The Integration of Food Markets in Mozambique

Opportunities and Challenges

Bjorn Van Campenhout – IFPRI, Kampala b.vancampehout@cgiar.org

Prepared for the IFPRI Maputo workshop on 18 November 2012 @

Hotel VIP

Significance

• Definition: Spatial market integration = net producers are connected to net consumers through price arbitrage

• Importance for Mozambique: – Large ag potential of north and central

Mozambique to feed Maputo and rest of SE Africa

– Food security: pockets of hunger are on the increase due to climatic shocks

The Concept of Market Integration - To integrate local markets into the wider economy,

the “transaction cost” is a key variable -

1EQ

D

S

S

D

1EP

2EQ

2EP

D’

'2EQ

'2EP

'1EQ

'1EP

S’

Until TPP EE =− '2'1

The Effect of Market Integration

Source: Jensen, 2007

The Theory of Spatial Price Equilibrium

• Correlation coefficient • Cointegration and error correction • The parity bounds model • Threshold autoregressive/cointegration

models

TAR models: piecewise linear

Δ(p1-p2) at t

-TC TC

(p1-p2) at t-1

Slope: adjustement speed

TAR models: piecewise linear

Random walk (imposed)

Error correction

Error correction

Transaction cost

Transaction cost

Non-parametric extenstion

• TAR model, but estimate transaction cost using locally weighted least squares

• Iterative method: – Estimate a standard TAR model (ρ,TC) – Fix adjustment parameter and estimate transaction

cost using locally weighted LS (TCt) – Using new transaction cost, re-estimate adjustment

parameter – Repeat until criterion is met (i.e.|Δρ|<0.0005)

Nominal price of Maize in 3 markets

Results – Estimated Parameters

Maputo - Maxixe

Selected Markets

Policy Options to Increase Market Integration

• Transport infrastructure: • Information systems • Increase competition among traders ->

formalize trade of trader – Credit – Insurance – Quality control