PATTerms of Trade

Session 3.1.

WFP Markets Learning Programme 3.1. 1Price Analysis Training

Learning objectives

After this session, participants should be able to:

Explain the terms of trade (ToT) concept – definitions, and pros and cons of its usage

Explain the implications of trends in ToT for HH FS & for WFP decision-making

Analyze a ToT graph & identify the implications for FS analysis of the changes in ToT

Calculate the appropriate ToT for particular food groups in the country

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Use:

Determine potential deterioration of HH food purchasing power

At macro-level, expressed as ratio of nation’s export prices to its import prices: measures country’s trading position

At micro (HH)-level, ToT measures HH purchasing power as ratio of prices of two different goods

ToTij = (Price of good i) / (Price of good j)

WFP Markets Learning Programme 3.1 3Price Analysis Training

Terms of Trade

Data required:

Time series of ratio of income sources (livestock/food staple, cash crop/food staple, daily wage/food staple by livelihood type)

Generally: the income producing item is in the numerator and the consumption item (the item on which the livelihood group spends its income) is in the denominator

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Terms of Trade

Interpretation

A decreasing (or increasing) ToT indicates potential reduction (or improvement) of HH purchasing power (a decreasing ratio implies income is declining and consumption costs are rising)

Indicates access component of food security

Contributes to identification of appropriate crisis-response strategies

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Terms of Trade

ToT Example #1

WFP Markets Learning Programme Price Analysis Training 3.1.6

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

0.16

0.18

0.20

Jan-

03

Apr-

03

Jul-0

3

Oct

-03

Jan-

04

Apr-

04

Jul-0

4

Oct

-04

Jan-

05

Apr-

05

Jul-0

5

Oct

-05

Jan-

06

Apr-

06

Jul-0

6

Oct

-06

Jan-

07

Apr-

07

Jul-0

7

Oct

-07

2003 to 2007 ( month)

El Geneina, Sudan: Price of two-year female goat / Price of sorghum per ton

Rising trend: ToT turning in favour of item in numerator

Rising trend: ToT turning against item in numerator

ToT Example #2

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Kassala, Sudan: Casual Labour wage rate / Price of sorghum

ToT Example #3

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Nicaragua: Maize / Coffee

Pros

Simplicity

Quick analysis of possible patterns of HH purchasing power

Ratio of prices means don’t need to worry about nominal vs. real prices

ToT Pros & Cons

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ConsUnderlying causes required to

explain ToT patterns

Price data at geographical location of livelihood group may not be available

Impact on HH is implicit but not measured

May be misleading as other coping mechanisms may be in force (transfers/remittances, food stocks, wild products…)

Terms of Trade & Livelihoods

With a livelihoods approach, market analysts can differentiate the likely market price impacts on different producers and consumers

WFP Markets Learning Programme Price Analysis Training 3.1.10

Example: The same drought that causes meat prices to fall (as herders rush to market to sell off livestock before they die) can cause the price of increasingly scarce maize to skyrocket (thereby benefitting those still able to produce maize

Please turn to Workbook Exercise 3.1.

The Marketastan File: Terms of Trade in Marketastan (use Excel data file: 3.1. Marketastan ToT Exercise.xls)

WFP Markets Learning Programme Price Analysis Training 1.4.11

Small Group Work

Marketastan 3.1. Debriefing

Do you agree with the Provincial Commissioner’s statements?

Is he correct that ToT have in recent months shifted severely against wheat producers in favor of pastoralists?

Do you agree these are the worst ToT for northern wheat producers (vis à vis northern pastoralists) in more than a decade?

WFP Markets Learning Programme Price Analysis Training 3.1.12

Wrap-up: Terms of Trade - Interpretation & Decision-Making

Interpretation

Indicative of HH food access: purchasing power

Indicative of employment of coping strategies

Complementary information needs:

• HH dependency on markets for food

• HH capabilities to access food through markets

• Labour market functioning (unemployment rates and wage rates by season, sector, gender and regions, range of labour market regulations…)

Decision-making

Early warning or trigger for deeper assessment

Can contribute to decisions regarding cash or food aid

Can help to inform livelihood specific government policies and corporate policies of global actors on food security strategies

WFP Markets Learning Programme 3.1 13Price Analysis Training