SERA Policy Research Brief: Cross-Border Transmission of Food Price Shocks

Food price volatility has a profound impact on the lives of the poor in developing countries, but much remains to be learned about the sources of food price volatility. Food prices may be influenced by internal factors such as supply shocks or external factors such as demand shocks emanating from neighboring countries or world markets. The influence of external factors is commonly assumed to be transmitted from one external, typically international, market to the largest domestic city or port. This Policy Research Brief reports the results of research that aims to better understand the cross-border transmission of demand shocks using a network approach that identifies the sources of price volatility for 18 regional maize and rice markets in Tanzania.

The findings have important trade policy implications. If shocks to domestic food markets are transmitted through Dar es Salaam, then border controls will be more effective at controlling food price volatility than if shocks are transmitted from regional sources through more informal trade channels such as across land borders and lakes. Further, understanding the channels through which regional food market disturbances are transmitted to local Tanzanian markets will serve to improve forecasts of domestic food price volatility. The research concluded that Dar es Salaam is not a demand or supply focal point and that most external demand shocks to the domestic maize and rice market do not emanate from or go through Dar es Salaam. This suggests that border controls that are primarily directed at imports coming through the port in Dar es Salaam will not be very effective at controlling food price volatility.

Dar es Salaam does not connect the main surplus producing areas (i.e. the southern zone for maize and rice, and the lake zone for rice) with the main regional demand centers of Nairobi (Kenya) in the north and Nampula (and the rest of Mozambique) in the south and much of this trade is through informal channels. That limits the effectiveness of protectionist trade policies since informal trade is more difficult to control than trade through major ports such as Dar es Salaam. In particular, Songea (for maize) and Shinyanga (for rice) are focal points for local price formation, and these markets are influenced by other markets in the region. For maize markets, Nairobi has the largest influence on Tanzanian markets during the harvest season, while Nampula has the largest influence during the lean season. For rice, Bukoba (an important Lake Victoria port) has the largest influence during the harvest season, while international markets (Vietnam and Pakistan) have the largest influence during the lean season.

These findings suggest a more effective policy than trying to control cross-border food movements would be to remove impediments to food flows within the country. While Dar es Salaam is the largest city and economic capital of the country, the demand from Kenya and Mozambique are more significant determinants of prices and policy makers need to be aware of the policies of neighboring countries when formulating a national food trade policy. The main policy message from this Policy Research Brief is that border controls for maize and rice are not likely to be an effective way to provide improved price incentives to producers because demand shocks are primarily transmitted through informal channels from neighboring countries. Other measures such as reducing inefficiencies that stem from inadequate rural infrastructure are likely to be more effective at increasing agricultural productivity.

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