How Markets Work

1. How Markets Work TST Session 1.4 WFP Markets Learning Programme Trader Survey Training V2 1.4. 1

2. Learning Objectives After this session, participants should be able to: • Identify and explain the key elements of market functioning, including market structure, conduct and performance • Explain the relevance of structure, conduct and performance in anticipating market response to shocks WFP Markets Learning Programme Trader Survey Training V2 1.4. 2

3. Key elements of market analysis Supply: understanding food production and trading patterns (especially for most important staple foods) Demand: factors that affect household demand (e.g. changes in incomes, purchasing power, preferences) Prices: levels, trends, seasonality Markets: environment & functioning (structure-conduct-performance of “SCP”) - factors influencing trader decisions and behaviour WFP Markets Learning Programme Trader Survey Training V2 1.4. 3

4. e.g., Traders plan to import cereals using prices from regional & from international markets. They have strategies for dealing with production shortfalls in their market areas. Learning about trader behaviors helps identify market indicators to follow, analyze implications of market phenomena, project likely supply responses, and ultimate market outcomes. Why focus on “SCP”? More comprehensive, forward looking SCP analysis can: • Help analysts anticipate market response, define relevant scenarios, formulate expectations about the season to tell more complete food security story • provide decision makers with info needed to make better responses • help orient timing of humanitarian interventions, complementing & compensating for markets rather than replacing them Price Analysis Training

5. Key elements for market analysis Understanding Market Functioning Market environment: external factors affecting market conditions (trade policies…) WFP Markets Learning Programme Trader Survey Training V2 1.4. 5

6. Market Environment • Economic and Public policies and regulations • Price ceilings • Trade policies: Import/export regulations • Quality control and food safety measures • Net Importers vs. Net Exporters (national level) • Example: Food price crisis and national policy reactions: subsidies, export bans etc. • Environmental • Agro-ecological conditions and seasonal calendars • Surplus/deficit areas WFP Markets Learning Programme Trader Survey Training V2 1.4. 6

7. Quick Case: Exercise 1.4.a. Markets & FS Policy in Egypt Task: Read the Quick Case in your workbook and, with a partner, answer the questions. • What are the main thrusts of the GoE’s food security policy? • What are the main challenges confronting the GoE in liberalising its food security policies? Price Analysis Training

8. How do trade policies impact markets in this country? WFP Markets Learning Programme Trader Survey Training V2 1.4. 8

9. Market Structure Refers to relatively stable features of market that influence rivalry of buyers and sellers: • Number of buyers & sellers • Barriers to entry (e.g. license fees and taxes, farmer and trader access to credit, kinship ties) • Nature of trading relations: vertical coordination mechanisms, or the ways in which transactions are conducted between market participants (e.g, spot market transactions, contracts, cooperatives, or strategic alliances among farmers, traders, transporters, processors and consumers) WFP Markets Learning Programme Trader Survey Training V2 1.4. 9

10. Structure: Surplus/Deficit Areas - Example District level cereal balances in Timor Leste (2003-2006) WFP Markets Learning Programme Trader Survey Training V2 1.4. 10

11. Structure: Commodity Flows Wheat & wheat flour flows in Caucasus Region WFP Markets Learning Programme Trader Survey Training V2 1.4. 11

12. Structure: Vertical Coordination/IntegrationMarketing Chain WFP Markets Learning Programme Trader Survey Training V2 1.4. 12

13. Structure: Marketing Chain Channels WFP Markets Learning Programme Trader Survey Training V2 1.4. 13

14. Market Structure How do marketing chains function in this country? How might a major shock disrupt these chains? WFP Markets Learning Programme Trader Survey Training V2 1.4. 14

15. Market Conduct The patterns of behaviour that traders follow to affect or adjust to changing market conditions: • Price-setting behaviour • Level of competition • Buying and selling practices • Weights and measures • Grades and standards WFP Markets Learning Programme Trader Survey Training V2 1.4. 15

16. Conduct: Market Actor’s Margin Breakdown: from Rural Guinea Bissau to India 391- <-CIF Cochin, India Transport Insurance (53) 338- <-FOB Guinea Bissau Margin – International Trade (92) Cashew Nut Prices (FCFA) 246- <-FAS Guinea Bissau Tax (14) Exporter Fees (5) & Port Fees (10), Export Tax (47) 170- <-Wholesale Price Collection (5), local transport (20) & wholesaler fees (5) , wholesaler margin (25), transport to Bissau (10) 105- <-Producer Price in Guinea Bissau Producer costs and profit (105) WFP Markets Learning Programme Price Analysis Training 1.4. 16

17. Market Conduct To what extent is there competition in markets in this country? Or is the market controlled by a few interests? WFP Markets Learning Programme Trader Survey Training V2 1.4. 17

18. Market Performance Extent to which markets produce outcomes deemed good or preferred by society: regular, predictable availability of basic foods at affordable prices • Price levels and stability over time and space (market integration) • Margins and costs • Volumes • Profits: excessive or not • Product quality • Food distribution within market WFP Markets Learning Programme Trader Survey Training V2 1.4. 18

19. What is Market Integration? The existence of tradeflows: the movement of food in response to supply/demandimbalances Market integration allows price signals to be transmitted from one market to another Impact on HH Food Security of market integration? • When markets are integrated, prices become more stable: then HH FS is likely to be improved, as poor HHs can obtain food at more affordable prices Price Analysis Training

20. Market Performance: Example Real millet prices in regions of Niger and Nigeria, 1995 to 2006 WFP Markets Learning Programme Trader Survey Training V2 1.4. 20

21. Market Performance How do markets perform in this country? Are prices & supply relatively steady, predictable? Or are extreme fluctuations the norm? WFP Markets Learning Programme Trader Survey Training V2 1.4. 21

22. Market Functioning • Logical conclusion from structure, conduct and performance of markets • Is food moving from where it is produced to where it is needed? WFP Markets Learning Programme Trader Survey Training V2 1.4. 22

23. Application and Interpretation of S-C-P and Market Functioning • Helps anticipate market response to shocks • Can formulate expectations about the season • Implications for cash & voucher programming: helps identify risks related to corruption, inflation & trader response capacities WFP Markets Learning Programme Trader Survey Training V2 1.4. 23

24. Exercise 1.4.b. Market Environment in Malawi Trader Survey Training V2