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How Markets Work

How Markets Work. PAT. Session 1.4. WFP Markets Learning Programme. Price Analysis Training. 1.4. 1. 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

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How Markets Work

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  1. How Markets Work PAT Session 1.4 WFP Markets Learning Programme Price Analysis Training 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 Price Analysis Training 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 …and… • Markets: environment & functioning (structure-conduct-performance of “SCP”) - factors influencing trader decisions and behaviour WFP Markets Learning Programme Price Analysis Training 1.4. 3

  4. e.g. Traders plan to import cereals using prices from regional & 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”? Sound SCP analysis can help: • analysts anticipate market response, define relevant scenarios, formulate expectations about the season to tell more complete food security story • decision makers with info needed to make better responses • orient timing of humanitarian response, complementing, compensating for markets rather than replacing them Price Analysis Training

  5. Market Structure Refers to stable market features that influence buyers & sellers: • Number of buyers & sellers • Market environment aspects: public policies, regulations, barriers to entry (e.g. license fees, taxes, credit access, kinship ties) • Nature of trading relations: vertical coordination mechanisms (how transactions are conducted between market participants: spot market transactions, contracts, cooperatives, strategic alliances among farmers, traders, transporters, processors & consumers) WFP Markets Learning Programme Price Analysis Training 1.4. 5

  6. Structure: Surplus/Deficit Areas - Example District level cereal balances in Timor Leste (2003-2006) WFP Markets Learning Programme Price Analysis Training 1.4. 6

  7. Structure: Commodity Flows Wheat & wheat flour flows in Caucasus Region WFP Markets Learning Programme Price Analysis Training 1.4. 7

  8. Structure: Vertical Coordination/IntegrationMarketing Chain WFP Markets Learning Programme Price Analysis Training 1.4. 8

  9. 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 Price Analysis Training 1.4. 10

  10. 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. 11

  11. 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 • Margins and costs • Volumes • Profits: excessive or not • Product quality • Food distribution within market WFP Markets Learning Programme Price Analysis Training 1.4. 12

  12. Market Functioning: • The logical conclusion drawn from analysing market structure, conduct and performance • Market functioning should not be equated simply with market performance: all three market aspects (S-C-P) must be analysed • Understanding market structure & the conduct of traders, other actors in the market system helps us understand how traders may respond to a shock: i.e. whether they will hoard – or move – commodities when price differentials sky rocket. WFP Markets Learning Programme Price Analysis Training 1.4. 14

  13. Application and Interpretation of S-C-P and Market Functioning • Helps us anticipate how the market is likely to respond to shocks • Can help us anticipate price changes (seasonal impacts, etc.) • Informs response decisions: helps identify risks (e.g. corruption, inflation, trader response capacities) confronting various response options WFP Markets Learning Programme Price Analysis Training 1.4. 15

  14. Please turn to Workbook Exercise 1.4. The Marketastan File: Market Environment in Northern Province Small Group Work Price Analysis Training

  15. Exercise 1.4. Debriefing • Market environment in Northern Province? • Likely implications for market functioning and for HH food security in Northern Province? Price Analysis Training

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