LRP and Market Prices:A Multi-Country Analysis

Teevrat GargChristopher B. Barrett

Miguel I. GómezErin C. Lentz

William Violette

Cornell University

FAO ISN-SymposiumJanuary, 2012

Motivation for Framework Local procurement is a demand stimulus that could put

upward pressures on local prices and price volatility.

Local distribution is a supply stimulus that could place downward pressures on local prices and fuel price volatility.

USDA requires LRP to meet the “do no harm” condition, that is, LRP should not substantially drive up retail prices.

Simple monitoring of prices cannot control for confounding factors, including WFP procurements, climate fluctuations, inflation, seasonal variation, changing transport costs, etc.

Why Study Price Effects?

Motivation

Motivation for FrameworkProcurement

Motivation

Price

Quantity

P*

Q*

Exogenous Demand Shift from Procurement

D

S

Prices Rise

D’

Motivation for FrameworkDistribution

Motivation

Price

Quantity

P*

Q*

Exogenous Supply Shift from Distribution

Prices fall

D

S S’

Motivation for Framework Retail prices only (wholesale for Kenya).

Scope of the Study

Motivation

Table 1: Types of LRP Projects By Country and CommodityCountry Procurement Distribution Voucher

Burkina Faso Millet Millet, Cowpeas

GuatemalaBeans, Incaparina, White Maize

Kenya Beans, Maize Beans, Maize

Kyrgyzstan Wheat (Cash)

Niger Maize, Millet Maize, Cowpeas

Uganda

Maize Flour, Maize Grain, Dried Beans, Sorghum

Zambia Maize Meal, Beans Maize Meal, Beans

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Identification Strategy

Identification Strategy

Price Level Impacts:

Price Volatility Impacts:

X = Full Set of Controls (WFP included)c: commoditys: price type (transmission channel)

i: regiont: time period

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Key Results: Procurement(Price Levels)

Country Maize Beans MilletBurkina Faso 1.386

(3.814)In Procurement 0.760Markets (7.088)In Non-Procurement 1.525Markets (4.620)

Guatemala -3.473 0.536(6.097) (1.245)

In Procurement -4.261 5.592Markets (3.982) (4.430)In Non-Procurement -3.389 -0.178Markets (6.948) (1.277)

Kenya 11.68*** 2.892(3.005) (3.113)

In Procurement 10.99* -1.236Markets (6.451) (7.112)In Non-Procurement 11.84*** 4.088Markets (3.484) (3.577)

Niger 2.123 -1.285(1.625) (1.355)

In Procurement 5.958 -0.883Markets (14.90) (2.969)In Non-Procurement 2.091 -2.284Markets (1.622) (1.543)

Zambia -3.860 -1.078(6.484) (2.859)

In Procurement -3.187 10.03Markets (12.22) (7.003)In Non-Procurement -3.905 -1.259Markets (7.607) (2.926)

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Key Results: Procurement(Price Volatility)

Country Maize Beans Millet

Burkina Faso -1.185(2.670)

In Procurement -1.990Markets (4.452)In Non-Procurement -0.626Markets (3.337)

Guatemala 3.318 -1.077(5.584) (0.806)

In Procurement 2.989 -1.803Markets (2.497) (2.888)In Non-Procurement 3.190 -0.745Markets (6.369) (0.822)

Kenya -0.670 -0.690(1.904) (2.028)

In Procurement -2.440 0.346Markets (3.003) (4.107)In Non-Procurement -0.574 0.204Markets (2.243) (2.369)

Niger 0.505 -1.161(1.862) (0.872)

In Procurement -3.683 -1.428Markets (11.07) (1.656)In Non-Procurement 1.066 -0.927Markets (3.235) (0.978)

Zambia -6.139 0.533(4.138) (1.938)

In Procurement -6.699 -4.115Markets (6.533) (3.930)In Non-Procurement -6.711 0.495Markets (4.761) (1.982)

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Key Results: Distribution(Price Levels)

Country Millet/Maize Dried Beans Cowpeas

Burkina Faso (Millet, not Maize) -3.055 10.32(4.553) (11.03)

In Distribution -5.429 -Markets (11.80)In Non-Distribution -2.298 11.31Markets (5.033) (9.486)

Niger 1.755 -14.97*(1.707) (8.904)

In Distribution - -MarketsIn Non-Distribution 1.736 -10.21Markets (1.738) (8.172)

Zambia -9.734 3.841(6.628) (4.162)

In Distribution - -6.875Markets (28.69)In Non-Distribution - 4.261Markets (4.216)

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Key Results: Distribution(Price Volatility)

Country Millet/Maize Dried Beans Cowpeas

Burkina Faso (Millet, not Maize) 9.800*** 0.932(3.299) (7.184)

In Distribution 11.34Markets (7.187)In Non-Distribution 8.775** 1.849Markets (3.848) (5.657)

Niger 3.854*** 36.06**(1.204) (15.24)

In Distribution -MarketsIn Non-Distribution 3.859*** 22.73Markets (1.228) (16.66)

Zambia -4.020 2.470(4.102) (2.817)

In Distribution - -4.865Markets (14.53)In Non-Distribution - 2.309Markets (2.860)

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Key Results: Cash and Vouchers(Price Levels)

Country Maize Grain Sorghum Wheat

Kyrgyzstan 6.528***

(1.908)

In Procurement -

Markets

In Non-Procurement 6.004***

Markets (2.095)

Uganda -3.666 -2.941

(11.38) (12.96)

In Procurement - -

Markets

In Non-Procurement -2.238 -5.987

Markets (14.10) (16.35)

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Country Maize Grain Sorghum Wheat

Kyrgyzstan 0.622

(1.204)

In Procurement -

Markets

In Non-Procurement 0.716

Markets (1.314)

Uganda -3.434 -5.310

(7.518) (7.792)

In Procurement - -

Markets

In Non-Procurement -3.474 -3.055

Markets (8.562) (10.89)

Key Results: Cash and Vouchers(Price Volatility)

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Limitations Not strictly causal estimates due to potential for omitted

relevant variables (e.g., government policies).

Unable to control for GE effects (typical for this literature)

Potential endogeneity of prices and LRP (timing and quantity).Good News: Practitioners control this mechanism!

Conclusion

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• For most commodities and countries, there is no economically or statistically significant correlation of LRP and prices. 

• In a very small number of instances, procurement is correlated with upward price pressures, consistent with economic theory.

• The possibility of significant induced price effects underscores the importance of market monitoring. 

• The relative infrequency of such effects suggests that LRP can be undertaken effectively when well designed and monitored.

• Distribution may be more of a concern when it comes to price impacts.

Conclusion

Policy Implications

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Teevrat GargCharles H. Dyson School of

Applied Economics and ManagementCornell University

tg236@cornell.edu

Contact Information

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