Food Price Shocks Tool

The price shock tool is based on the methodology in this paper. The tool considers only first-order impacts of a price shock on the poor since the price elasticities of demand generally are low, especially for staple foods. Low price elasticities for staple foods mean that demand for food among the poor does not change much in the face of price increases. Because price elasticities of demand are low, using first-order impacts of price shocks is justified. In addition, using first order impacts makes sense as substitution among food items is low as a result of price shocks in food markets often not being isolated to individual crops.

To get the first order impacts of the price shocks, we multiply a matrix by a vector of price shocks. This matrix comes from household surveys and contains the net sales of each crop (columns) for each household (rows). By multiplying this matrix of net sales by a vector of price shocks, we get a vector of net impacts (across all crops) for each household. Then we compare these effects in relation to the poverty line indicated to see how many people fall below or rise above that line. The outcome variable is poverty.

The impact on the poverty headcount is given by counting how many households rise out of poverty and how many fall into poverty after the price shock - using the international poverty line of $1.90 per person a day (valued at purchasing power parity, PPP).

Considerations for the use and interpretation of the price shock tool:

• It is important to note that the source of the price shocks matters for the use of this tool. The impacts on poverty are valid when the shock is exogenous to the country's agriculture. If the source of a price increase is a domestic production shock, the impact of the combined production shock and price change may be very different. This is because a domestic production shock directly impacts poverty in addition to the impact of the associated price changes.
• The approach assumes full transmission of world market prices to the prices that domestic consumers and producers face, so considering the extent of price transmission in a particular country is relevant in interpreting the results.
• The drivers of these hypothetical price changes can be anything that affects world market prices (full transmission to domestic markets is assumed) or a trade measure that has the effect of increasing or decreasing domestic prices.