSalima MK490

RailinsurancecostsfromSalimatoLilongwe MK240

PortChargesUnloadingatQuelimane,Mozambique MZN33.50/ton

Malawibordercharges MK140/ton

Formula:IPPofonetonofprocessedproduct=(IPPofonetonofunprocessedproductPCF)+costof

processingonetonofunprocessedproduct

Note:Itisimportanttorealizethatsometimeswhenthereisaprofittobemade,therewillbeno

trade,thereasonbeingrestrictivepolicies,conflict,climaticconditions,risk,etc.


15/28



Sto ketingrage,handling,andmar StorageandhandlingmarketingcostsinLilongwe(averagestorageisfourdays) MK130/tonperday

CurrenciesUS$=UnitedStatesDollar

ZAR=SouthAfricanRand

MK=Malawi

Kwacha

MZN=MozambicanMeticais

Effectiveexchangerate US$1=ZAR20=MK140=MZN25.5

aritypricecalculationP

Lineitem CurrencyUnit FinancialTermsTake:FOBatportofexport(Rands/toninDurban,SouthAfrica)

11

ConvertforeigncurrencytoMozambicancurrencyatEffective MZN (114225.5020) =

MZN

Equals:CIFatportofQuelimane MZN 1489.55Nsanje,Malawiborder)

2

reigncurrencytodomesticcurrencyatEffectiveExchange (2189.55140

MK

idies

rgesatNsanje,Malawi K 14

cost(NsanjetoSalima, 2

insurancecharges(NsanjetoSalima) MK 490.00

ongwe)

16,

tingcostsinLilongwe(MK130/ton

sportfromLilongwetoMzuzu,Malawi MK 2

lawi

20,

ZAR 1,028.00

Add:FreightchargesDurbantoportofQuelimane,Mozambique ZAR 90.00

Add:Insurancecharges ZAR 24.00

Subtotal ZAR 42.00

ExchangeRate(EER)[ZAR1=MZN25.5020]a/ 1456.05

33.50Add:Unloadingcharges

Add:Transportcosts(Quelimaneto MZN 700.00

Subtotal MZN 189.55

Convertfo

Rate(EER)[MZN1=MK14025.5]b/ MK 25.50)=

12,021.06

12,021.06Equals:CIFatportofentry(Nsanje)Add:Tariffs ___

Deduct:

Subs ___

Add:Localportcha M 0.00

Add:Handling,railtransportandmarketing

Malawi)

Add:Rail

MK 960.00

Add:TransportfromSalimatoLilongwe MK 980.00

Add:Railinsurancecharges(SalimatoLil MK 240.00

Equals:MarketPrice(Lilongwe) MK 831.06Add:Storageandhandlingmarke

perday)

Add:Tran

MK (4130)=

520.00

500.00

Add:TransportfromMzuzutofarmsinUsisya,Ma MK 980.00

Equals:IPPatlocalmarket(Usisya) MK 831.06


16/28



Lineitem CurrencyUnit FinancialTermsNOTE:LocalcurrenciesincludeZAR=SouthAfricaRand,MZN=MozambiqueMeticalandMalawiKwacha.Durbanisacoastalcity

inSouthAfrica,bytheIndianOcean.QuelimaneisaseaportinMozambique,northofDurbanSouthAfricaandbytheIndian

Ocean.QuelimaneisalsotheadministrativecapitalofZambeziaProvince,aMozambicanprovince.Nsanjeisatowninthe

southernregionofMalawineartheborderwithMozambique.Salimaisacity(20kmwestoftheshoreofLakeMalawi)incentral

Malawiabout90kmeasteastnorthofLilongwe,thecapitalcityofMalawi.MzuzuisacityinMalawiabout283kmnorthof

Lilongwe.Usisya

is

asmall

remote

town

in

northern

Malawi

located

in

the

Nkhata

Bay

district.

The

closest

city

to

Usisya

is

Mzuzu.a/SinceUS$1=ZAR20=25.5MZNweneedtoconverttheamountinZARintoMZNbymultiplyingitbytheMZNtoZAR

ratio,whichisMZN25.5ZAR20.Toavoidconfusionaboutwhichratiotouse,alwaysconsiderthecurrencies.Inthiscase,

westartoffwithZARbutwanttoconverttoMZN.SothenZAR(MZNZAR)shouldgiveustheMZNsincetheZARcancels

withtheotherZAR.

b/Similarly,toconvertfromMZNtoMKweneedtomultiplybytheMKtoMZNratio,whichisMK140MZN25.5

Notethatinthisapplication,thereareseveralexchangerates,thusonehastoconvertcurrenciesmorethanoncebecause

thefertilizercrossesmorethanonenationalboundary.

APPLICATION3:ExportParityPriceCalculationforanImportantIncomeEarningExportCrop

FollowingisanexampleofhowtocalculatetheIPPforonetonofcottonlintinBurkinaFaso. Giventhefollowingdataand


Dataandinformation

CommodityCostCIFLiverpoolforcottonlint(takenasestimateforworldpriceofcotton) 580/ton

CIFLiverpoolforseed 94/ton

TransportCostsFreightchargesforlint(Accra,GhanatoLiverpool,UK) US$89/ton

Freightchargesforseed(Accra,GhanatoLiverpool,UK) US$45/ton

InlandtransportcostsinGhana:PagaborderposttoKumasitoAccra,Ghana CFA39,500

Incountrytransportcosts(OuagadougoutoPaga,Ghanaborderpost) CFA13,500

Incountrytransportcosts(TougantoOuagadougou) CFA20,000

InsuranceCostsInsurancechargesforlint(AccratoLiverpool) US$14/ton

Insurancechargesforseed(AccratoLiverpool) US$10/ton

PortChargesLocalportchargesinAccraforcottonlint CFA6,500

LocalportchargesinAccraforcottonseed CFA1,200

BorderchargesatPagaborderpost CFA4,500

TaxesCottonlintexportsubsidy:5%advalorembasedonLiverpoolprice

Storage,handling,andmarketingHandlingchargesforseedorlint(AccratoLiverpool) US$8/ton

Cottonginning,bailingandstorageiscarriedoutinOuagadougoucityMiscellaneousCosts

Processingconversionfactor(PCF):onetonofseedcottonyields400kgofcottonlint

and590kgofseed.ThisimpliesthatthePCFforseedcottonbeingprocessedintolint

is0.4andthatforseedcottonbeingprocessedintoseedis0.59.

CurrenciesEffectiveexchangerate(EER) US$1= 2=CFA520


17/28




Lineitem CurrencyUnit LintFinancial

TermsSeed

FinancialTermsTake:CIFatportofImport(Liverpool,UK) 580 94Convert

to

US$

at

EER

[US$1

=2]

US$

(580

2)

=

1160(94

2)=

188

Deduct:Freightchargestoyourport(US$/tonfromAccra,Ghana) 89 45

Deduct:Insurancecharges 14 10

Deduct:Handlingcharges 8 8

FOBportofAccra(inUS$terms) 1049 125

ConvertforeigncurrencytodomesticcurrencyatEER

[US$1=2=CFA520]

CFA (1049520) (125520)

Equals:FOBatportinAccra,Ghana(inCFAterms) 545,480 65,000Deduct:Exportduties ___ ___

Deduct:Local

port

charges

at

Accra,

Ghana

6,500

1,200

Deduct:Handling,transportandmarketingcostfromBurkinaFaso

BordertoAccra,Ghana

39,500 39,500

Deduct:BorderchargesatBurkinaFaso/Paga,Ghanaborder 4,500 4,500

Subtotal: 494,980 19,800

Add:Cottonlintexportsubsidy,(5%advalorem) (5%

US$1160

CFA520)

=30,160

___

Subtotal: 525,140 19,800

Deduct:TransportfromOuagadougou,BurkinaFasotoPaga

borderpost

CFA 13,500 13,500

EqualsXPPatOuagadougou CFA 511,640 6,300

Converttoseedcotton:(Ouagadougou)a/

CFA (511,6400.

4)

(6,3000.59)

EqualsportionsoftheseedcottonXPPatOuagadougou CFA 204,656 3,717

Add2portionstogetXPPofseedcottonatOuagadougou 208,373

Deducttransportcost(TougantoOuagadougou,bothinBurkina

Faso)

CFA 20,000

Equals:XPPforseedcottonatlocalmarket(Tougan,BurkinaFaso) CFA 188,373LiverpoolisacityinEnglandwhichhasacottonmarketwherecottonexportersfromallovertheworldsellto.Accraisthecapital

cityofGhana.PagaisatowninGhanaattheborderwithBurkinaFaso.OuagadougouisthecapitalcityofBurkinaFaso.Touganis

atowninthenorthwesternpartofBurkinaFaso;itisthecapitalofSourouProvinceinBurkinaFaso.

a/ThePCFisuseddifferentlyherebecausewearenowcalculatingtheXPPoftherawmaterialnottheprocessedproduct.Hence,wemultiplythefiguresbythePCF.ComparethiswiththepreviousdiscussionwherewedividedbythePCF,andyou

willseethattheformulaorequationisstillthesame.TheonlydifferenceisthatsincewearenowinterestedintheXPPof

theunprocessedproduct,wetakethePCFtotheothersideoftheequation,whichleadstomultiplicationbythePCF.

AdaptedfromBellietal.(2001)EconomicAnalysisofInvestmentOperations:AnalyticalToolsandPracticalApplications.

WorldBankInstitute,DevelopmentStudies,Washington,D.C.

NotethattheXPPoftherawmaterial(seedcotton)dependsontheXPPsofthevariousprocessedproducts(lintandseed)

thatcomefromtherawmaterial.ThiscanmakeXPPcalculationalittledifficultinthatonehastotracevariousprocessed


18/28



productcomponentsoftherawmaterial.Inpractice,itiscommontoonlyconsiderthosecomponentsthataretradedand

thosethatrepresentafairshareoftherawmaterialinprocessing.Inthecaseoftheprecedingcottonexample,anotherby

productofcalledscarto(whichisaveryshortsoiledfibernotsuitableforexport)hasbeenleftout.Thereasonforthisis

thatitisnontradedanditconstitutesonly1%oftherawseedcottonsuses.TypicallythemagnitudeofthePCFwillgivean

indicationoftheimportanceoftheprocessedproductvisvistheXPPfortherawmaterial.Inthecaseofscarto,thePCF

for

processing

one

ton

of

seed

cotton

to

scarto

is

only

0.01

implying

that

only

10kg

of

scarto

is

yielded

from

one

ton

of

seed

cotton(Gittinger,1982).Thisisnegligibleandisthusleftout.

Anothercomplicatingfactoristhatdifferentexporterswillhavetheirproductsprocessedatdifferentlocations.So,in

principle,oneoughttofollowuptheexactlocationofprocessingtoapplythePCFintherespectiveprocessinglocations.In

practice,thiscanbetediousandsoitsufficestocomputetheconversioninthelocationwheremostprocessingoccurs.

Typicallythiswouldbeamajorcityormanufacturingcenterinthecountry.

Clearly,animportantassumptionhereisthatdataonthePCFisavailable.Thiskindofdataisoftenaroughestimate

gatheredfromthemajorprocessorsoftheproductinquestion.Itisobviousthatdifferentprocessorsmayhavedifferent

PCFsdependingontheirlevelofprocessingefficiencyandevenasingleprocessorwillhavevaryingPFCsfromonetimeto

another.ThislevelofdetailaboutthePCFisoftenassumedawaybysimplytakingthePCFofthemajorprocessorina

countryasthereferencePCF.


19/28



APPLICATION4:ExportParityPriceCalculationforaProcessedCommodity

FollowingisanexampleofhowtocalculatetheIPPforontonfreshbabycorninZambia. Giventhefollowingdataand


Dataandinformation

CommodityCost

CIFLondonforbabycorn 420/ton

TransportCostsAirFreightchargesforbabycorn(Lusaka,ZambiatoLondon,UK) US$320/ton

TransportcostsfromLusakaprocessingplanttoairport ZMK13,700

InlandtransportandhandlingcostsinZambia:NorthenZambiatoLusaka ZMK249,500

InsuranceCostsInsurancechargesforbabycorn(Lusaka,ZambiatoLondon,UK) US$49/ton

PortChargesInspectionchargesatportofentry(Heathrow,Londonairport) 40/ton

LocalairportchargesinLusakaforbabycorn ZMK209,300

CustomschargesatLusakaairport ZMK63,450

Storage,handling,

and

marketing

Handlingandrefrigerationchargesforbabycorn(Lusaka,ZambiatoLondon,UK) US$24/ton

PackagingandcuttingcostsatLusakaprocessingplant ZMK241,000

MiscellaneousCostsHACCPcertificationcosts US$25/ton

Processingconversionfactor(PCF):onetonofunprocessedbabycornyields820kgof

processedbabycorn.ProcessingisdoneinLusakaandthePCFofYorkFarm(the

majorprocessorofexportfreshbabycorninZambiaisused).

CurrenciesEffectiveexchangerate(EER)(ZMKistheZambiancurrency,theZambianKwacha) US$1=2=ZMK4020


Lineitem CurrencyUnit FinancialTerms

Take:CIFatportofImport(London,UK) 420Deduct:Inspectioncharges 40

Subtotal: 380

ConvertBritishpoundstoU.S$currency US$ (3802)=760

Deduct:AirFreightchargestoHeathrowairportfromLusaka,

Zambia

US$ 320

Deduct:Insurancecharges US$ 49

Deduct:Handlingandrefrigerationcharges US$ 34

FOBinLusaka(inUS$terms) US$ 357

ConvertforeigncurrencytodomesticcurrencyatEER

[US$1=2=ZMK4020]

ZMK (3574020)

Equals:FOBatLusakaairport(inKwachaterms) ZMK 1,435,140Deduct:Exportduties ___

Deduct:LocalairportchargesinLusaka,Zambia ZMK 209,300

Deduct:CustomschargesatLusakaairport ZMK 63.450

Deduct:TransportcostsfromLusakaprocessingplanttoLusaka

airport

ZMK 13,700


20/28



Lineitem CurrencyUnit FinancialTerms

Subtotal ZMK 1,148,690

Deduct:HACCPcertificationcosts(convertedtoZMKatEERUS$1=

ZMK4020)

ZMK (US$254020)=

100,500

Deduct:Packaging

and

processing

costs

ZMK

241,000

Subtotal 807,190

Converttounprocessedfreshbabycorn ZMK (807,1900.82)=

XPPforunprocessedfreshbabycorninLusaka ZMK 661,895.80

Deduct:Handling,transportandmarketingcostfromNorthern

Zambia(Malupengafarmingareas)toLusaka

ZMK 249,500

XPPforunprocessedfreshbabycorninMalupenga,Zambiafarmingarea ZMK 412,395.80NOTE:LocalcurrenciesincludeZMK=ZambianKwacha.LondonisthecapitalcityofEnglandandadestinationforbaby

cornexportedfromZambia.LusakaisthecapitalcityofZambia.Malupengaisaruralfarmingareainnorthernparts

ofZambia.Somefarmersinthisareagrowbabycornforexport.

OneimportantlessontotakefromtheprecedingapplicationisthattheCIFandFOBcanbecalculatedusingtheairportasa

portofentry.ThuseventhoughLondonisnotattheborderoftheUK,aCIFcanbecalculatedatthislocation.However,this

isarelativelyuncommoncaseasmostagriculturalproductsarebulkyandnottransportedbyairfreight.

AnotheraspectisthatbyspecifyingthatwewantedtocalculatetheXPPforfreshbabycorn,wedidnothavetoworry

aboutbabycornthatisprocessedintootherformse.g.canned.Inthissense,theaboveanalysiscouldbeconsideredapart

oftheanalysisthatwouldgointocalculatingtheXPPforoverallbabycornexports(whetheritisexportedascannedbaby

corn,orpickledorfrozenorfreshpackedbabycorn)inthatwewouldonlychangethefirstsectionsofthecalculationand

calculatetheoverallbabycornparitypricebyaveragingtheparitypricesofthedifferentbabycorntypesintheLondon

market.ThislevelofdetailwasavoidedgiventhatmostofthebabycornexportedfromZambiatotheUKisintheformof

freshpackedbabycorn.However,itcouldhavebeendonebycalculatingaweightedaverageoftheparitypricesinLondon

forthedifferentbabycorntypes,usingthepercentageshareofeachtypeofbabycornasweights.Foranhypothetical

example;ifthe

overall

baby

corn

exported

to

London

consisted

of

70%

fresh

baby

corn

and

30%

canned

baby

corn

our

CIF

intheLondonlineitemwouldhavebeencalculatedasequalto0.7420+0.3(CIFofcannedbabycorninLondon).

DATANEEDSANDSOURCESFORCOMPUTINGPARITYPRICESFindingtherightdatatocomputeparitypricescanbedifficult.Moreover,thesourcesofdatanotalwaysknownandthere

arehighsearchcostsoffindingwhatyoureallyneedaswellashighcostsofdatacollection.Itbecomescriticaltofindways

ofefficientlycollectinggood,reliableandappropriatedatatobeusedinthecalculations.Thissectionoftheguidance

servestogiveadviceonhowandwheresomeofthedataforcalculatingparitypricesmightbefound.Itisbynomeansan

exhaustivelistandeachlocationwillvaryintermsofsourcesandavailabilityofdata.Thefirsttimethatthedataare

collectedisprobablythemostdifficultsincetheanalysthastosearchforthedataandinformationfrommultiplesources

butoncethefirstdatacollectionhasbeencompleted,thesamesourcescanbeusedtointhefuture.Thismakescollection

of

data

to

update

the

parity

prices

a

little

less

cumbersome.

TypicallyFEWSNETrepresentativesarenotdirectlyinvolvedincollectingdata,butusesecondarydatafromvarious

sources.Thedataneededwillincludeworldpricesofcommoditiesobservedatdifferentlocationsaswellastransportand

freightcharges,tariffsrates,subsidies,effectiveexchangerates(EER)andconversionfactorsforprocessingofcommodities.

Insomeinstancesyouwillalsoneedunitconversionfactors(e.g.conversionratefromkgstotonsorfrombushelstotons).

FinancialpriceswilleitherbetheCIForFOBprices,dependingonwhetheryouareinterestedincalculatingimportparity

priceorexportparityprice.Thefollowingpointoutsomeusefulsources:


21/28



AgoodstartingplaceforonlineagriculturalmarketdatasourcesisacomprehensivecompilationbyLevallee(1996),(seehttp://aec.msu.edu/fs2/market_information.htm).Hereyouwillfindlinkstoseveralonlinedatabases

particularlyforworldcommodityprices.SomeareregularlyupdatedsuchasthepinksheetsfromtheWorldBank

website,whileothersmaynotbeasuptodate.Afewofthesewebsitesareincludedattheendofthisguidancein

theusefulwebsitessection.

Datathatarerelativelymoredifficulttoaccessareoceanandairfreightratesaswellaslocaltransportandmarketingcosts.Typicallythesewillvarybyspecificationsofeachtypeofshipmentandcountryunder

consideration.Thus,usingcountryspecificratherthaninternationalsourcesofsuchdataisbetter.Insome

countries,therearepublicreportingagenciesthatmayhaveestimatesofsuchdata,e.g.thenationalorcentral

statisticalofficesorMinistriesofAgricultureorMinistriesofTrade.Onehastomakeenquiriesbyphoneoremail

andsearchforthem.Publicreportingagencieswilltendtohavepublicationssuchasstatisticalbulletins,

newslettersoronlinepublicationsthatonecanconsult(e.g.SAFEXinSouthAfrica;www.safex.co.za).Insome

instances,privateagenciesandcentralmarketswillprovidethesedataaspublicinformation(thoughusuallyfora

fee).Generally,foroceanfreightrates,privatecompaniesinvolvedintheimportexportbusinesswillhavedataon

theseandmayprovidefreeregularupdates(thesameappliesforincountrytransportcosts).

Whereinformaltradeconstitutesasignificantportionofthetradeintheproductyouareconsidering,datamaybevery

difficult

to

get

so

that

the

analyst

must

use

ballpark

estimates

based

on

key

informant

interviews

or

conversationswithinformalimportersandexporters.Consultinglocalfarmergroupssuchascooperativesand

tradersmaybeaveryhelpfulexerciseandparticularlywheredataarenotavailableandballparkestimateshaveto

beused.Inmanyinstancesyouwillbeforcedtorelymoreonthekeyinformantfarmersandprocessorsofthe

productstoaccessdata.Thefollowingboxcontainsalistofsomeofthemostimportantdatathatwouldtendto

representthebulkofthecosts

ImportantDatatoCollectData SourceTransportandfreightcosts Truckingcompaniesandlocaltransporters

Localmarketing

margins

Traders

Exchangerates Importersandexportersaswellasgovernmenttradeoffices

inthecaseoftheOER

Processingcostsandprocessingconversionfactors Processors

Packaging Packingcompaniesorsellersofpackingmaterials

Localoutputprices Localmarkets

Localtaxesandsubsidies(e.g.,salestax,transporttaxes,

exportsubsidies,etc.,dependingontheareaandtypeof

taxesleviedorsubsidiespaidbythegovernment)

Localgovernmentofficesandagencies

Inthecasethatinformationisnotavailableandnodatacanbefound,calculatingtheIPPandorXPPatcertainspecific

locationswillnotbepossiblebutqualitativeinformationaboutpricesandtradecanstillbesolicitedforfromtradersand

consumers

in

a

location.

In

addition,

it

is

usually

the

case

that

parity

prices

will

still

be

calculable

for

major

cities

and

centers

thatsmallertownsareclosetoandareconnectedto.Suchsecondarymarketscanplaytheroleofaproxyandstillinform

theanalyst(thoughlessso)abouttheexpectedparitypriceinthesmaller/remotetown.
http://www.safex.co.za/http://www.safex.co.za/http://www.safex.co.za/


22/28



5. IllustrativepricegraphsandtablesThefollowingaregraphsandtablesdesignedtoshowthevariouswaysofdisplayinginformationonparityprices.Since

mostparitypricecalculationsaredoneinaspreadsheetprogramsuchasMicrosoftExcel,itiscommontousethesame

programtodevelopgraphsandtablesasisdoneintheexampleshere.

a.Paritypricegraph

IPP of Wheat in Johannesburg, South Africa and Harare, Zimbabwe July '06 to September '07

1600

1700

1800

1900

2000

2100

2200

2300

2400

2500

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61

week

R/Ton

Asseeninthegraphabove,theparitypricedifferentialforwheatbetweenJohannesburg,SouthAfrica(theblueline)and

Harare,Zimbabwe(thegreenline)increasedinthefirst12weeksindicatingsomemajorchange(e.g.,thateithercostsof

transportingormarketingwheatfromJohannesburgtoHarareincreasedinthatperiod).Itisalsopossiblethatashortage

ofwheatinHarare,Zimbabweledtohigherparitypricesforimportwheatorthatthereweretradepolicychangessuchas

graduallyincreasedimporttariffs.Afterthefirst12weeks,theparitypricedifferentialstabilizedsuggestingthatafterthe

first12weekperiodtherewerenofurthermajorchanges.Theprecedinggraphanddiscussionservetoillustratesomeof

theinformationthatcanbepresentedbasedonthecalculatedparitypricesovertime.Theinformationis,however,less

informativeonitsownandwouldrequiretheanalysttogroundtruthinordertoexplaintheparitypricemovements.

Bymonitoringtheparitypricemovementsovertimeinthedifferentlocationsorlevelsofthesupplychain,trendscanbe

establishedtoassessandcomparepricemovementsbetweenthetwolocations.However,togleanmoreinformationfrom

theparitypricesweneedtoassessthevariousadjustmentcomponentsofthepricedifferential.Todothisweneedto

assessforeachtimeperiodtheIPPsharethateachadjustmentitemorcomponentaccountsforinthetotalIPP.Table8

belowgivesanexampleofsuchanassessment.

b.ParitypricecomponentsofwheatandmaizedeliveredinHarare,ZimbabweviatheborderpostinBeitbridge,Zimbabwe

22


23/28



Table8.MaizeandWheatIPPshareJohannesburgtomillersinHarare

PercentageshareofmillersalepriceinHarare Wheat MaizeDeliverypriceatBeitbridgeborderpost,Zimbabwe(CIF) 73.70% 58.60%

BeitbridgetoHarare(transportcost) 1.10% 0.80%

Governmentimportsubsidy 0.00% 2.30%

SpecificTax

11.00%

32.10%

VAT 14.20% 10.80%

SalePricetograinmillersinHarare(IPP) 100% 100%

Theaboveinformationcanbeshowninagraphicalrepresentationasinthefollowingchart.Basicallythisinformationhelps

thefoodsecurityanalysttoassesswhatcomponentsareinthefinalparitypricestructureandtowhatextenteach

componentisanimportantcontributortothefinalparityprice.

58.6%

-2.30%

32.1%

10.8%

73.7%

11.0%

14.2%

-20%

0%

20%

40%

60%

80%

100%

Maize Wheat

IPP shares for maize and wheat IPP in Harare, Zimbabwe

VAT

Specific Tax

Government import subsidy

Beitbridge to Harare (transport

cost)

Delivery price at Beitbridge border

post, Zimbabwe (CIF)

Thegraphandtableshowthedifferentcomponentsoftheparitypriceinpercentageterms.Thiscanhelpinformuswhat

constitutesthebulkoftheparityprice(forexamplethebulkofthepriceinbothwheatandmaizeisderivedfromthe

deliverypriceattheborder).WecanalsotrackIPPshares(andXPPshares)overtimeandseethetrendsandpriceshare

movementsinasimilarwaytohowwegraphedtheactualparitypricesinthefirstgraph.Thismightbedoneforasingle

costcomponentsuchastransportwhichwemightsuspecttobevolatile.Soforexampleiffuelpricesandthetransportcost

havebeenincreasingoverthelast12monthswhileothercomponentsofthepricehaveremainedrelativelystable,wecan

inferthattransportcostsarethecauseforhigherparitypricesandthatitistherisingfuelandtransportcoststhatarelikely

contributingtomakingfoodlessaccessibletothepoorwhocannotaffordtobuyit.Risingpricesarethensaidtoreflect

risingtransactionscosts,notproductscarcityorgreedytraders.

Generally,graphicscanbeusedinmultiplewaystocommunicateandconveyvariousimportantaspectsandbehaviorsof

parityprices.Thisguidedoesnotgointodetailaboutthewiderangeofgraphicsandsimplyaimstopresentsomeofthe

waysthatthedatacanbepresented.Theguidedoesnotgothroughthedifferentcomputerprograms/softwareandhowto

usethesoftwarethatcanbeusedtodevelopgraphics.

23


24/28



CONCLUSIONSThisguidanceillustratedhowparitypriceanalysisisanimportanttoolforfoodsecurityandearlywarninganalystsinthatit

canbeusedtodeterminetheincentivestoproducefoodandthepotentialforprofitableimportationoffoodand

agriculturalinputsthroughprimaryportsofentryoracrossinternalregionalborders.

Acompletefoodsecurityanalysisrequiresthatanalystsaccountforeventsthathavepotentialfoodsecurityimplications

whethertheyoccurwithinoroutsidetheircountry.Marketsandtradeactasimportanttransmissionmechanismsforthese

externaleventsandare,therefore,essentialtounderstandingfoodsecurity.Theseeventscanberelatedtocommercial

marketactivityaswellasgovernmentpoliciesandprogramsthataffectmarketsandtrade,whichinturnaffectsfood

security.Paritypriceanalysisprovidesatooltocomparepricesindifferentlocationstoderivemeaningfuleconomicand

socialinterpretationofthosedifferences.

Foodsecuritymonitoringandanalysisforearlywarningpurposesentailsforecastingorsettingexpectationsabout

significanteventsthatmayhappeninthecomingmonthsandtheirimplicationsonfoodsecurity;regularlymonitoringthe

conditionsthatunderlietheexpectations,andperiodicallyvalidating,updatingormodifyingtheexpectations.Forming

expectationsinvolvesaskingquestionsaboutwhatwilllikelyhappeninthenearandmediumtermsuchaswhatwillthe

rainfallpatternlooklikeoverthecominggrowingseason,willtherebeadequateavailabilityoffoodcommoditiesinvarious

partsof

the

country

and

throughout

abroader

region,

and

how

will

prices

behave

over

the

pending

hunger

season.

Parity

pricecalculationsandanalysiscanhelpanswerthesetypicalandveryimportantfoodsecurityandearlywarningquestions.


25/28



REFERENCESBelli,P.,J.R.Anderson,H.N.Barnum,J.A.DixonandTan,JP.(2001),EconomicAnalysisofInvestmentOperations:

AnalyticalToolsandPracticalApplicationsTheInternationalBankforReconstructionandDevelopment/TheWorldBank,

Washington,

D.C.

Crawford,E.AgriculturalBenefitCostAnalysisHandoutSpring2007Semester

Gittinger,J.P.,(1982)EconomicAnalysisofAgriculturalProjectsJohnHopkinsUniversityPress,Baltimore,Maryland

Holden,M.TheEconomicsofImportParityPricing:APedagogicalNoteSouthAfricanJournalofEconomics,vol.73:3

September,2005

Parr,G,ImportParityPricing:ACompetitiveConstraintoraSourceofMarketPower?AnnualForum(2005),Tradeand

UnevenDevelopment:OpportunitiesandChallenges,EconomicSocietyofSouthAfrica,Durban

Solnik,B(1996),InternationalInvestments,3rd

edition.AddisonWesleyPublishingCompany,Reading,MA

Ward,W.A.CalculatingImportandExportParityPrices,TrainingmaterialoftheEconomicDevelopmentInstitute,CN3

(WashingtonD.C.:WorldBank,1977),p.8.


26/28



USEFULWEBSITESFAO:www.fao.org

FAO

Trade

and

Markets:

www.fao.org/es/esc/en/20953/21032/index.html ,

Accessed

Septermber

3

rd

2007

Levallee,JeanCharles,1996,MarketInformationSourcesAvailableThroughtheInternet:DailytoYearlyMarketand

OutlookReports,Prices,CommoditiesandQuoteMichiganStateUniversity,DepartmentofAgriculturalEconomics

WorkingPaper,No.64,EastLansing,MI.http://aec.msu.edu/fs2/market information.htm

SAFEX:www.safex.co.za,AccessedSeptemer3rd

2007

SouthAfricanCompetitionCommission,

http://www.compcom.co.za/resources/Com p%20Comm%20March%20HTML/3%20Importparity.html Accessed,June14th,2007

StanfordUniversity,http://www.stanford.edu/group/FRI/indonesia/courses/manuals/pam/pam

book/Output/chap6.html#wp432059,Accessed

June

14th,

2007

UniversityofPretoria,DepartmentofAgriculturalEconomicsandExtension,

http://www.up.ac.za/academic/ecoagric/pdfs/theme3.1.pdf,Accessed,June14th

,2007

XE.comhttp://www.xe.com/ucc/convert.cgi ,AccessedJuly1st,2007WorldBankwww.worldbank.org

WorldBankPinkSheets

http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTDECPROSPECTS/0,,contentMDK:21148472~menuPK:476941~pa

gePK:64165401~piPK:64165026~theSitePK:476883,00.html
http://www.fao.org/http://www.fao.org/es/esc/en/20953/21032/index.htmlhttps://mail.msu.edu/cgi-bin/webmail?redirect=http%3A%2F%2Faec.msu.edu%2Ffs2%2Fmarket_information.htm&timestamp=1186520432&md5=8T2HUXb9EuuXTL193wjxoQ%3D%3Dhttp://www.safex.co.za/http://www.compcom.co.za/resources/Comp%20Comm%20March%20HTML/3%20Importparity.htmlhttp://www.compcom.co.za/resources/Comp%20Comm%20March%20HTML/3%20Importparity.htmlhttp://www.compcom.co.za/resources/Comp%20Comm%20March%20HTML/3%20Importparity.htmlhttp://www.compcom.co.za/resources/Comp%20Comm%20March%20HTML/3%20Importparity.htmlhttp://www.stanford.edu/group/FRI/indonesia/courses/manuals/pam/pam-book/Output/chap6.html#wp432059http://www.stanford.edu/group/FRI/indonesia/courses/manuals/pam/pam-book/Output/chap6.html#wp432059http://www.stanford.edu/group/FRI/indonesia/courses/manuals/pam/pam-book/Output/chap6.html#wp432059http://www.up.ac.za/academic/ecoagric/pdfs/theme3.1.pdfhttp://www.xe.com/ucc/convert.cgihttp://www.worldbank.org/http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTDECPROSPECTS/0,,contentMDK:21148472~menuPK:476941~pagePK:64165401~piPK:64165026~theSitePK:476883,00.htmlhttp://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTDECPROSPECTS/0,,contentMDK:21148472~menuPK:476941~pagePK:64165401~piPK:64165026~theSitePK:476883,00.htmlhttp://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTDECPROSPECTS/0,,contentMDK:21148472~menuPK:476941~pagePK:64165401~piPK:64165026~theSitePK:476883,00.htmlhttp://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTDECPROSPECTS/0,,contentMDK:21148472~menuPK:476941~pagePK:64165401~piPK:64165026~theSitePK:476883,00.htmlhttp://www.worldbank.org/http://www.xe.com/ucc/convert.cgihttp://www.up.ac.za/academic/ecoagric/pdfs/theme3.1.pdfhttp://www.stanford.edu/group/FRI/indonesia/courses/manuals/pam/pam-book/Output/chap6.html#wp432059http://www.stanford.edu/group/FRI/indonesia/courses/manuals/pam/pam-book/Output/chap6.html#wp432059http://www.compcom.co.za/resources/Comp%20Comm%20March%20HTML/3%20Importparity.htmlhttp://www.safex.co.za/https://mail.msu.edu/cgi-bin/webmail?redirect=http%3A%2F%2Faec.msu.edu%2Ffs2%2Fmarket_information.htm&timestamp=1186520432&md5=8T2HUXb9EuuXTL193wjxoQ%3D%3Dhttp://www.fao.org/es/esc/en/20953/21032/index.htmlhttp://www.fao.org/


27/28



GLOSSARY

Arbitrageistakingadvantageofapricedifferential.Itistheactofmakingaprofitbypurchasingaproductinonemarket

andsellingitinanothermarketforahigherprice.Thetwomostcommontypesofarbitragerelatedtofoodsecurityare

spatial

arbitrage

(where

commodities

are

moved

from

areas

or

markets

with

lower

prices

to

areas

or

markets

with

higher

priceswherethedifferenceinpricesisexpectedtoexceedthetransfercosts),andtemporalarbitrage(wherecommodities

areobtained,storedandsoldatapointinthefuturewhenpricesareexpectedtobehigherwherethedifferenceis

expectedtoexceedthecostsassociatedwiththetemporaltransfer.Paritypriceanalysisdealswithspatialarbitrage.

Borderpricethepriceofgoodatacountrysportofentryorexit.

Costinsurancefreight(CIF)thelandedcostofanimportonthedockorotherentryportintheimportingorreceiving

country.

Economicvaluetheequivalentfinancialormonetaryvalueofaunitofresourceaccountingforitsopportunitycost(other

potentialuses)andnotincludingmarketdistortionssuchasthoseresultingfromgovernmentpolicies.

Effectiveexchange

rate

(EER)

the

rate

at

which

currency

is

actually

being

exchanged.

Exportparityprice(XPP)thevalueofaproductsoldataspecificlocationinaforeigncountry,butvaluedfromaspecific

locationintheexportingcountry.

FOB(Freeonboard)thepriceofanexportloadedontheshiporotherconveyancethatwillcarryittoforeignbuyers

Financialpricetheprevailingcostpaidbyabuyerforaunitofaproductwhenpurchasingitinthemarket.Thisprice

includesmarketdistortionssuchasthoseresultingfromgovernmentpolicies.

Importparityprice(IPP)thevalueofaunitofproductboughtfromaforeigncountry,valuedatageographiclocationof

interestintheimportingcountry

LawofOnePricestatesthattheunitpriceofaproductisthesameinallgeographiclocationsafteradjustingfortransport,

transactionandmarketingcostsaswellasexchangerateconversions.Theonlyreasonfordifferencesinpricesarethe

foreignexchangeconversion,marketing,transportandtransactioncostsnecessarytobringtheproductfromthelower

pricecountry.So,ifthepriceisnotdifferentintwocountries,peoplewillnotbuyitinthelowerpricedcountryandsellin

thehigherpricedcountrybecauseitisnotprofitabletodoso.

Opportunitycostmostresourcescanbeusedinmultiplebutmutualexclusiveways.Theopportunitycostisthevalueof

thebestalternativeuseforgoneforaparticularscarceresourcebecauseitisbeingusedinacertainway.

ProcessingConversionFactor(PCF)thisisaratioofthequantityofaprocessedproducttothequantityofthe

unprocessedproduct(rawmaterial)thattheprocessedproductwasderivedfrom.Itbasicallytellsushowmuchofthe

processedproductwillresultfromprocessingoneunitoftheunprocessedproduct,e.g.thePCFofpaddytoriceis0.64(i.e.

1kg

paddy

=0.64

kg

rice)

implying

that

if

you

process

1kilogram

of

paddy

you

will

get

640

grams

of

processed

rice.

Purchasingpowerparity(PPP)theeconomictheorythatlinkscurrencyexchangeratestopricespaidforgoodsand

servicesinanytwocountries.Basically,thePPPlinksexchangerateadjustmentstoinflationratemovementsineither

countrysothatnoarbitrageispossible.Forexample,ifatonofmaizecanbeboughtwith$400intheUnitedStatesorCFAF

200,000inNiger,theparityoftheUSDollartotheCFAFis400/200,000whichis1to500.Ifeithercurrencyweretogain

purchasingpower,itwouldbebetterforbuyerstoconvertCFAFintodollars,forinstance,andbuyintheUS.Thetheory

usuallyappliestotradablegoodswithlowtransportcostsandisbasedonthepremiseoffreemarkets(i.e.unrestricted

trade,afloatingexchangerateandtheLawofOnePrice).SometimesthereisadistinctionmadebetweenabsolutePPPand


28/28


relativePPP.ThedifferenceisthatrelativePPPincludeschangesintheinflationratesbetweencountrieswhileabsolute

onlylooksattheratioofexchangerates.

TradedgoodisonewhosedomesticproductioncostiseitherlowerthanitsFOBpriceorgreaterthantheCIFprice.

Basicallythisimpliesthatthereexisteconomicincentivestomovethegoodfromonecountrytoanotherforprofitablesale

and

gains

in

welfare.

(Gittinger,

1982)

NontradedgoodisonewhosedomesticproductioncostisaboveitsFOBpricebutbelowitsCIFprice(assumingnotaxes

orsubsidies).Essentially,therearenoincentivestobuy(sell)theproductfrom(to)anothercountry.(Gittinger,1982)

Documents

import/export parity pricing