NAF
International Working Paper Series
Year 10/04 paper n. 4
Increasing World Food Prices and the Impact on the Agricultural Sector of Sudan: Tradeoffs Between Food Security and Agricultural Trade
Mohamed B. ELGALI
University of Gezira, Department of Agricultural Economics, Sudan
Rajaa H. MUSTAFA
University of Gezira, Department of Agricultural Economics, Sudan
D. Kirschke
Humboldt-Universität, Institut für Agrarpolitik, Germany
The online version of this article can be found at:
Scientific Board
Maria Sassi (Editor) - University of Pavia
Johann Kirsten (Co-editor)- University of Pretoria
Gero Carletto - The World Bank
Piero Conforti - Food and Agriculture Organization of the United Nations
Marco Cavalcante - United Nations World Food Programme
Luc de Haese - Gent University
Stefano Farolfi - Cirad - Joint Research Unit G-Eau University of Pretoria
Ilaria Firmian -IFAD
Firmino G. Mucavele - Universidade Eduardo Mondlane
Michele Nardella - International Cocoa Organization
Nick Vink - University of Stellenbosch
Alessandro Zanotta - Delegation of the European Commission to Zambia
Copyright @ Sassi Maria ed.
Pavia -IT
ISBN 978-88-96189-06-1
INCREASING WORLD FOOD PRICES AND THE IMPACT ON THE AGRICULTURAL SECTOR OF SUDAN: TRADEOFFS BETWEEN FOOD SECURITY AND AGRICULTURAL TRADE
Mohamed B. ELGALI (1), Rajaa H. MUSTAFA (2) D. Kirschke (3)[1]
Abstract
The objective of this article is to assess the responses economic variables (Supply and demand) to the high world prices and their consequences on the food security and agricultural trade of Sudan. In addition, to estimate the remedy of liberalization policies. During the 2007 and 2008 the world market prices of food has reached unprecedented levels. In 2007 the international food price index rose by nearly 40%, compared with 9% the year before, and in the first three months of 2008 prices increased further, by about 50% (Von Braun et al 2008). Sudan is one of the developing countries and the agriculture is the main sector in the economy, the country characterized by its small open economy, and as price taker in the world market of agriculture; the country is more vulnerable to changes in international agricultural prices and markets. In this paper a multi-market partial equilibrium model is used as a main tool to assess policy and the price impact on the agricultural crop markets of the Sudan. The paper's result show that the impact of the high world prices on the country’s food security is contradictory. The country’s state of food availability is generally improved. Regarding food accessibility, the rising prices incapacitate consumers access to staple food. Concerning the impact on trade, the agricultural crop markets are showing improvement under the high prices scenario. Under the liberalization scenarios the demand of major cereals will fall at lower levels than that with existence of these taxes. With regard to trade sector, the liberalization policy still has a positive impacts on the exports of agricultural commodities.
Keywords: High world market prices, Multi-market model, Sudan
JEL: Q11, Q18
INCREASING WORLD FOOD PRICES AND THE IMPACT ON THE AGRICULTURAL SECTOR OF SUDAN: TRADEOFFS BETWEEN FOOD SECURITY AND AGRICULTURAL TRADE
Mohamed B. ELGALI (1), Rajaa H. MUSTAFA (2) D. Kirschke (3)[2]
1 Introduction
Agriculture is the most important sector in Sudan's economy. It contributes on average about 43% of the country Gross Domestic Product (GDP) during the period 1999-2006. The sector provides employment for about 70 percent of the country’s population, and provides inputs to many major manufacturing industries. (Abdakarim and Alfahal 2007). Agriculture historically generated the bulk of Sudan’s foreign exchange earnings through a diversified basket of exports which can be broadly classified into three categories that includes field crops, animals and forest exports. The main field crops exports include sorghum, millet, cotton, sesame and ground nut, while animal exports include sheep, camels and cattle, and, gum arabic represents the major forest exports. The share of agricultural exports in total country’s exports is declining because of the growing exports of oil sector; this share has declined to only 4.4% in 2008 compared to14.6% in 2001. Sudan enjoys the preconditions for a strategy of boosting its flagging agricultural exports, which have declined in value terms each year since its peak in 2004 of $569 million to an estimated $508.9 million in 2008 table (1).
Total cereal production in the country has ranged over the last five years between 4 and 6 million tones. It accounts for about 65% to total annual grain requirements (El-Dukheri 2007). The major imported food in Sudan is wheat and due to the low and variable domestic production, imports of wheat and wheat flour in terms of wheat equivalent have been escalating, reaching about 1.183 million tons in 2008 compared to about 0.52 million tons in 2001, and the value of imported wheat has increased from 109.6 million US$ in 2001 to 715.3 million US$ in 2008 (table 1). During 2007 and 2008 the world market prices of food has reached unprecedented levels. In 2007 the international food price index rose by nearly 40%, compared with 9% the year before, and in the first three months of 2008 the prices increased further, by about 50% between January 2007 and January 2008 wheat nominal prices rose by 240% and real prices by 172%.
Table (1) Agricultural Exports And Wheat Imports In Sudan 2001-2006
Year / Agriculture Exports(Million US$) / Share of Agriculture Exports in Total Exports (%) / Wheat Imports Quantity
(million tons) / Wheat Imports Value
(Million US$)
2001 / 240.6 / 14.9 / 0.52 / 109.7
2002 / 356.2 / 18.8 / 1.03 / 199.3
2003 / 410.3 / 16.1 / 0.90 / 190.5
2004 / 590.7 / 16.5 / 1.06 / 255.6
2005 / 578.8 / 12.0 / 1.45 / 373.9
2006 / 569.4 / 10.0 / 1.36 / 336.5
2007 / 412.3 / 4.6 / 1.13 / 363.6
2008 / 508.9 / 4.4 / 1.18 / 715.3
Source: Bank of Sudan, Annual reports
Wheat export prices from USA climbed from $375/ton in January to $425/ton in February 2008 (Von Braun et al 2008). The expected growth in global demand for agricultural commodities has outstripped the growth in supply. As a consequence, the trend in prices has been positive. The tendency towards higher prices than in the past may be expected to continue for the next few decades (Von Witzke, etal 2010).
The Food and Agriculture Organization (FAO) has attributed the dramatic increase in food world market prices to factors related to both supply and demand of food in the world. Regarding the supply side, weather related production short falls, the declining stock levels and the increasing fuel costs arises as the main factors that have negatively affected the supply of food in the world. On the demand side, the increasing demand for agricultural commodities for biofuels production and the changing structure of food demand in emerging economies are considered as the major factors that has increased world food prices (FAO, 2008).
To lower domestic prices the World Bank has recommend an option includes reducing tariffs and other taxes on key staples. Since many countries impose tariffs on food imports, both to encourage domestic production and boost domestic revenue. In times of sharply increasing prices, reductions in tariffs and taxes can provide some relief to consumers, albeit at a fiscal cost. The revenue loss from reducing tariffs can be significant and the fiscal implications of combining this with additional social protection expenditures may well require cutbacks in lower priority areas (World Bank, 2008).
Despite of liberalization and privatization policies adopted by the government and the declaration of supporting agricultural sector, heavy taxes are still imposed on agricultural production and export in different kind , a number of government agencies at both local and national levels impose taxes, charges, and fees that raise the cost of international trade (e.g. administration fees, transportation fees, production fees and other domestic taxes (zakat, state support fees, ports fees, profits tax and others). For example, Local taxes and fees charged on major export crops can also make up large shares of export prices: 17 percent for sesame and 15–20 percent for groundnuts (DTIS, 2008).
2 Objectives of the Study
Higher food prices have radically different effects across countries. At the country level, countries that are net food exporters will benefit from improved terms of trade, although some of them are missing out on this opportunity by banning exports to protect their consumers. Net food importers, however, will fight to meet domestic food demand. Given that almost all countries in Africa are net importers of cereals, they will be hard hit by rising prices. At the household level, surging and volatile food prices hit those who can afford it the least the poor and food insecure (Von Braun et al, 2008).
Sudan is one of the developing countries with agriculture as the main sector of economy is characterized by its small open economy, and it is a price taker in the world market of agriculture; the country is more vulnerable to changes in international agricultural prices and markets. This paper aims at studying the impact of the increasing world food prices on the agricultural commodity markets and the tradeoffs between food security and agricultural trade in Sudan. More particularly to:
1-Assess the responses of economic variables (Supply and demand) to the high world prices and their consequences on the food security and agricultural trade of the country.
2-Analyze what could have been happened if liberalization policies were undertaken by reducing tariffs and export taxes.
3 MATERIALS AND METHODS
3.1 A Multi-market Model for Sudan Agricultural Crop Markets: General Features and Equations
In this paper a multi-market, partial equilibrium model is used as a main tool to assess policy and the price impact on the agricultural commodity markets of the Sudan. Partial equilibrium models are the most widely used models to assess the effect of various policy interventions on agricultural sector. Multi-market analysis is a tool for simulating the effects of agricultural price policies on outcomes considered of interest to policy makers (Braverman and Hammer 1987).
The strength of partial equilibrium modeling as a way of understanding the Sudanese agricultural market rests in several of its strengths. Firstly, using partial equilibrium analysis is empirically not complicated and the analysis thereof reasonably approximates the general effects of trade policy changes where weak links between commodities and their supplier or output sectors may exist (Perali,2003). Secondly, partial equilibrium analysis provides useful information on the impact of trade and policy changes at very detailed product and sectoral levels, hence allowing for the utilization of widely available trade data (Lang, 2006; Thurlow et al., 2005; Wubehen, 2006).
Sudan economy is modeled as a small open economy on both the import and export sides of the agricultural commodities. The model under consideration takes the normal specification of a standard partial equilibrium model; it is static and consists of a set of demand and supply equations for each commodity with the level of supply and demand determined by factors including prices, income, demand and supply shift variables and various other assumptions about policies (see Jechlitschka et al, 2007). In specifying supply and demand functions for each product market, domestic prices for one market help to determine the quantity supplied and demanded not only in that market but also in the other markets through cross-market price linkages. Price transmission equations in the model establish links between producer price (for producers of exportable products and of import-substitute products) and the consumer price and the world market price.
Ten key agricultural crop markets of the Sudanese agriculture are considered in the model. The major crop exports are sorghum, millet, sesame, ground nut, cotton, gum arabic and livestock, while, wheat and rice are the main import substitutes. The model has been extended to calculate the impact of the world high food prices on the economy variables which mainly include food security and trade.
3.1.1 The Supply Component Equations
The supply of each commodity is represented by the quantity produced which is function of its own price and the prices of the competing commodities. The product supply equations represented asfollows:
Where
denotes the amount of the ith commodity supplied
is the supply calibration coefficient of the ith commodity
is the supply price of the ith commodity
is the supply price of the jth commodity
is the supply price elasticity of the ith commodity
is the supply cross price elasticity of the products jth that are
competing the ith commodity
is the set of relevant competing substitutes of the ith commodity
3.1.2 The Demand Component Equations
On the other hand, the demand (consumption) quantity of a commodity is set to depend on its own price, the prices of close consumption substitutes or complementary commodities and the consumer per capita income. So, the system of the demand function can be expressed as follows:
Where,
denotes the amount of the ith commodity demanded
is the demand calibration coefficient of the ith commodity
is the demand price of the ith commodity
I is per capita income
is the demand price elasticity
is the cross price elasticity of the ith commodities that are
complementary or substitutes for the jth commodities.
is the income elasticity of the ith commodity.
3.1.3 Price Transmission in the Model
The illustration of the price-linkage equations assumes that the government could control the domestic price through price policy measures. Also, it assumes that the movements in producer and consumer prices are connected to the world price movements. (for exportable products and import-substitute products). Therefore, price transmission in the model is represented as follow:
Producer and consumer prices of the export and import-substitute commoditiesare shown by the following equation:
(i) Producer price
(ii) Consumer price
Where,
is the producer price for the commodity i
is the consumer price for the commodity i
is the world price of the commodity i
is domestic rate of producer's tax
is domestic rate of consumer's tax
is the protection rate of the commodity
3.2 Food Security Indicators
The FAO defines food security as: "When all people at all times have both physical and economic access to sufficient food to meet their dietary needs in order to lead a healthy and productive life". Wheat, rice, sorghum and millet are the major staple food for the population used as the food security component in the model. National macroeconomic indicators of food availability used in the model are self-sufficiency ratio (SSR) of cereals, and per capita consumption (PCC) of cereals.
3.2.1 Self-sufficiency ratio (SSR)
3.2.2 Per Capita Consumption (PCC)
Where, N denotes the population number.
3.3 Trade indicators
In order to assess the effect of the high world food prices on the major agricultural crop markets of the Sudan, a selected trade indicators used by the United Nations are implemented. Simple and composite indices are established as recognized approaches in monitoring progress in achieving various policy goals or in benchmarking various policy options. The indicators include Growth Rate of Exports, Export Propensity, Import Penetration, Marginal Propensity to Import and Export/Import Coverage.
3.3.1 Growth Rate of Exports
The growth rate is one of the most common indicators used when assessing the progress of an economy in any area of economic activity, it calculates the annual compound percentage change in the value of exports between two periods, it is a percentage, and can take a value between 100 per cent (if trade ceases) and + ∞. A value of zero indicates that the value of trade has remained constant.
Growth Rate of Exports= j = 1,…, 8 (5)
Where,
is the bilateral total export flow of the commodities in the start period,
is the bilateral total export flow of the commodities in the end period,
and is the number of periods (not including the start).
3.3.2 Export Propensity
The index shows the overall degree of reliance of domestic producers on foreign markets. The index provides an indicator of vulnerability to certain types of external shocks (e.g., increase or falls in export prices or changes in exchange rates). The ratio is expressed as a percentage and it ranges from zero (with no exports) to 100 (with all domestic production exported).
Export Propensity = j = 1,…, 8 (6)
Where,
are total bilateral exports of (sorghum, millet, sesame, ground nut, , gum arabic, sugar livestock and cotton) the markets under study,
and is agricultural gross domestic product of country ( the covered commodities in the model).
3.3.3 Import Penetration
The import penetration rate shows to what degree domestic demand (the difference between GDP and net exports) is satisfied by imports. Calculated at the sectoral level it is termed the self-sufficiency ratio. The ratio ranges from zero (with no imports) to 100 percent when whole domestic demand is satisfied by imports only (no domestic production and no exports).
Import Penetration = j = 1,…, 8 and i=1,2 (7)
Where,
is total bilateral exports of the country under study,
is total bilateral imports of wheat
and is agricultural gross domestic product of country ( the covered commodities in the model).
3.3.4 Marginal Propensity to Import
The marginal propensity to import (MPM) is a measure of the extent to which imports are induced by a change in incomes. With higher MPM, in an economic downturn with a fall in GDP, there will also be a significant fall in imports as compared with lower MPM. More generally, higher MPM reduces the multiplier effect of an increase in GDP. The ratio ranges between 0 (with no part of extra GDP spent on additional imports) to 1 when the whole extra GDP created is spent on imports.