MONITORING AND ANALYZING PRICES: 11. How are prices changing?

Local and Regional Procurement Learning Alliance

Overview of Monitoring and Analyzing Prices

Objectives of price monitoring and analysis are:• Identify which prices change and by how much

– Identify when to investigate further (using triggers)

• Identify factors that can cause price changes– Data sources for these factors– Analytical tools to evaluate the likelihood of each factor

changing prices

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Food prices can be unstable

Why do prices matter?

• In spatially integrated markets, an increase in prices due to a large local purchase of food would signal traders to bring in more supply, bringing prices back down.

• A procurement or distribution is less likely to cause lasting price impacts in integrated markets

– To understand the degree of spatial integration, we need to track prices across markets over time

• For definitions and overviews, review LRP Price Collection Training powerpoints:

– 3 Introduction to Markets.ppt– 4 Introduction to Prices.ppt

Why do prices matter?

• Do No Harm conditions under USDA pilot program (2010 Interim Guidelines, p. 27):– Prevent local and regional purchases that would:

• Have a disruptive impact on farmers

• Unduly disrupt world prices… or [unduly disrupt] normal patterns of commercial trade with foreign countries

• Significantly increase commodity costs for low- income consumers

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Examine retail prices separately from wholesale prices 1. Convert prices2. Examine magnitude of price changes3. Determine when to investigate further (using triggers)4. Categorize price changes: use analytical tools and

data to identify possible sources of price changes

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How are prices changing?

• First, convert prices to standard price per kg (or price per liter for liquids)

• Different units often have different prices, even when converted to a standard price per kg– Small volume purchases tend to have higher

purchase prices per standard unit.

Price/kg = (Price/unit * Number of units) / Weight in kgs on scale

Or: Price/kg = (Price/unit) / (units/kg)7

Convert prices

Convert prices

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Market AStandard

Unit

Number of units to reach at

least 2kgsWeight on the scale

Price / standard

unitLocal rice price /kg

Trader 1 kg 2 2 50 50

Trader 2 cup 5 2.3 34.5 75

Trader 3 cup 5 2.5 37.5 75

Trader 4 cup 5 2.2 34.5 78

Trader 5 can 4 2.5 43.75 70

Average 70

Convert Prices• Evaluate retail and wholesale prices separately

• If a single per unit price is 2-3 times larger or smaller than other prices for the same commodity in the same market, enumerator or market analyst should verify that that reported price is correct

– What could be causing these differences?• Conversion error• Misreporting by enumerator (e.g., reporting wholesale price as a

retail price)• Misunderstanding by trader

– Rule out reporting error before proceeding9

Magnitude of price changes by commodity

• For each commodity:– For each market, for each period: take average of

converted retail prices across retailers (e.g., per kg)

– For each market, for each period: take average of converted wholesale prices (e.g., per ton)

• Then, graph.

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For each commodity:

A. Question: How do prices differ within markets over time?A. Trigger = large price differences within markets over time– Inspect graph– Compute period-to-period price changes (next slide)

B. Question: How do prices differ across spatially distinct markets over time?B. Trigger = large changes in price differences across markets over time– Compare price changes across markets over time

• Will likely vary across markets due to varying transportation costs and other factors

– Look for outliers11

Triggers for further investigation

Triggers: A. Large change in prices within a market

A. Question: How do prices differ within markets over time?

• Investigate further if prices change more than 30% from one month to the next month

• Compute period-to-period difference in prices to determine how large the price differences are.

• Formula: (Current price – Last price)/Last price12

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A. Large change in prices within a market: Example within a maize market in Kenya – reported prices

Nairobi Mombasa Kisumu Eldoret BusiaMkt avg

Jul-06 255 273 236 227 206 239.4Aug-06 242 211 211 247 171 216.4Sep-06 204 163 188 170 140 173Oct-06 199 174 190 164 152 175.8Nov-06 201 179 198 154 155 177.4Dec-06 193 184 221 163 157 183.6

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A. Large change in prices within a market: Example within a maize market in Kenya - inspecting prices

A. Large change in prices within a market: Example within a maize market in Kenya

A. Question: How do prices differ within markets over time?– By inspection, prices are much higher in July than in

September. – Compute month-to-month price changes

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A. Large change in prices within a market: Example within a maize market in Kenya

Nairobi Mombasa Kisumu Eldoret BusiaMkt avg

Jul-Aug Change -5% -23% -11% 9% -17% -10%Aug-Sep Change -16% -23% -11% -31% -18% -20%Sep-Oct Change -2% 7% 1% -4% 9% 2%Oct-Nov Change 1% 3% 4% -6% 2% 1%Nov-Dec Change -4% 3% 12% 6% 1% 3%

A. Large change in prices within a market: Example within a maize market in Kenya

A. Question: How do prices differ within markets over time?– By computation: Compute period-to-period difference

in prices to determine how large the price differences are: (Current price – Last price)/Last price

– Trigger is 30%– The price of maize in Eldoret fell by more than 30%

between August and September17

A. Large change in prices within a market: Example within a maize market in Kenya

What could be causing this change?: • Unique to the community?

– Is there something happening in Eldoret that is different from other markets (e.g., infrastructure disruption)?

• Unique to the commodity?– Is this price change specific to maize or are all (monitored)

prices falling quickly in Eldoret?

• Unique to the time period?– Did the same price pattern occur in earlier years (i.e., is it

recurring, perhaps seasonal)?

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A. Large change in prices within a market: Example within a maize market in Kenya

Further investigate:• Unique to the community?

– Use key informant discussions to assess whether that change is likely to continue impacting prices. Discussed in more detail in next ppt.

• Unique to the commodity? – Identify possible factors related to that commodity (e.g., local

release of stock). Discussed in more detail in next ppt.

• Unique to the time period?– Compute seasonal price index

– Examine for seasonal flow reversals

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A. Large change in prices within a market: Seasonal Price Index

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To examine impact of seasonality on Kenyan markets:

Formula:

1. Take average by month and by year across all markets (or group of markets, if investigating a particular region)

2. Take average by month across years for these markets

3. Take overall average for these markets (across months and across years)

4. Divide monthly average by overall average

• When the ratio is above 1, prices are higher in this season

• When the ratio is below 1, prices are lower in this season

5. Ground-truth seasonal price index through creation of seasonal calendar for maize

A. Large change in prices within a market: Seasonal Price Index

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Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Overall avg

2006 206 224 215 229 251 245 239 214 174 176 177 184

2007 184 191 184 185 194 199 207 205 199 200 213 214

2008 227 230 258 284 355 359 341 335 341 349 353 340

2009 315 357 396 390 404 377 374 390 372 353 362 369

Avg 233 250 263 272 301 295 290 286 271 269 276 277 274

Index 0.85 0.91 0.96 0.99 1.10 1.08 1.06 1.04 0.99 0.98 1.01 1.01

A. Large change in prices within a market: Seasonal Price Index

Low prices in Jan – Mar; High prices in May-Aug

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A. Large change in prices within a market: Seasonal Price Index - Eldoret

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To examine impact of seasonality on prices in a single market:

Formula:

1. Report market price for a single market

2. Take average by month across years

3. Take overall average (across months and across years)

4. Divide monthly average by overall average

• When the ratio is above 1, prices are higher in this season

• When the ratio is below 1, prices are lower in this season

5. Ground-truth seasonal price index through creation of seasonal calendar for maize

A. Large change in prices within a market: Seasonal Price Index - Eldoret

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Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Overall avg

2006 180 184 185 200 220 236 227 236 173 164 154 163

2007 154 151 157 187 189 199 197 196 191 200 208 210

2008- - - 257 319 311 280 304 361 310 287 234

2009 230 308 381 375 382 382 406 455 417- - 328

Avg 188 214 241 255 278 282 278 298 286 225 216 234 249

Index 0.75 0.86 0.97 1.02 1.11 1.13 1.11 1.19 1.14 0.90 0.87 0.94

A. Large change in prices within a market: Seasonal Price Index – Eldoret

Examine seasonal price patterns per market• Low prices in Oct – Mar; High prices in May-Sept• More variability than across averaged Kenyan markets

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A. Large change in prices within a market: Seasonal flow reversals - Eldoret

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• Eldoret faces more variability in prices than other Kenyan markets• Common trend for outlying production areas, which may have lower

prices during post-harvest and higher prices during lean seasons than urban areas

• Traders evacuate products from outlying areas to urban areas for storage during post-harvest, and move them back to outlying areas during lean seasons, incurring storage and transportation costs, driving prices in rural areas up during lean season • Therefore, there may be divergence between urban and outlying

area price patterns.• Use historical prices to compute ratio between outlying area prices

and urban prices

A. Large change in prices within a market: Seasonal flow reversals - Eldoret

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• Seasonal flow reversals may be responsible for greater price variability in Eldoret relative to Nairobi, when:• The lean season in Eldoret coincides with the ratio being above 1

(indicating that food is more expensive in Eldoret than Nairobi) • The harvest season in Eldoret coincides with the ratio being

below 1 (indicating the food is cheaper in Eldoret than Nairobi)

B. Question: How do prices differ across spatially distinct markets over time?– By inspection, compare prices across markets

• Will likely vary somewhat across markets due to varying transportation costs and other factors

– Examine historical patterns to assist in identification of divergence• Is the pattern of the difference relatively consistent over

time?

• If so, markets are said to be spatially well-integrated; if not, what may be causing prices to change in one market but not in another?

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Trigger:B. Large change in price differences across markets over time

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B. Large change in price differences across markets: maize markets in Kenya

B. Large change in price differences across markets: Inspection of Kenyan markets in Kenya

B. How do prices differ across spatially distinct markets over time?– Eldoret’s prices differ from the standard pattern.

Eldoret’s prices increase in August, whereas prices are falling in other markets. And, in September, Eldoret’s prices fell faster than in other markets.

– Kisumu’s prices differ from the standard pattern too, but not as dramatically. Kisumu’s prices increase faster in December than other market prices.

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B. Large change in price differences across markets: Inspection of Kenya markets

B. How do prices differ across spatially distinct markets?– No rule of thumb for trigger– Consider historical data:

• Is the current pattern divergent from historical pattern?

• Are changes in the current pattern proportionally much larger than previous patterns?

• If yes to either of these, consider changes to factors that may be influencing prices

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• Are large month-to-month price changes observed for a single commodity? For many commodities?– Repeat computations for each commodity

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How are prices changing?: Categorize price changes

• What is the scale of price change?– Global, regional or national price changes

– Localized price changes• In procurement areas?

• In distribution areas?

• Single market price changes (e.g., Eldoret)?

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How are prices changing?: Categorize price changes

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How are prices changing?: Categorize price changes•Categorize price change by number of affected communities and number of commodities

–If price changes occur for many commodities, it may be due to changes in cost of commerce (e.g., inflation, fuel price changes)–If price changes occur for a single commodity, it may be due to commodity-specific shocks or policy changes –If prices change for a single market, may indicate insecurity, localized transport issues, trader collusion–If prices change for many markets, may indicate national-level factors

•Begin to brainstorm: have any factors that influence prices changed?

–Next: frequent factors that cause prices to change