The effects of agricultural trade openness on food price transmission in Latin American countries

Insa Flachsbarth, Alberto Garrido


Trade of agricultural commodities has grown significantly in most Latin American countries (LAC) over the last two decades. However, after the international food price surges in 2006-08 and 2011-12 concerns about food access of the poor arose. Within a panel framework containing six LAC (Argentina, Brazil, Chile, Colombia, Mexico and Peru), we used a single equation error correction model to identify possible cointegrating relationships between the food consumer price index (CPI) and a set of trade related and domestic variables. The main focus of the study was to examine how different levels of trade openness impact international food price transmission to domestic markets. Our results confirm that deeper market integration increases global price transmission elasticities. In other words, more agricultural trade openness proves to elevate food CPIs during global price spikes. Thus, for poor consumers world price shocks can be deteriorating in the short-run and domestic food prices will slowly converge to a higher long-run equilibrium. Especially in increasingly integrated economies, effective policies to buffer food price shocks should be put in place, but must be carefully planned with the required budget readily available. We also found that exchange rate appreciations can buffer price shocks to a certain extent and that monetary policies seem to be an appropriate means for stabilizing food prices to safeguard food access of the poor population.


international food trade; market liberalization; global price shock; food security; food access; error correction model; consumer food prices

Full Text:



Ahsan H, Iftikhar Z, Kemal MA, 2011. The determinants of food prices: a case study of Pakistan. Pak Inst Develop Econ, Islamabad. PIDE Working Papers No. 76.

Alemu ZG, Ogundeji AA, 2010. Price transmission in the South African food market. Agrekon 49: 433-445.

Anderson K, Cockburn J, Martin W, 2011. Would freeing up world trade reduce poverty and inequality? The vexed role of agricultural distortions. World Econ 34: 487-515.

Arellano M, Bond S, 1991. Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. The Rev of Econ Stud 58: 277-297.

Attanasio O, Di Mario V, Lechene V, Phillips D, 2013. Welfare consequences of food prices increases: Evidence from rural Mexico. J Dev Econ 104: 136-151.

Baek J, Koo WW, 2014. On the upsurge of U.S. food prices revisited. Econ Model 42: 272-276.

Banerjee A, Dolado JJ, Mestre R, 1998. Error-correction mechanism tests for cointegration in a single-equation framework. J Time Series Analysis 19: 267-283.

Baquedano FG, Liefert WM, 2014. Market integration and price transmission in consumer markets of developing countries. Food Policy 44: 103-114.

Baquedano FG, Liefert W, Shapouri S, 2011. World market integration for export and food crops in developing countries: a case study for Mali and Nicaragua. Agr Econ 42: 619-630.

Benson T, Mugarura S, Wanda K, 2008. Impacts in Uganda of rising global food prices: the role of diversified staples and limited price transmission. Agr Econ 39: 513-524.

Blundell R, Bond S, 1998. Initial conditions and moment restrictions in dynamic panel data models. J Econometrics 87: 115-143.

Brambor T, 2005. Understanding interaction models: improving empirical analyses. Polit Anal 14: 63-82.

Cudjoe G, Breisinger C, Diao X, 2010. Local impacts of a global crisis: Food price transmission, consumer welfare and poverty in Ghana. Food Policy 35: 294-302.

Davidson J, Halunga A, Lloyd TA, McCorriston S, Morgan CW, 2011. Explaining UK food price inflation. TRANSFOP, Seventh Framework Programme, Grant Agreement No. KBBE-265601-4-TRANSFOP, Working Paper No. 1.

Dawe D, 2008. Have recent increases in international cereal prices been transmitted to domestic economies? The experience in seven large Asian countries. ESA Working Paper No. 08-03. FAO, Rome, Italy.

Dawe D, Slayton T, 2010. The world rice market crisis of 2007-2008. In: The rice crisis: markets, policies and food security (Dawe D, ed.). FAO and Earthscan London. Washington DC (USA), pp: 15-28.

Dawe D, Maltsoglou I, 2014. Marketing margins and the welfare analysis of food price shocks. Food Policy 46: 50-55.

De Boef S, Keele L, 2008. Taking time seriously. Am J Pol Sci 52: 184-200.

Diaz-Bonilla E, Robinson S, 2010. Macroeconomics, macrosectoral policies, and agriculture in developing countries. In: Handbook of agricultural economics (Pingali P & Evenson R, eds.). Elsevier, Oxford (UK), pp: 3035-3213.

Dorward A, 2012. The short- and medium-term impacts of rises in staple food prices. Food Sec 4: 633-645.

Durevall D, Loening JL, Birru YA, 2013. Inflation dynamics and food prices in Ethiopia. J Dev Econ 104: 89-106.

ECLAC, 2008.The escalation in world food prices and its implications for the Caribbean. The Economic Commission for Latin America, Santiago, Chile.

Engle R, Granger C, 1987. Co-integration and error correction: representation, estimation, and testing. Econometrica 2: 251-276.

FAO, 2012. Panorama de la seguridad alimentaria y nutricional en América Latina y el Caribe. The United Nations Food and Agriculture Organization, Rome, Italy.

García-Solanes J, Torrejón-Flores F, 2009. Inflation targeting works well in Latin America. ECLAC, Santiago, Chile. Review 106, pp: 37-53.

Gonçalves CS, Salles JM, 2008. Inflation targeting in emerging economies: What do the data say? J Dev Econ 85: 312-318.

Goodwin BK, Grennes TJ, Wohlgenant MK, 1990. A revised test of the law of one price using rational price expectations. Am J Agr Econ 72: 682-693.

Greene WH, 2003. Econometric analysis. Prentice Hall, New York, USA. 1026 pp.

Gros D, Hefeker C, 2002. Common monetary policy with asymmetric shocks. CESifo, Munich, Germany. Working Paper No. 705: 6.

Hanson K, 1993. Sectoral effects of a world oil price shock: economy wide linkages to the agricultural sector. J Agr Res Econ 18: 96-116.

Headey D, Fan S, 2008. Anatomy of a crisis: the causes and consequences of surging food prices. Agric Econ 39: 375-391.

Headey D, 2011. Rethinking the global food crisis: The role of trade shocks. Food Policy 36: 136-146.

Hoyos R, Medvedev D, 2011. Poverty effects of higher food prices: a global perspective. Rev Dev Econ 15: 387-402.

Im KS, Pesaran MH, Shin Y, 2003. Testing for unit roots in heterogeneous panels. J Econometrics 115: 53-74.

Jalil M, Tamayo E, 2011. Pass-through of international food prices to domestic inflation during and after the great recession: evidence from a set of Latin American economies. Rev Desarrollo Sociedad 67: 135-179.

Leibtag E, 2009. How much and how quick? Pass through of commodity and input cost changes to retail food prices. Am J Agr Econ 91 (5): 1462-1467.

Levin A, Lin C, Chu CJ, 2002. Unit root tests in panel data: asymptotic and finite-sample properties. J Econometrics 108: 1-24.

Lütkepohl H, 2005. New introduction to multiple time series analysis. Springer, New York, USA. 764 pp.

Maddala G, Wu S, 1999. A comparative study of unit root tests with panel data and a new simple test. Oxf Bull Econ Stat 61: 631-652.

Miljkovic D, 1999. The law of one price in international trade: a critical review. Appl Econ Perspect Policy 21: 126-139.

Minot N, 2011. Transmission of world food price changes to markets in Sub-Saharan Africa. Int Food Policy Res Inst, Washington DC, USA. Discussion Paper 01059.

Nazlioglu S, Soytas U, 2011. World oil prices and agricultural commodity prices: Evidence from an emerging market. Energy Econ 33: 488–496.

Österholm P, 2004. Killing four unit root birds in the US economy with three panel unit root test stones. Appl Econ Let 11: 213-216.

Poelhekke S, 2011. Urban growth and uninsured rural risk: Booming towns in bust times. J Dev Econ 96: 461-475.

Rodriguez-Takeuchi L, Imai SK, 2013. Food price surges and poverty in urban Colombia: New evidence from household survey data. Food Policy 43: 227-236.

Serra T, Gil JM, 2013. Price volatility in food markets: can stock building mitigate price fluctuations? Eur Rev Agr Econ 40 (3): 507-528.

Trostle R, 2008. Global agricultural supply and demand: factors contributing to the recent increase in food commodity prices. Economic Research Service, USDA. Washington DC, USA. WRS-0801.

Vousden N, 1990. The economics of trade protection. Cambridge University Press, New York, USA. 305 pp.

Willaarts B, Garrido A, Llamas RM (eds), 2014. Water for food security and well-being in Latin America and the Caribbean: social and environmental implications for a globalized economy. Earthscan London-Sterling, UK. 454 pp.

Wooldridge JM, 2002. Econometric analysis of cross section and panel data. The MIT Press, Cambridge, MA, USA. 752 pp.

DOI: 10.5424/sjar/2014124-6292