Javier E. Baez, German Caruso, and Hemant Pullabhotla1 Changes in food prices –triggered frequently by natural disasters, macroeconomic shocks or regional market disruptions– can lead to large household welfare effects. At over 60 and 40 percent, food budget shares remain high in rural and urban Mozambique, respectively. Furthermore, nearly 70 percent of the population depends on agriculture for their livelihoods. To determine the net impact of food price changes on consumption and poverty, we performed incidence analysis combining household and farmer survey data with disaggregated, market-level price data on major staples (maize, rice, and cassava). Overall, we find evidence for a large net negative welfare effect of price rises in rural areas, and a small, negative effect in the urban areas. For instance, A 10 percent increase in maize prices is associated with an average reduction of 1.2 percent in consumption per capita in rural areas and 0.2 percent in urban areas. Not all households are affected equally. Overall, the negative impacts are larger for the bottom half of the distribution. As a result, the sharp food price spike observed in 2016–17 may have translated into a poverty increase of 4-6 percentage points, with some of the poorest provinces bearing much of the brunt. These findings underscore the importance of improving the functioning of agricultural input and output markets, developing early food security warning systems, and increasing the availability of rapidly scalable safety nets. Mozambique is highly exposed to frequent food depending on their net food consumption status. In price spikes. As seen in Figure 1, food as well as other other words, there are “winners” and “losers” from goods and services such as fuel and electricity saw changes in food prices. In order to keep their calorie large price increases across the country from 2015- intake constant, consumers (net buyers) might have 2017. Food price increases are especially important to buy cheaper food or re-allocate money intended to understand, as most Mozambican households for other goods. In contrast, food sellers (net sellers) depend on agriculture for their livelihoods. Because might see an increase in their profits if everything of many unexpected shocks, including weather else remains constant. Since the country might disasters, pests, and international market pressures, continue being exposed to large changes in food the country’s food prices increased an average of 40 prices in the future because of climate change and percent between 2016 and 2017, and prices in some natural disasters –among other factors, the impacts provinces even increased by 180 percent. However, of food price inflation must be better understood. broadly speaking, food price changes might cause both negative and positive effects for households 1 This note summarizes the key findings of a larger working paper: Baez Ramirez, Javier Eduardo; Caruso, German Daniel; Pullabhotla, Hemant Kumar. 2018. “Who Wins and Who Loses from Staple Food Price Spikes? Welfare Implications for Mozambique (English)”. World Bank Policy Research working paper; no. WPS 8612. Washington, D.C. © World Bank. Figure 1. Mozambique saw steep food price inflation Figure 2: Food represents a large share of total of in 2016, going up as high as 40 percent household consumption, even in urban areas Source: World Bank calculations based on IOF-2014/15 Source: INE. Taken from “Mozambique Economic Update: A Two Speed Economy” (World Bank, 2017) were conducted, including matching household consumption and farmers production data at different spatial distances and varying the relative size of the increase in food prices on producers. Since the analysis does not account for potential production and consumption behavioral responses caused by changes in food prices, the findings should How much do price shocks in Mozambique impact be interpreted as short-run estimates only. household welfare? Are households in different locations more, or less vulnerable? Many researchers drawn to the effects of the 2007-2008 global price spikes found how Mozambique was vulnerable to the effects of price shocks. For instance, some studies Food consumption patterns reveal that poorer found that domestic prices for staple goods remain Mozambican households can be highly vulnerable to high in the country after international prices had price shocks. Mozambican households spend a high declined, and that there was high volatility in retail share of their budgets on food: an average of 56 markets before and during price spikes in multiple percent of the household budget goes towards food. countries. This study uses both consumption data Figure 2 shows that households who have less to from households and production data from spend allocate a larger share of their consumption to smallholders to analyze the net household welfare food, both in rural and urban areas. The food budget effects (consumption per capita) of food price shocks share also varies widely across geographic locations. at the national, regional, and province levels. The Food consumption forms a higher percentage of analysis focuses on maize, cassava, and rice, which overall consumption in rural areas and Northern make up more than 30 percent of the average food regions of the country –where the levels of poverty budget share of a typical Mozambican household. are higher, and a lower percentage in the Southern The findings hold when multiple robustness tests regions and cities. For instance, 72.1 percent of the total consumption of an average household from the Figure 3: The negative welfare impacts of food price Niassa province (amongst the provinces with the inflation increased poverty across the country highest poverty rates) in the north is allocated to (Rural) food, while in Maputo Cidade (the capital city) this 81.5 71.6 71.3 68.7 share falls to 31 percent. Overall, food consumption 64.3 63.4 60.6 54.1 shares across the country are high; households in 53.1 seven of the eleven provinces in the country use over 38.6 half of their budget on food, and the food shares in 25.3 cities in the northern provinces are over 50 percent. 71.1 49.4 67.1 63.9 43.3 43.1 60.8 36.6 47.6 22.0 55.0 Households are differently impacted based on staple type, location, and level of poverty. Overall, the Tete Niassa Nampula Province Cabo Delgado Gaza Inhambane Zambezia Manica Sofala Total Maputo simulations show that a 10 percent increase in maize prices causes a loss of 1.2 percent of household Initial After consumption per person in the rural areas and 0.2 percent in urban areas. Partly due to their lower (Urban) weight in the food basket, price increases of both rice and cassava lead to smaller consumption losses: 60.5 59.0 51.4 49.5 households lose 0.2 percent in both rural and urban 34.9 areas because of a 10 percent increase in rice prices, 32.6 32.4 31.5 25.9 and they lose 0.4 percent in rural areas and 0.1 in 14.9 urban areas because of a similar increase in cassava 6.0 3.7 57.8 50.3 57.6 48.2 31.3 20.9 29.1 14.6 33.3 31.3 prices. When accounting for the combined net welfare impact of the actual increase in prices of the Maputo Province Niassa Nampula Tete Cabo Delgado Gaza Zambezia Inhambane Maputo Cidade Manica Sofala Total three staples in the period 2014-2016 (89 percent for maize, 37 percent for cassava and 22 percent for rice), the average reduction in household consumption Initial After adds up to 11.7 percent in rural areas and 2.7 percent Note: simulations of the first order effects of increases in the in urban areas. However, the impact of the price prices of maize, rice and cassava (2014-16) on poverty headcount rates. Initial = before price increase. After = after price increase. shocks varies greatly across provinces. Households Source: World Bank calculations based on IOF-2014/15 experience the largest welfare losses in the provinces of Niassa, Tete, Manica, and Sofala, some of the Overall, the net reduction on consumption brought poorest regions of the country, which see a net effect about by the 2016-17 food price spikes is expected of over 20 percent lost consumption. However, some to have increased the number of people in poverty more urbanized areas like Maputo Province and the Though the negative effects are felt at all levels of capital city, Maputo Cidade, only see a net loss of less income in the country, households at different levels than 0.83 percent of income feel the shock to varying degrees. In rural households, those most affected by the price shock are not the poorest, but those closer to the poverty line. In urban areas, the largest losses are from the absolute poorest households in the country. Due to the spike, the poverty headcount increased in the producing and marketing the food, and will reduce country by 5.9 percentage points; rural areas price volatility. Also, the country should invest in early experience a poverty increase of 8.5 percentage warning systems that track food security, food prices, points, and urban areas increased the poverty and rainfall across the country. In conjunction with headcount by 1.34 percentage points. The most improving the functioning of agricultural markets, substantial increase was in the rural areas of the Tete long-term efforts to diversify household diets are province, where the fraction of people in poverty required to reduce reliance on staples to meet calorie could have increased by close to 19 percentage and nutrition needs. Finally, scalable safety net points. Figure 3 shows estimates of the increase in policies are essential to ensure that individuals can poverty both in rural and urban areas across experience minimally acceptable standards of living provinces, confirming the high levels of regional after the shocks occur. The insights offered by this heterogeneity in changes in household welfare. research can help to target and prioritize the implementation of such programs to benefit the most vulnerable households in Mozambique. Several policy options are available to reduce food price fluctuations and the vulnerability of households to large price shocks. The effects of food price spikes in Mozambique are mostly felt by low-income households in poorer regions, which at the same time are also highly exposed and vulnerable to other types of shocks. Minimizing these losses requires action across several policy areas, including of course ABOUT THE AUTHORS Javier E. Baez is a Senior Economist at the World comprehensive risk management policies. Bank’s Poverty and Equity Global Practice and a Research Fellow at the Institute of the Study of Labor To do this, Mozambique must increase the resilience (IZA). jbaez@worldbank.org of agriculture to weather shocks and other risks, like pests, and allow trade within the country and across German Caruso is an Economist at the World Bank’s Poverty and Equity Global Practice. borders during these high-price periods. Second, gcaruso@worldbank.org countries must make sure local agricultural markets are more efficient, by investing in better connectivity Hemant Pullabhotla is a Graduate Student in and get better information on prices to farmers and Agricultural and Consumer Economics at the consumers. This will improve the markets’ ability to University of Illinois. pullabh2@illinois.edu reflect the agriculture’s value, will reduce costs of This note series is intended to summarize good practices and key policy findings on Poverty-related topics. The views expressed in the notes are those of the authors and do not necessarily reflect those of the World Bank, its board or its member countries. Copies of these notes series are available on www.worldbank.org/poverty