MIFIRA Framework Lecture 12 Local supply responsiveness

1. MIFIRA FrameworkLecture 12Local supply responsiveness Chris Barrett and Erin Lentz March 2012

2. Lecture Overview • What do we do when we can’t compute the degree of market integration? • Estimate prospective equilibrium effects • Overview: • Theoretical approach to drawing supply curves • Example: estimate changes in demand due to transfer / procurement • Example: estimate responsiveness of supply to change in demand, using local wholesale trader information

3. Supply Responsiveness • Approaches to estimate equilibrium: • Link marginal costs with changes in demand • Recover marginal costs to draw supply curve • Marketing margins and ability to expand • Utilize demand estimates: • Combine elasticities and MPCF and expected size of the intervention

4. Price Effects of Different Supply Patterns Source: Barrett (2009) MIFIRA

5. Supply Responsiveness: Marketing Margins Revisited • Marginal costs are often elicited as the costs associated with buying one more unit of product • Costs vary with the number of units purchased • How much more volume can be moved under the same marginal cost structure? • At what volume will marketing margins increase? • By how much will the margins increase? • How much more can be moved at that margin?

6. Supply Responsiveness: Discussions with traders • Objective for discussions with traders is to learn: • Are traders at capacity? • Room for expansion? How much? • Do traders face barriers to expansion? • The greater traders’ capacity to increase delivery volumes at the pre-existing price or a level near it, the greater the scope for cash-based response.

7. Supply Responsiveness: Discussions with traders • Questions to ask traders: • If demand increases, how much more can a trader import / sell at current prices? • If this is not concrete enough, specify demand increase in tons or percentage • If demand increases and prices increase by 10%, how much more can a trader sell? • If entire stock was purchased today, how much time would a trader need to restock? • What constrains the volume traded?

8. Supply Responsiveness: Discussions with traders • Eliciting supply responsiveness data from traders can be difficult • Larger market actors generally have fewer competitors • Larger actors may not be willing to participate • Traders may have incentives to overstate their ability to meet demand • Quite difficult to generate a statistically significant sample of major market actors • More effective to approach traders as key informants

9. Marketing Margins: Estimating Induced Price Effects

10. Marketing Margins: Estimating Induced Price Effects

11. Estimating Marginal Costs Source: Barrett (2009) Food Insecurity

12. Demand Side • Demand response • Size of the transfer, current prices • Elasticities • Marginal propensity to consume • Upper and lower bounds for sensitivity

13. Adding in Demand: Estimating increased volume demanded for food due to cash distribution

14. Marketing Margins: Estimating Induced Price Effects (Initial Price: 2600)

15. Example: Estimating Rice Demand in Sirajganj • Estimate increase in demand if cash replaced food aid in a community receiving food aid • SHOUHARDO-MCHN program distributed 12 kilograms of wheat to each of 6500 district recipients over a single month • The total distribution of 78 MT of wheat • Assume 1:1 substitution of rice for wheat • IFPRI MPCs: 0.3-0.45

16. Example: Estimate rice demand in Sirajganj Source: Barrett (2009) MIFIRA …What about linking supply response to demand increases?

17. Example: Simple estimate of Sirajganj’s rice volume and market behavior • What is the level of competition at the wholesaler level? • How diverse and numerous are upstream suppliers? • What is current wholesaler volume?

18. Example: Sirajganj trader volume and ability to respond to demand Source: Barrett (2009) MIFIRA

19. Example from Northern Kenya • Estimate demand, using elicited MPCF • Estimate supply responsiveness • Barriers to trade expansion

20. Example from Northern Kenya • Estimating demand by eliciting MPCs in the field: • Ask likely recipient households how they would spend a one-time gift of specified value. • Using proportional piling, households indicate what proportion would be spent on food. • The denominator is the size of the one-time gift • The numerator is the value of the gift that would be spent on a certain commodity. MPCF= Amount spent on food/ Value of gift

21. Estimated Value of Food Demand Generated by Cash Transfer Source: Mude et al. (forthcoming)

22. Example from Northern Kenya • Estimate supply responsiveness • For key commodities, what is the trader’s maximum supply capacity at any one time given their current access to storage, transport, credit, etc., without increasing prices. ? • All else equal, how many days does a trader need in order to fully restock?

23. Value of Maximum Possible Wholesale Supply Capacity of Top 3 Commodities Source: Mude et al. (forthcoming)

24. Induced Demand for Top 3 Commodities as a Fraction of Excess Capacity Source: Mude et al. (forthcoming)

25. Example from Northern Kenya • Barriers to trade expansion • What would need to change for the trader to be willing to increase his or her capacity beyond the current maximum at current sales prices?

26. Factors Necessary for Traders to Increase their Maximum Stocking Capacity at Current Sales Prices Source: Mude et al. (forthcoming)

27. Factors Affecting the Speed at which Extra Supply is Sources Source: Mude et al. (forthcoming)

28. Supply Responsiveness • Approach: • Consider current capacity and barriers to expansion • Elicit information on volume expansion and cost effects, as well as barriers • Be skeptical • examine competition, historical pricing patterns to triangulate • Limitations of the analytic • Hypothetical situations • Marginal costs are difficult and time consuming to elicit