PATSession 4.1.

Import Parity Price

WFP Markets Learning Programme Price Analysis Training 4.1.1

Learning Objectives

By the end of this session, participants should be able to:

Explain the concept of import parity price (IPP), its use &

value as a market analysis tool, and pros & cons of its use

List types of data required to calculate IPP

Analyze graph of import parity prices, identify implications

for food security analysis of changes in IPP

Calculate import parity price for selected goods from

country/region in which the workshop is held

WFP Markets Learning Programme Price Analysis Training 4.1.2

Task: Read Quick Case and, with a partner, discuss questions below:

High cereal prices continue to negatively affect the livelihoods of many households in Ethiopia. Local cereal prices are now higher than global market prices…imported wheat is currently cheaper than local maize or sorghum. Local wheat price is US$ 605/MT compared to import parity of US$ 355/MT.

The situation is expected to further escalate as the hunger season progresses from June to September.

How is the difference in local and global food prices likely to impact food security in Ethiopia – assuming free market conditions?

How is the difference likely to impact small producers in Ethiopia?

Quick CaseIPP Comparisons in Ethiopia

WFP Markets Learning Programme Price Analysis Training 4.2.3

Adapted from: OCHA Humanitarian Bulletin, Weekly Humanitarian Highlights in Ethiopia, 23 June 2008.

Import parity price

Definition and Objective

• IPP: the total cost (in domestic currency) of delivering a good that is imported to the main entry point in the importing country/province (e.g. to port of import, major trading city, or central warehousing location)

• IPP helps clarify whether the national market is integrated into regional or world markets

WFP Markets Learning Programme Price Analysis Training 4.1.4

Import parity price

Data required:

• cost of the commodity (fob) at the source

• freight, insurance & handling cost

• + domestic transport, handling & taxes (if key destination is within importing country)

• domestic wholesale price of the commodity

WFP Markets Learning Programme Price Analysis Training 4.1.5

Import parity price

Interpretation

• if a good is cheaper abroad (i.e. the domestic price > the IPP), traders could have incentives to import the good, assuming free trade

• comparison of the time series of domestic wholesale prices, import parity prices and import quantities of a good can give an indication whether traders are responsive to price changes and the reasons they are

WFP Markets Learning Programme Price Analysis Training 4.1.6

IPP Example

WFP Markets Learning Programme Price Analysis Training 4.2.7

Calculation:

Dhaka wholesale price

of rice -A-

India wholesale

price of rice -B-

Transport cost Delhi-Bangladesh

border -C-

Official exchange rate -D-

Import tariff on rice -E-

Transport cost bangladesh border

to Dhaka -F-

Over marketing costs, margins -G-

Tk/Kg Rs/Kg Rs/Kg Tk/Rs % Tk/Kg Tk/Kg

7.65 5.89 0.72 1.27 0 0.65 1.53

= 8.3947

= 10.5747

=((B+C)*D)*(1+E/100)

=((B+C)*D)*(1+E/100)+F+G

IPP at Bangladesh border

IPP in Dhaka

IPP Example

WFP Markets Learning Programme Price Analysis Training 4.2.8

0

2

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Pri

ce

(T

ak

a/k

g)

0

50

100

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Imp

ort

s (

'000

Mt)

Private Sector Imports Dhaka wholesale price IPP

Whenever IPP < domestic wholesale prices, private imports flows in Dhaka

Import Parity Price Pros & Cons

Pros Monitoring world markets & potential incentives for private

sector imports

Cons Data availability

Could be misleading if trade barriers, status of competition, trade uncertainties, public imports, internal transport costs and parallel markets (black market exchange rate, informal trade channels) are not analyzed.

WFP Markets Learning Programme Price Analysis Training 4.2.9

Please turn to Workbook Exercise 4.1.

The Marketastan File: Wheat IPP for Marketastan

(use Excel data file: 4.1. Wheat IPP for Marketastan.xls)

WFP Markets Learning Programme Price Analysis Training 1.4.10

Small Group Work

Marketastan 4.1. Debriefing

What are the likely implications for household food security in Marketastan – and for WFP - of the current IPP for wheat (i.e. in the first few months of 2010? Why?

WFP Markets Learning Programme Price Analysis Training 4.2.11

Wrap-up IPP & Interpretation and Decision-making

Interpretation• Informs availability: Important part of overall

Food Balances• Informs responsiveness of private commercial

traders to shocks

Decision-making• Amount of food aid required• Local purchase vs. international purchase• Purchase for Progress

WFP Markets Learning Programme Price Analysis Training 4.1.12