This document analyzes the benefits of improved market information for farmers and traders in Africa. It presents a price adjustment model to estimate the reduction in social welfare loss from more accurate price forecasts. The model is applied to major cereals in Mali, estimating losses from different levels of forecast errors. Sensitivity analysis shows benefits are greater when uncertainty is high, demand is inelastic, and supply is elastic. Cost-benefit comparisons of market information systems in various countries are provided.

1. Estimating The Benefits From Improved
Market Information
Andrew Kizito
Agricultural, Food, and, Resource Economics
g , , ,
Michigan State University
A paper prepared for the workshop on “Agricultural Market
Information Systems in Africa: Renewal and Impact”
Montpellier (France), 29-31 March 2010

2. Summary of presentation
• Method Used To Value Information
• The Price Adjustment Model
• Comparative Statics
• Application of the Model
– Results and Sensitivity Analysis
– Cost - Benefit Comparisons
• Summary and Conclusion
• Implications for MIS Investment

3. Method Used To Value Information
Hayami and Peterson (1972): Increase in social
welfare resulting from increased accuracy or
reduction in sampling errors
1.Inventory Adjustment Model
a) Constant production
) p
2.Production Adjustment Model
a) Production adjusts
Complementarities with other reforms
• Potentially lead to attribution problems
• Jointly measure the benefits and costs of
complementary programs

4. The Price Adjustment Model
• Based on the partial equilibrium model
– Value information as the reduction in
dead-weight loss when users with rational
expectations respond to improved price
forecasts from MIS.
– Reduction of the cost of being off the
equilibrium price and quantity

5. The Price Adjustment Model
Setting and Assumptions:
• MIS provides price forecasts
• A closed economy with no international trade
• Rational Expectations- Based on new
information
– Adjust Production strategies (how much to
grow)
– Adjust Marketing strategies (when to sell or
store)
• A single homogenous commodity replicated
commodity,
to four separate commodities sold on the
market.

6. The Price Adjustment Model
• Benefits in form of reduction in net social
welfare loss by producers and consumers as
a result of reduction in price forecasting
errors.
• Also known as cost of being off the
equilibrium price and quantity
ilib i i d tit
• Estimations based on
– Fo r major cereals (millet mai e sorgh m
Four (millet, maize, sorghum
and rice)
– Account for more than 85% of cereal
calories in Mali (Dembélé and Staatz.,
1999).

7. The Price Adjustment Model
ΔQ P
Price
Ed = * = elasticity of demand
A
S
ΔP Q
Pc
ΔQ P
Es = = elasticity of supply
ΔP Q
P B
ˆ
P C
ΔP =| P − P |= e p P
ˆ
D ΔQ =| Q s - Q |= e p E s Q
O Qs Q Q
Quantity
y
ΔQ P
ΔP2 =| Pc − P |= = e p Es P / Ed
P = producer price of the commodity. Ed Q
ˆ
P = forecast producerprice of the commodity 1
E (L) = ΔQ(ΔP + ΔP2 )
( Pt − Pt )
ˆ 2
ep = price forecasterror
Pt
1 2 ⎛ Es2 ⎞
Q = quantityproduced E (L) = e p PQ⎜
⎜ E + Es ⎟
⎟
2 ⎝ d ⎠

8. Comparative Statics-Payoffs greater where:
(a)The level of uncertainty about future
market price in the market is high
(sampling error is large)
∂L ⎛ E s2 ⎞
= e p PQ⎜
⎜ E + Es
⎟>0
⎟
∂e p ⎝ d ⎠
Large forecasts errors lead to less
production Excess demand large
cost of being off the equilibrium price
and quantity
Low forecasts errors lead to a smaller cost
of being off the equilibrium

9. Comparative Statics-Payoffs greater where:
(b) The own-price elasticity of demand for
agricultural commodity is low (becomes less
negative—i.e., less elastic).
∂L 1 2 ⎛ Es2 ⎞
= − e p PQ⎜ 2 ⎟ < 0
⎜E ⎟
∂Ed 2 ⎝ d⎠
When production respond to price forecasts,
but consumption decisions do not, there is a
misallocation of resources d t “ i t k ”
i ll ti f due to “mistaken”
price forecasts.

10. Comparative Statics-Payoffs greater where:
(c) The own-price elasticity of supply for the
agricultural commodity is high.
∂L 1 2 ⎛ 2 E s ⎞
= e p PQ⎜
⎜ E + 1⎟ > 0
⎟
∂E s 2 ⎝ d ⎠
Poor price forecast induce a relatively large
shift in production, implying a relatively large
misallocation of resources
resources.
(d) The value of farm production of the crop is
g
high

11. Application of the Model
Elasticities of demand and supply
2002
Elasticities Maize Millet ce, Paddy Sorghum
Demand -1.968 -0.691 -0.767 -0.691
Supply 0.17 0.14 0.18 0.14
Production, prices and value of farm production in '000 CFA francs and USD, 2002
Crop Production and Prices Maize Millet ce, Paddy Sorghum Total
Production (000' MT) 364 795 710 642
Price CFA Franc/MT 72 92 128 87
Value of Farm Production (CFAF)* 26,254 73,233 90,653 55,827 245,967
Value of Farm Production (USD)** 37,668 105,070 130,063 80,098 352,899
* V l of F
Value f Farm Production i '000 CFAF
P d ti in
**2002 Exchange rate 1 USD=696.99 CFA; CIA World Fact Book
Demand and Supply Elasticities
• Rogers and Lowdermilk (1991) Camara (2004)
Lo dermilk (1991), (2004),
Rosegrant, et al., 2001
Value of Farm Production
• quantity produced (Q) x producer prices (P) f
tit d d d i from
FAOSTAT

12. Welfare Loss & Benefits of Improved
Information
Social loss corresponding to percentage of • For sorghum, if the price
forecasting error in Million Dollars, 2002 forecast error is 40%,
Maize Millet Rice Sorghum Total
40% 0.56 1.42 2.31 1.08 5.36
society losses $1.08M.
35% 0.43
0 43 1.08
1 08 1.77
1 77 0.83
0 83 4.11
4 11
30% 0.31 0.80 1.30 0.61 3.02
25% 0.22 0.55 0.90 0.42 2.09 • If error is reduced to
20% 0.14 0.35 0.58 0.27 1.34 35%, society looses
15% 0.08 0.20 0.33 0.15 0.75 $0.83M
10% 0.03
0 03 0.09
0 09 0.14
0 14 0.07
0 07 0.34
0 34
5% 0.01 0.02 0.04 0.02 0.08
0% - - - - -
Marginal social returns from reduction of price
g p
forecasting error in Million Dollars, 2002 • For Rice, reducing the
40% to 35%
Maize
0.13
Millet
0.33
Rice Sorghum
0.54 0.25
Total
1.26
price forecast error from
35% to 30% 0.11 0.29 0.47 0.22 1.09
40% to 35% would save
30% to 25% 0.10 0.24 0.40 0.19 0.92 $0.54M of social welfare,
25% to 20% 0.08 0.20 0.33 0.15 0.75 while reducing the
20% to 15% 0.06 0.15 0.25 0.12 0.59 forecast error from 15%
15% to 10% 0.04 0.11 0.18 0.08 0.42
10% to 5% 0.03 0.07 0.11 0.05 0.25 to 10% would save
5% to 0% 0.01 0.02 0.04 0.02 0.08 $0.08M dollars worth in
2002 Exchange rate 1 USD=696.99 CFA; CIA World Fact Book social welfare.
i l lf

13. Sensitivity Analysis: Effect of Changes in
Price Forecast Errors
Fig 2A. Social welfare loss corresponding to
6,000,000
percentage of forecasting error in 2002
• Total loss in social welfare from
5,000,000 a 40% forecast error is $5.4M
4,000,000
4 000 000 per year
Social loss in USD
3,000,000
• Total loss in social welfare from
2,000,000
a 10% forecast error is $.34M
1,000,000
per year.
year
0
0% 5% 10% 15% 20% 25% 30% 35% 40%
Price forecast error
Maize Millet Rice Sorghum Total
Fig 2B. Marginal social returns from reduction
1,400,000 of price forecasting errors, 2002
• Reducing the error from 40% to
1,200,000 35% saves $1.2M per year
Marginal soc benefits
1,000,000
800,000 • Reducing the error from 10% to
cial
600,000
400,000
5% to saves $
$0.25M per year
200,000
0
• Higher losses when there is
uncertainty regarding future
Change in price forecast error
prices
Maize Millet Rice, Paddy Sorghum Total

14. Sensitivity Analysis: Effect of Increase in
Elasticity of Demand
Fig 3A. Effect of an increase in elasticity of
6,000,000 demand to loss in social welfare
• Total loss in social welfare from
5,000,000
a 40% forecast error is $5.4M
per year
Social loss in USD
D
4,000,000
4 000 000
3,000,000
• When the elasticity of demand is
2,000,000
increased by 50%, total loss in
1,000,000
welfare reduces to $5.1 million,
representing only a 6%
0
0% 10% 20%
Price forecast error
30% 40% reduction.
0% increase 25% 50% 75% 100%
Fig 3B. Effect of an increase in elasticity of
demand to marginal benefits from improved
• Marginal Benefits from
1,400,000
1,200,000
price forecasts improved information less
ocial benefits
1,000,000 variable due to changes in
800,000
elasticities of demand
600,000
600 000
Marginal so
400,000
200,000
0
Change in price forecast error
0% increase 25% 50% 75% 100%

15. Sensitivity Analysis: Effect of Decrease in
Elasticity of Supply
Fig 4A. Effect of a decrease in elasticity of supply to
6,000,000
loss in social welfare • Total loss in social welfare
from a 40% forecast error
5,000,000
is $5.4M per year
4,000,000
4 000 000
Social loss in USD
3,000,000
• When the elasticity of
2,000,000
supply is reduced by 50%,
total loss in welfare
1,000,000
reduces to $2 5M
$2.5M,
0
0% 10% forecast20%
Price error 30% 40%
representing a 54%
0% Decrease 25% 50% 75% 100%
reduction.
Fig 4B. Effect of decrease in elasticity of supply to
marginal benefits from improved price forecasts
1,400,000
1,200,000 • Marginal Benefits from
Marginal social benefits
1,000,000
800,000
improved information
600,000 more variable due to
400,000
200,000
changes in elasticities
0 of supply
Change i price forecast error
Ch in i f t
0% Decrease 25% 50% 75% 100%

16. Cost - Benefit comparisons
Cost / year
Country Activity in USD Source
Kenya **
y Dissemination only
y 120,000(Shepherd, 2001)
( p )
Dissemination /
Uganda language 20,000(Shepherd, 2001)
Uganda* Full operation costs 30,000(Muganga, et al. 2000)
Tanzania Dissemination only 10,000(Shepherd, 2001)
Mali** Full operation costs 350,000(Staatz, 2006)
• *Decentralized/Localized MIS covering 3 districts
• ** National MIS (Covers many commodities and
Markets)
• Benefit from reducing price forecast errors with in a
10% to 15% range (
g ($.42 million) are larger than the
) g
costs ($.35 million) of running the service.

17. Summary and Conclusions
Better returns if improved market information is
targeted to farmers and traders when:
1. The level of uncertainty about future market
price in the market is high.
2.
2 The o n price elasticit of demand for
own-price elasticity
agricultural commodity is low.
3.
3 The own-price elasticity of supply for the
own price
agricultural commodity is high.
4. The value of farm production of the crop is
p p
high.

18. Implications for MIS investments
• Decentralized or localized MIS: Collection,
analysis and dissemination of market
information on few crops in a given agro-
i f ti f i i
ecological, market or administrative area or
region.
• Targeted Crop-specific MIS: Collection,
g p p ,
analysis and dissemination in areas where
the value of agricultural production of the
selected crops is high and responds to
market information signals.