Thursday, June 16, 2011

Lit in Review: Food Demand -- Ethiopia and Speculators

K. Tafere, Taffesse, and Tamiru, with N. Tefera and Paulos, (2010) “Food Demand Elasticities in Ethiopia: Estimates Using Household Income Consumption Expenditure (HICE) Survey Data), IFPRI and EDRI, ESSP2 Discsussion Paper 011.

One of the difficulties of working with Ethiopian food data is that there are four staple cereals: wheat, maize, teff, and sorghum. Another difficulty is that this means there are a lot of zeroes in the data: 28 percent consume no sorghum, 22 percent no teff, 16 percent no maize, 9 percent no wheat, and 2 percent no animal products.

They come up with a fairly large group of significant own-price and expenditure elasticities (90% of the 230 possible price effects are significant). Most commodities are own-price unitary elastic, though maize (-.75) and sorghum (-.66) are the furthest from -1 and wheat closest (-.98) of the major cereals. Cross-price elasticities are relatively small, with complementarity between teff-sorghum and maize-sorghum, but substitution between teff and wheat. Own-price elasticities appear to be the same in urban and rural areas, but there are different cross-price effects.

Hailu and Weersink, “Commodity Price Volatility: The Impact of Commodity Index Traders,” CATPRN Trade Policy Brief 2011-04

While both sides agree that there is a correlation between CIT (commodity index trader) activity and commodity futures prices, the direct of causation is the point of contention. The empirical evidence is mixed with very limited support for the view that higher commodity prices draws in investment activity by index funds. … There is more empirical support for the claim that CITs are associated with greater market volatility. Khara in a Brookings report argues it is unpredictable price volatility that is the real problem for producers, consumers and governments, not the level of prices. … Thus, an increase in commodity market volatility may lead to greater costs for managing risk: more costly insurance premiums, higher options premiums, and greater margins for hedging. … The research conducted to-date suggests commodity index traders had little to do in driving prices upward but are one of the reasons for the significant increase in market volatility over the last several years, but are not the sole cause.

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