Cooling effect of pulse imports on domestic prices
1. Cooling effect of Pulse
Imports on Domestic
Prices
By
Akanksha Negi, Devesh Roy and Raj Chandra
International Food Policy Research Institute
Raj Chandra
10-06-2016
2. Imports and Inflation
Trade fills the gap between production and consumption and can also
contribute to cool down inflation (Gokarn, 2011)
Has been employed as a tool to stabilize prices for a spectrum of food
products facing price pressures
In case of potential threat of significant price rise, trade policy has
been quick and large
When price pressure was faced on wheat in 2006, 6 million tons was
imported from Australia
Edible oil is another example
Stop-gap import of milk, sugar, onion and other vegetables represents
common policy stance
Raj Chandra 10-06-2016
3. Imports and Domestic Price Dynamics:
A quick look
Annual shortage of around 2-3 million tons of pulses over the past
decade
Demand outspacing supply both at aggregate level and across variety
resulted in persistently high prices
Liberal trade policy has been adopted in case of pulses since 2000
Import has maintained a steady growth of 36 percent over the past
decade
Evolution of pulse import coincided with persistent increase in prices
To what extent have imports cooled domestic market in pulses is an
interesting question to explore
Raj Chandra 10-06-2016
5. Objective
How imports of pulses have affected their domestic
prices?
What is the nature of effect on pulse prices? Do imports
bring down prices or just slow their rate of increase?
What is the time span for imports to have a bearing on
price of pulses?
10-06-2016Raj Chandra
6. Methodology
We employ basic Vector Error Correction Model
Steps:
Stationarity: Traditional unit root test- DFGLS & KPSS
Test for unit root in the presence of structural break-zivot andrews
Cointegration: Johansen’s cointegration test to find the order of integration
VECM was employed to study the dynamics between pulses import and domestic prices
VECM allows to delineate the short run as well as long dynamics
Impulse response graph to visually interpret the short term adjustment by imports to shock in
price and vise versa
The cointegrating equation provides the estimate for long run import price equilibrium
relationship
Raj Chandra 10-06-2016
7. Data and Variables
Time Period: 2002-2012
Data Sources:
Imports: Customs Dataset (Government of India)
Domestic Prices: Centre for Monitoring Indian Economy Pvt. Ltd (CMIE)
Market Arrival: Centre for Monitoring Indian Economy Pvt. Ltd (CMIE)
Variables:
Imports
Domestic Prices
Market Arrival (Principal Market)
Frequency: Weekly
10-06-2016Raj Chandra
8. Import and Price Dynamics: 2002-2012
Green Gram
5.566.577.5
logPrice
2468
10
logImport
2002w1 2004w1 2006w1 2008w1 2010w1 2012w1
Date in weeks
log Import log Price
Import and Domestic Price of Green gram
10-06-2016Raj Chandra
9. Import and Price Dynamics: 2002-2012
Pigeon pea
10-06-2016Raj Chandra
66.577.5
logPrice
468
1012
2002w1 2004w1 2006w1 2008w1 2010w1 2012w1
Date in weeks
log Import log Price
Import and Domestic Price of Pigeon pea
10. Import and Price Dynamics: 2002-2012
5.566.57
logPrice
2468
1012
logImport
2002w1 2004w1 2006w1 2008w1 2010w1 2012w1
Date in weeks
Import and Market Price of Chickpea
10-06-2016Raj Chandra
66.577.5
logPrice
2468
1012
logImport
2002w1 2004w1 2006w1 2008w1 2010w1 2012w1
Date in weeks
Import and Market Price of Black Matpe
11. Long Run Dynamics between Imports
and Domestic Prices
The long run dynamics between imports and prices are captured by the
cointegrating equation:
Pigeon Pea: 𝒍𝒏𝑷 𝒕 = 𝟐. 𝟕𝟎 − 𝟏. 𝟕𝟏𝒍𝒏𝑴 𝒕
Green Gram: 𝒍𝒏𝑷 𝒕 = 𝟑. 𝟔𝟒 − 𝟏. 𝟑𝟓𝒍𝒏𝑴 𝒕
Lentil: 𝒍𝒏𝑷 𝒕 = 𝟐. 𝟓𝟐−. 𝟓𝟕𝟓𝒍𝒏𝑴 𝒕
*Note: 𝐥𝐧𝐌𝐭 is the log value of imports and 𝐥𝐧𝐏𝐭 is the market price of the
respective pulse
Raj Chandra 10-06-2016
12. Long Run Dynamics between Imports
and Domestic Prices Contd..
After controlling for market arrival the cointgrating relation can be presented as:
Pigeon Pea: 𝒍𝒏𝑷 𝒕 = 𝟑. 𝟓𝟑 − 𝟏. 𝟓𝟖𝒍𝒏𝑴𝒕 + 𝟎. 𝟎𝟎𝟗𝒍𝒏𝑴𝑨 𝒕
Green Gram: 𝒍𝒏𝑷 𝒕 = 𝟑. 𝟔𝟕 − 𝟏. 𝟏𝟎𝒍𝒏𝑴 𝒕 − 𝟎. 𝟐𝟐𝒍𝒏𝑴𝑨 𝒕
Lentils: 𝒍𝒏𝑷 𝒕 = 𝟐. 𝟔𝟏−. 𝟕𝟕𝒍𝒏𝑴𝒕 − 𝟎. 𝟑𝟐𝒍𝒏𝑴𝑨 𝒕
*Note: 𝑙𝑛𝑀𝑡 is the log value of imports and 𝑙𝑛𝑃𝑡 is the market price of the
respective pulse and 𝑙𝑛𝑀𝐴 𝑡 is the market arrival for pulses in one of the principal
market
10-06-2016Raj Chandra
14. Seasonality and Imports: Case of Pigeon
pea
Wide variation in prices is mainly driven by fluctuations in market arrival
The nature of demand and supply for agricultural products creates instability
in prices for producers, consumers and income for farmers
Seasonality is quite important in pigeon pea markets with highest arrivals
during January to March
Lowest arrivals observed in the month of October
Seasonality indices lower during April to June with lowest in the June (0.92)
(IIPR 2013)
With seasonality trade can play important role in evening out prices
Harvest season differs across countries: India- December to January;
Myanmar- January to February and East Africa- July to October
10-06-2016Raj Chandra
15. Seasonality and Imports: Case of Pigeon
pea
10-06-2016Raj Chandra
Myanmar
2000030000400005000060000
Avg_Price
0
.05
.1
.15
Weekly_Import
2002w1 2004w1 2006w1 2008w1 2010w1 2012w1
Date in weeks
Import_Quantity Domestic_Price
Tanzania
0200004000060000
Avg_Price
0
.002.004.006.008
Weekly_Import
2002w1 2004w1 2006w1 2008w1 2010w1 2012w1
Date in weeks
Import_Quantity Domestic_Price
16. Seasonality and Imports: Case of Pigeon pea
Contd..
10-06-2016Raj Chandra
Low or almost negligible import are associated with the periods of high
domestic prices
With imports coming, in the following period there is seems to be some
association in terms of moderating prices
Big import spikes are associated with fall in prices in subsequent periods
Import series displays a distinct floor in the import and price graph
The density of log imports clearly shows a truncated distribution
Effective way to deal with such truncated distribution is to consider the net
imports
Export data limited as pulses export being restricted due to government
policy
17. Policy Implication
Imports and prices needs to be considered in conjunction
Clear evidence of import and price comovement
A unitary shock in imports at first leads to a sustained increase in
prices up till 20 weeks, after which price stabilizes
Expansion on extensive margin might speed up things
Roughly imports’ role in cooling pulse markets reflect the reactionary
stance rather than a pro active disposition
Import needs to be operationalized quickly as it takes some time to
bear on prices
10-06-2016Raj Chandra
Whether imports bring down prices significantly or are merely stemming the rate of growth or prices
Time taken for the effects of import to be fruitful is very important. Hence we access also the time taken for the imports to have any bearing if at all on domestic prices
A unit shock in imports stabilizes prices only after 20 weeks, the price continue to rise but at a concave trajectory ; i.e. the rate of increase of price fall as weeks goes by. In both the cases the shock causes a permanent innovations in the time path of the influenced variable
Low or almost negligible imports are associated with periods of high domestic prices. Without attributing causality, it is also evident that once some imports comes in the following period there seems to be some association in moderating prices. Big
