ECONOMICS, TRADE AND INVESTMENT | MACROECONOMICS, TRADE AND INVESTMENT | MACROECONOMICS, TRADE AND INVESTMENT D INVESTMENT | MACROECONOMICS, TRADE AND INVESTMENT | MACROECONOMICS, TRADE AND INVESTMENT | MACROECON ECONOMICS, TRADE AND INVESTMENT | MACROECONOMICS, TRADE AND INVESTMENT | MACROECONOMICS, TRADE AND INVESTMENT MACROECONOMICS, TRADE AND INVESTMENT D INVESTMENT | MACROECONOMICS, TRADE AND INVESTMENT | MACROECONOMICS, TRADE AND INVESTMENT | MACROECON Erik von Uexkull Prosperity Insight Series AND COLOMBIA Stylized facts from customs data PRICE SHOCK IN CHILE THE 2022 GLOBAL FOOD MACROECON | TRADE, INVESTMENT AND COMPETITIVENESS THE 2022 GLOBAL FOOD | PRICE SHOCK IN CHILE TRADE, INVESTMENT AND COMPETITIVENESS AND COLOMBIA Stylized facts from customs data Erik von Uexkull | PETITIVENESS A verified reproducibility package for this paper is available at http://reproducibility.worldbank.org, click here for direct access. © 2024 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. 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Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. Cover photo: Sandsun, iStock. Further permission required for reuse. Document photos: Igor Alecsander, iStock. Starcevic, iStock Cover design: Anatol Ursu, https://www.behance.net/olywebart TABLE OF CONTENTS Executive Summary 01 Introduction 03 1. A large share of the food price increase is explained by currency depreciation. 06 2. Price transmission: Delayed is not avoided. 08 3. No savings through short-term demand adjustments. 10 4. The stabilizing role of regional trade. 11 5. Transport costs: The shock before the shock. 13 6. Import concentration increased only for maize in Chile. 14 7. Price dispersion among importers increased, especially in Chile. 15 Conclusions and areas for further research 16 Annex 1a: Data sources and methodology 17 Annex 1b: Transaction level imports and global price data: Chile wheat 20 Annex 1c: Transaction level imports and global price data: Chile maize 21 Annex 1d: Transaction level imports and global price data: Colombia wheat 22 Annex 1e: Transaction level imports and global price data: Colombia maize 23 LIST OF FIGURES Figure 1: Customs data explains some of the observed differences in transmission from global prices to import prices. 02 Figure 2: Global food prices increased sharply following Russia’s invasion of Ukraine. 04 Figure 3: Chile and Colombia are large importers of wheat and maize, for which Ukraine is a major exporter. 04 Figure 4: Both Chile (top) and Colombia (bottom) experienced slow growth and accelerated food price inflation in 2022 05 Figure 5 a/b: Exchange rate depreciation in CHL and COL contributed to increases in median import prices in local currency. 06 Figure 5 c/d: Exchange rate depreciation in CHL and COL contributed to increases in median import prices in local currency. 07 Figure 6: Over the course of 2022, Chile’s US$ import prices for wheat and maize rose more than those of Colombia. 08 Figure 7 a/b: Chile’s import prices remained elevated for a longer time after world market prices had reached their peak. 09 Figure 8: In the short term, import demand was inelastic to prices and there were almost no cost savings through strategic timing of purchases. 10 Figure 9: Regional trade helped stabilize import prices. 11 Figure 10: Colombia benefitted from lower prices within LAC by raising its regional imports, Chile did so only for maize. 12 Figure 11 a/b: Both countries increased their reliance on the regional market for maize imports in 2022. 13 Figure 12 a/b: Rising transport costs contributed to higher food import prices. 14 Figure 13 a/b: Import concentration for maize increased in Chile. 15 THE 2022 GLOBAL FOOD PRICE SHOCK IN CHILE AND COLOMBIA vi Prosperity Insight Acknowledgements This report was prepared by Erik von Uexkull (Senior Economist, ELCMU) under the supervision of Doerte Doemeland (Practice Manager, ELCMU). Helpful comments from two peer reviewers (Viviana Perego, Senior Agriculture Economist, SLCDR and Fernando Giuliano, ELCMU) as well as attendants of a presentation of this work at the Central Bank of Chile in March 2024 are gratefully acknowledged. Maryan Raquel Porras Barrera (Extended Term Consultant, ELCMU) provided significant support with data analysis for Colombia. Typesetting and formatting by Bruna Sofia Simoes (Short Term Consultant). Luis Eduardo San Martin (Junior Data Scientist, DIME3) guided the team in the preparation of the reproducibility package. THE 2022 GLOBAL FOOD PRICE SHOCK IN CHILE AND COLOMBIA vii Prosperity Insight THE 2022 GLOBAL FOOD PRICE SHOCK IN CHILE AND COLOMBIA 1 Prosperity Insight ES. EXECUTIVE SUMMARY This note uses transaction level customs data for Chile and Colombia to provide insights into food price transmission from global markets to import prices. This is a non-trivial relationship with significant cross-country variation that is relevant for policy design for the management of future shocks. Transaction level data makes it possible to look beyond average prices at underlying dynamics in terms of import prices, volumes, origins, etc. Focusing on price movements for wheata and maize during 2021-2022, a time of significant price variation in global markets, the note lays out several stylized facts on the mechanics of price transmission through trade. Exchange rate depreciation contributed significantly to rising import prices in local currency in Chile and Colombia, increasing the import prices of wheat and maize between 13 - 15 percent in 2022. Exchange rate depreciation explains nearly half of the total domestic currency price increase for maize and close to one third for wheat in both countries. There were significant differences in world price transmission between the two countries. In US$ terms, Chile’s average imports of wheat and maize became 39 and 17 percent more expensive in 2022, while the corresponding figures are 28 percent and 13 percent for Colombia. Increases in median import prices materialized later for Chile, but also persisted longer, which accounts for most of the discrepancy with Colombia in the total effect. Neither country was able to significantly mitigate global market price increases through short-term adjustments of the times of purchase. Regional trade had a significant stabilizing THE 2022 GLOBAL FOOD PRICE SHOCK IN CHILE AND COLOMBIA 2 Prosperity Insight role on import prices for both countries as import Import structures changed somewhat during prices from regional trading partners increased less 2022, which may have implications for onward than global prices. Colombia was able to further price transmission to consumers. In Chile, the reap these benefits by increasing its regional dispersion of prices between import transactions import share, especially for maize. Increases in increased during the months of price turmoil global transport and fuel costs, on top of already in global markets. For Chile’s maize imports, high levels in 2021, accounted for significant concentration also increased. Both trends could shares of the import price increase in wheat in contribute to higher domestic prices through both countries, less so for maize which has a higher detrimental effects on competition. regional trade share. Figure 1: Customs data explains some of the observed differences in transmission from global prices to import prices. 50% CHL Wheat CHL Maize COL Wheat COL Maize 39% 40% Change in average import price, 2022 vs 2021 30% 28% 20% 17% 15%14%13%13% 13% 10% 5% 4% 2% 2% 0% 0% -1% 0% 0% -1% 0% -2% -3% -3% -10% -10% -20% Currency USD price change Short term Regional trade Adjustment in Change in depreciation el asticity stabilization regional import shipping costs share THE 2022 GLOBAL FOOD PRICE SHOCK IN CHILE AND COLOMBIA 3 Prosperity Insight INTRODUCTION Russia’s invasion of Ukraine in February 2022 biggest increases were registered for cereals (+21 exacerbated global food, fertilizer and energy percent) and oils (+35 percent). Prices gradually price pressures that had been building in the returned to their pre-war levels in the following aftermath of Covid, accelerating food inflation months. While Chile and Colombia do not import around the world. The FAO’s global food price significantly from Ukraine, they are both large index rose 20 percent between January 2021 and importers of wheat and maize, for which Ukraine is a January 2022, and then jumped up another 18 large global exporter. Wheat accounts for 4 percent percent between January and March 2022. The of Chile’s food imports and 7 percent of Colombia’s, THE 2022 GLOBAL FOOD PRICE SHOCK IN CHILE AND COLOMBIA 4 Prosperity Insight while pre-war Ukraine contributed 9 percent of This note uses detailed customs data on imports global wheat exports. Maize accounts for 7 and of maize and wheat by Chile and Colombia to 19 percent of Chile’s and Colombia’s food imports, better understand price transmission from global while Ukraine supplied around 10 percent of global spot prices to import prices. The relationship exports before the war. Chile and Colombia are not between world market and import prices is complex large importers of sunflower oil, for which Ukraine and depends on several interacting factors, supplies close to 40 percent of world exports, so some of which might be susceptible to policy this note focuses on wheat and maize. intervention. Global market prices typically reflect Figure 2: Global food prices increased sharply following Russia’s invasion of Ukraine. 200 180 FA O Food Price Index of which Cereals Jan 2021 = 100 160 of which Oils 140 120 100 80 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 2021 2022 spot transactions at major commodity exchanges. relationships, and trade costs. Transaction level However, commodity imports may follow different customs data, which is published by a few countries pricing arrangements, for instance through longer including Chile and Colombia, makes it possible to term supply contracts or futures transactions. In assess and quantify the role of these factors. The addition, price transmission differs in terms of lead full richness of this data is illustrated in annex 1. times from world market to import prices, as well as This note demonstrates some insights in the form by origin, quality of the product, importer-exporter of stylized facts. Figure 3: Chile and Colombia are large importers of wheat and maize, for which Ukraine is a major exporter. 25% Share in Chile's / Colombia's total Chil e Col ombia Maize 20% food imports 15% 10% Wheat Maize Wheat 5% Sunflower oil Sunflower oil 0% 0% 5% 10% 15% 20% 25% 30% 35% 40% Ukraine's pre-war share in world exports THE 2022 GLOBAL FOOD PRICE SHOCK IN CHILE AND COLOMBIA 5 Prosperity Insight Changes in import patterns observed in customs was characterized by economic recovery from the data may also have repercussions for the next Covid pandemic, both countries were left with the steps of price transmission, from importers to necessity to scale back Covid-response measures domestic producers, retailers, and consumers. and tighten monetary policy in 2022 to address An assessment of the link between imported and mounting imbalances. Chile’s growth turned domestic prices is beyond the scope of this note. negative in the first quarter of 2022 and consumer However, the note documents two import patterns price inflation accelerated as household spending with potential implications on domestic price was slow to adjust. Food was one of the main drivers transmission: Changes in the concentration of of inflation, outpacing overall CPI growth in every imports and changes in the dispersion of import quarter of 2022 and ending the year 29 percent prices between importers. Both patterns could above its QI 2021 level. In Colombia, growth also potentially diminish competition among importers slowed in 2022 but remained positive except and thus further add to domestic price increases. for QIV. As in Chile, food inflation significantly outpaced overall inflation and accelerated further Both Chile and Colombia underwent significant in 2022, ending the year 43 percent above its level macroeconomic adjustments in 2022. While 2021 in QI 2021. Figure 4: Both Chile (top) and Colombia (bottom) experienced slow growth and accelerated food price inflation in 2022 150 q/q GDP growth (real) 5% 4.3% 4.2% CPI Food CPI 140 q/q GDP growth (real) CPI (2021 I = 100) 3% 2.3% 129 130 1.2% 119 120 1% 0.1% 110 -1% -0.3% -0.8% 100 -1.1% -3% 90 I II III IV I II III IV 2021 2022 6% 5.4% 150 q/q GDP growth (real) 5% 143 4.0% CPI 140 4% 3.5% q/q GDP growth (real) CPI (2021 I = 100) 3% 130 2% 1.6% 1.2% 0.9% 120 1% 117 0% 110 -1% 100 -2% -1.6% -3% -2.2% 90 I II III IV I II III IV 2021 2022 THE 2022 GLOBAL FOOD PRICE SHOCK IN CHILE AND COLOMBIA 6 Prosperity Insight 1. A large share of the food price increase is explained by currency depreciation. Currency depreciation contributed significantly The average local currency price of imported wheat to rising prices of imported food in both Chile increased by 59 and 45 percent respectively in and Colombia during 2022. Chile went through Chile and Colombia, with currency depreciation a gradual episode of depreciation in the second accounting for just below one third of the total half of 2021. Then, between March and July increase. For maize, the corresponding figures 2022, depreciation accelerated, and the peso are 33 and 28 percent, with close to half of the lost nearly 16 percent of its US$ value until an effect explained by currency depreciation. While aggressive intervention program by the Central Chile’s and Colombia’s currencies depreciated Bank stabilized and eventually reversed its losses significantly against the US$, they gained value by early 2023. The Colombian peso gained some against the currency of Argentina, their key regional value in the immediate aftermath of the Russian trading partner for food items. A recent studyi using invasion of Ukraine as oil prices rose. But this was transaction level customs data for Chile finds that soon reversed, and between June and November while the US$ exchange rate dominates exchange 2022 the Colombian peso lost 20 percent of its rate pass-through in the short run, bilateral effects value. Global food price fluctuations, through their become more prominent over time. This would effects on the terms of trade, may have contributed suggest that Argentina’s parallel depreciation may to these dynamics, though several other factors have helped to mitigate further price increases. beyond the scope of this note were also at play. Figure 5 a/b: Exchange rate depreciation in CHL and COL contributed to increases in median import prices in local currency. 300 CHL, wheat, CLP CHL, wheat, USD 250 Jan 2021=100 200 150 100 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 2021 2022 300 CHL, maize, CLP CHL, maize, USD 250 Jan 2021=100 200 150 100 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 2021 2022 i. Giuliano, Fernando and Emiliano Luttini (2020): Import prices and invoice currency: Evidence from Chile. Journal of International Money and Finance, Elsevier, vol. 106(C). THE 2022 GLOBAL FOOD PRICE SHOCK IN CHILE AND COLOMBIA 7 Prosperity Insight Figure 5 c/d: Exchange rate depreciation in CHL and COL contributed to increases in median import prices in local currency. 300 COL, wheat, COP COL, wheat, USD 250 Jan 2021=100 200 150 100 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 2021 2022 300 COL, maize, COP COL, maize, USD 250 Jan 2021=100 200 150 100 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 2021 2022 THE 2022 GLOBAL FOOD PRICE SHOCK IN CHILE AND COLOMBIA 8 Prosperity Insight 2. Price transmission: Delayed is not avoided. Rising world market prices quickly translated while Chile was still paying 45 Cents. But fortunes into higher food import costs for both countries started to change the following month and by in 2022, but with differences in magnitude and September, Chile’s median import price peaked timing of transmission. In Chile, the weighted at 50 Cents / kg while Colombia’s had returned to average cost of a kilogram of imported wheat in US$ pre-invasion levels at 39 Cents. By the end of 2022, terms rose 39 percent compared between 2022 Chile’s median wheat import price still stood at 44 and 2021, while in Colombia the increase was 28 Cents, compared to Colombia’s 39 Cents. percent. The difference results from a higher base The rise of world market prices for maize affected price for Colombia in 2021 while both countries both countries quickly, but Chile’s import prices paid on average 42 Cents/kg in 2022. For maize, remained elevated for a longer period. Maize the corresponding increases were 17 percent for import prices in both countries peaked in May Chile and 13 percent for Colombia. 2022 at 39 Cents / kg for Chile and 38 Cents / kg for Despite faring better immediately after the Colombia, a month after reaching the global price Ukraine invasion, Chile faced elevated wheat peak in April. However, while Colombia’s import import prices later in the year for a more prolonged prices quickly followed the downward trend in period than Colombia. Global wheat prices peaked global prices and by August had returned to pre-war in May 2022, and Colombia’s median import price levels, Chile’s import prices remained significantly followed suit in June. At that point, Colombia was elevated until September and had not fallen back importing wheat at a median price of 51 Cents / kg to their pre-war level by the end of the year. Figure 6: Over the course of 2022, Chile’s US$ import prices for wheat and maize rose more than those of Colombia. 0.5 39% 28% 0.4 Avg import price, US$/kg 17% 13% 0.3 0.2 0.1 0.0 CHL Wheat CHL Maize COL Wheat COL Maize THE 2022 GLOBAL FOOD PRICE SHOCK IN CHILE AND COLOMBIA 9 Prosperity Insight Figure 7 a/b: Chile’s import prices remained elevated for a longer time after world market prices had reached their peak. 0.55 CHL, Wheat Median import price in US$ / kg 0.50 COL, Wheat world market price 0.45 0.40 0.35 0.30 0.25 0.20 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 2021 2022 0.45 CHL, Maize Median import price in US$ / kg COL, Maize 0.40 world market price 0.35 0.30 0.25 0.20 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 2021 2022 THE 2022 GLOBAL FOOD PRICE SHOCK IN CHILE AND COLOMBIA 10 Prosperity Insight 3. No savings through short-term demand adjustments. Chile significantly lowered its total wheat imports domestic production declined 23 percent to 608 kt, in 2022, while Colombia’s increased slightly implying a small decline in overall consumption. The despite higher prices. Chile imported a total of value of maize imports rose 21 percent. Colombia 1,153 kt of wheat in 2022ii, 16 percent less than in increased its imports 8 percent to 6,498 in 2022 while 2021. At the same time, domestic production also domestic production increased 24 percent to 1,921 declined 18 percent to 1,107, reflecting a significant kt, with its import bill for maize rising 22 percent. decline in wheat consumption. The decline needs Neither country was able to benefit significantly to be seen in the context of an overall demand from short-term adjustments in imports to sit contraction in 2022 following the overheating of out the price hike. While Chile shows slightly the economy in 2021. Reduced demand allowed lower imports of wheat during the months of July, Chile to lower its wheat imports at times of high August and September 2022 when import prices prices and thus limit the overall increase in wheat were highest, the overall effect was relatively small: import costs to 17 percent, at the expense of Compared to a hypothetical uniform distribution of reduced consumption. Colombia, on the other hand, imports over the year, Chile’s actual wheat import slightly raised its imports by 5 percent to 2,079 kt costs in 2022 were just 1 percent lower. For Chile’s in 2022 (domestic production is negligible), and imports of maize, and Colombia’s imports of both in combination with higher prices this led to a 35 wheat and maize, the two figures are nearly identical, percent increase in import costs for wheat in 2022. suggesting very low short-term elasticity in demand. Both countries increased maize imports in 2022. Higher short-term demand elasticity would have Chile imported a total of 2,424 kt of maize in 2022iii, allowed companies to time their imports to more 4 percent more than in 2021. At the same time, favorable market conditions. Figure 8: In the short term, import demand was inelastic to prices and there were almost no cost savings through strategic timing of purchases. 0.55 CHL Wheat imports Average monthly import price, US$/kg 0.50 CHL Maize imports 0.45 COL Wheat imports COL Maize imports 0.40 Linear (CHL Wheat imports) 0.35 Linear (CHL Maize imports) 0.30 Linear (COL Wheat imports) 0.25 Linear (COL Maize imports) 4% 6% 8% 10% 12% 14% 16% Monthly share of total imports in 2022 ii. This excludes durum wheat, wheat for sewing, and some other small transactions that were likely not intended for consumption. iii. This excludes maize for sewing and some other small transactions that were likely not intended for consumption. THE 2022 GLOBAL FOOD PRICE SHOCK IN CHILE AND COLOMBIA 11 Prosperity Insight 4. The stabilizing role of regional trade. Prices of regional imports increased less than imports most of its maize from within the region, and those of global imports. For both Chile and in 2022 the share reached 100 percent compared Colombia, the price increases on regional imports to 90 percent in 2021. For Colombia, the import were smaller than for imports from the rest of the share from LAC rose from 22 percentage points to world. The differences are significant: The ability 52 percent in 2022. There is an obvious seasonal to rely on regional imports reduced the increase in pattern with most maize imports from LAC to prices by 3 percentage points for wheat in Chileiv, Colombia occurring in the second half of the calendar 2 percentage points for wheat in Colombia, and 10 year. During this time, presumably due to ample percentage points for maize in Colombia compared regional supply, the price wedge between maize to a scenario where regional import prices increase from LAC and the rest of the world in Colombian in line with the rest of the world. imports grows, and this was even more pronounced in 2022 with LAC import prices in some months more Chile has a higher reliance on regional imports, than 10 Cents / kg lower than those from the rest but Colombia lowered its import costs by raising of the world. In 2022, Colombia switched almost regional imports in 2022. Despite lower prices in entirely to regional imports of maize during these the regional market, Chile reduced its share of wheat months, which limited the increase in import prices imports from LAC by 12 percentage points while by 3 percentage points for maize and 1 percentage Colombia’s increased by the same margin (starting point for wheat. For Chile, import prices for wheat from near zero). For maize, both countries increased increased an additional 2 percentage points due to their import share from LAC. Chile traditionally its shift towards more extra-regional imports. Figure 9: Regional trade helped stabilize import prices. COL Maize COL Wheat CHL Maize CHL Wheat from LAC +33% from ROW +42% from LAC +16% from ROW from LAC +12% from ROW +29% from LAC +1% from ROW +23% 0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 0.50 Avg import price in US$/kg, 2021 (dark) vs 2022 (light) iv. Since Chile imported all its maize from within the region in 2022, no counterfactual calculation is possible as extra-regional import prices are not observed. THE 2022 GLOBAL FOOD PRICE SHOCK IN CHILE AND COLOMBIA 12 Prosperity Insight Figure 10: Colombia benefitted from lower prices within LAC by raising its regional imports, Chile did so only for maize. CHL Wheat -12 CHL Maize 10 COL Wheat 12 COL Maize 22 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Share of regional imports, 2021 (dark) vs 2022 (light) THE 2022 GLOBAL FOOD PRICE SHOCK IN CHILE AND COLOMBIA 13 Prosperity Insight 5. Transport costs: The shock before the shock. Both Chile and Colombia experienced significant throughout 2022. Colombia’s transport costs, lower increases in transport costs, linked to external than Chile’s from the beginning, increased as well, factors. In October 2021, the Baltic dry index, a and remained elevated for wheat while transport measure of bulk shipping rates, peaked at nearly costs for maize eventually declined again in 2022. three times its level at the beginning of that year. As The increase in transport costs further raised global shipping disruptions subsided, rates began to import prices. Import prices are quoted inclusive of drop and reached levels similar to those in January cost, insurance, and freight (cif), and for Chile’s and 2021 by early 2022. With Russia’s invasion of Ukraine Colombia’s imports of wheat and maize, such costs in February 2022, the global oil price began to rise and constituted between 10 and 17 percent of the total reached a peak of more than twice its January 2021 import price. Transport cost increases explain 5 and 4 level in June 2022 before gradually subsiding. Both percentage points respectively of the cost increases events had repercussions for Chile’s and Colombia’s in wheat imports for Chile and Colombia. For maize transport costs, especially for low value per weight imports, the impact was smaller, at 2 percentage items like wheat and maize. In Chile, transport points for Chile and 0 for Colombia since the increase costs per kg increased by roughly 50 percent for in freight rates was largely offset by the move towards wheat imports and 30 percent for maize imports in regional imports with lower transport costs. the second half of 2021 and remained at that level Figure 11 a/b: Rising transport costs contributed to higher food import 0.08 450 Baltic dry, oil price, Jan Shipping cost, US$ / kg of 0.06 350 2021=100 0.04 250 imports 0.02 150 0.00 50 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 2021 2022 CHL, maize, shipping cost CHL, wheat, shipping cost Bal tic dry index Oil price 0.08 450 Baltic dry, oil price, Jan Shipping cost, US$ / kg of 0.06 350 2021=100 0.04 250 imports 0.02 150 0.00 50 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 2021 2022 COL, maize, shipping cost COL, wheat, shipping cost Bal tic dry index Oil price THE 2022 GLOBAL FOOD PRICE SHOCK IN CHILE AND COLOMBIA 14 Prosperity Insight 6. Import concentration increased only for maize in Chile. Beyond import prices, the structure of imports and this did not significantly change during 2022. can have an impact on domestic prices. Importer Despite a large number of active firms, Chile’s maize concentration has been linked to higher domestic imports appear to be more concentrated, with a prices, arguably through diminished competitionv. Herfindahl index around 0.4 in 2021 that rose to The trade data suggests that wheat markets in both occasionally exceed 0.6 in 2022. This suggests that countries and the maize market in Colombia appear few importers account for large market shares which to be characterized by many importers competing, could potentially give them some market power. Figure 12 a/b: Import concentration for maize increased in Chile. 50 0.8 Herfindahl concentration index 0.7 40 0.6 # of active importers 30 0.5 0.4 20 0.3 0.2 10 0.1 0 0.0 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 2021 2022 # importers maize, CHL # importers wheat, CHL Import concentration maize import concentration w heat 80 0.5 Herfindahl concentration index 70 0.5 0.4 60 # of active importers 0.4 50 0.3 40 0.3 30 0.2 0.2 20 0.1 10 0.1 0 0.0 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 2021 2022 # importers maize, COL # importers wheat, COL Import concentration maize import concentration w heat v. Arezki,Rabah, Ana Margarida Fernandes, Frederico Merchán, He Nguyen and Tristan Reed (2023): Natural Resource Dependence and Monopolized Imports. Policy Research working paper no. 10339, Washington, D.C. : World Bank Group. THE 2022 GLOBAL FOOD PRICE SHOCK IN CHILE AND COLOMBIA 15 Prosperity Insight 7. Price dispersion among importers increased, especially in Chile. Some importers appear to have been more number of factors might contribute to such wide successful than other in maintaining lower price dispersion, the fact that they coincide with cost supply relationships, potentially creating fluctuations in global markets suggests that some windfall profits. For both countries and products, importers were better positioned than others to the dispersion of import prices – measured as the mitigate the global price hikes. Such dispersion is different between the 75th and 25th percentile of not uncommon in the context of rising inflationvi. import prices in a given month – increased. The Similar to import concentration, this could have effect was more pronounced in Chile where it also detrimental effects on competition to the extent coincides more clearly with the onset of global that lower cost importers may be able to increase price turbulences. For instance, the P75-P25 profits rather than passing lower import prices on price dispersion of Chile’s wheat imports, at 2 to food manufacturers and ultimately consumers. Cents in the fall of 2021, rose to 12 Cents by A similar effect for Chile is shown in a recent micro May 2022. For maize, it went from 3 Cents in analysis of intra-firm input price dispersion for November 2021 to 8 Cents in May 2022. While a Chilevii (Burstein et al, 2024) Figure 13 a/b: Rising world prices coincide with higher price dispersion between import transactions. 0.14 0.6 CHL wheat Price differential P75-P25 0.12 COL wheat World Market price, right axis 0.5 World price US$ / kg 0.1 (US$/kg) 0.08 0.4 0.06 0.04 0.3 0.02 0 0.2 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 2021 2022 0.1 0.4 CHL maize Price differential P75-P25 COL maize 0.08 0.35 World price US$ / kg (US$/kg) 0.06 0.3 0.04 0.25 0.02 0 0.2 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 2021 2022 vi. Nakamura, Emi, and Jón Steinsson (2013): Price rigidity: Microeconomic evidence and macroeconomic implications. Annual Review of Economics. 5.1: 133-163. vii. Burstein, Ariel, Javier Cravino and Marco Rojas (2024): Input price dispersion across buyers and misallocation, Documentos de Trabajo No 1006, Banco Central de Chile. THE 2022 GLOBAL FOOD PRICE SHOCK IN CHILE AND COLOMBIA 16 Prosperity Insight Conclusions and areas for further research Food price inflation is not least a macroeconomic became a topic in many countries during this problem. Both Chile and Colombia built up period. However, due to their poor targeting and macroeconomic imbalances in the aftermath of regressive nature, they are not a useful instrument the pandemic that led to significant exchange for protecting vulnerable populations from food rate depreciations in 2022. This exacerbated the price shocks. increase in global prices. The policy challenge Regional markets matter for price stability. Both for both countries in this context was to provide Chile and Colombia clearly benefitted from their protection to the most vulnerable parts of the proximity to and established trade relationships population while at the same time scaling back with Argentina and other large food producers the expansive fiscal policies they had enacted in the region. Further research could focus on during the Covid pandemic. Further research better understanding the interplay between global could more formally explore the role of exchange and regional food trade in LAC, their degree of rates in determining food price inflation and substitutability based on factors such as quality informing policy, including through a exchange and seasonality, and the role of prices. rate passthrough analysis for key food items, distinguishing US$ and bilateral exchange rate Transaction level customs data can provide effects with key food exporters in the region. insights into the mechanics of how food prices transmit from the global level to consumers. This There is heterogeneity in how quickly and how is a non-trivial relationship with significant cross- long countries are affected by higher world country variation that can provide insights on policy market prices, but the determinants are not well design for the management of future shocks. Further understood. Chile was initially able to continue research could look at the transmission from trade importing food at lower prices than Colombia, but to domestic prices, and assess the role of changes ultimately experienced a larger increase in its import in trade composition – e.g. importer concentration bill as price hikes persisted for its imports. The and price dispersion – that is observable through determinants of these effects, likely related to the way customs data in the transmission from global to firms organize their imports, merit further analysis. domestic prices. The same goes for the question whether a country’s ability to time its imports to market conditions, i.e. by maintaining strategic reserves that would allow it to sit out particularly turbulent periods in the market, is susceptible to cost efficient public policies. There is little governments can (or should) do to isolate their country from transport cost fluctuations. While transport costs did play a role in exacerbating the food price shock, they were initially driven by global shipping issues outside of the control of individual countries, and eventually by fuel price increases. As a result, fuel subsidies THE 2022 GLOBAL FOOD PRICE SHOCK IN CHILE AND COLOMBIA 17 Prosperity Insight Annex 1a: Data sources and methodology Chile customs data: Figure 1: https://datos.gob.cl/organization/ser vicio_ The impact of currency depreciation effect is nacional_de_aduanas defined as Colombia customs data: https://www.dian.gov.co/dian/cifras/Paginas/ Bases-Estadisticas- de - Comercio -Exterior- Importaciones-y-Exportaciones.aspx Where MUV denotes the import unit value, defined Chile’s and Colombia’s customs agencies report as the value of a country’s imports of wheat or imports and exports at the transaction level, including maize divided by the quantity of total imports in a the date, value, quantity, product type at tariff level given year. precision, firm identifier, transport costs, and country LC subscript stands for local currency: Import of origin. Temporary trade flows were removed, as transaction values are converted to local currency well as those of less than 1,000 kg to reduce noise. using the monthly average exchange rate during the Seed grains are also removed based on the customs month in which they took place before aggregating codes. Import prices are calculated as the import to annual data. value inclusive of freight and insurance divided by the quantity. Most figures in this report use different The US$ price change is defined as indicators calculated with these two datasets. A reproducibility package is available at this link: https://reproducibility.worldbank.org/index.php/ The short-term elasticity effect is defined as catalog/157 The following additional data sources are used: • Figures 1 & 5a/b/c/d: Average annual exchanges rates COP/USD and CLP/USD from OECD where MUVCQ denotes the import unit value under • Figure 2: Food price index from FAO a hypothetical scenario in which import quantities • Figure 3: Global trade data from UN COMTRADE are spread out evenly throughout the year: • Figure 4: Banco Central de Chile (quarterly growth for Chile), INE (inflation Chile), DANE (quarterly growth for Colombia), Banco de la República de Colombia (inflation Colombia) MQtotal stands for a country’s total annual import quantity of wheat or maize, MQm stands for import • Figure 7a/b & 13a/b: Global wheat and maize quantity in month m, and MVm stands for import prices from World Bank value in month m. • Figure 11a/b: Baltic Dry Index from Baltic Exchange, oil price from World Bank THE 2022 GLOBAL FOOD PRICE SHOCK IN CHILE AND COLOMBIA 18 Prosperity Insight The effect of regional import stabilization is defined Where MUVCSHP denotes the import unit value as under a hypothetical scenario where shipping costs per quantity unit remain the same in 2022 and in 2021. Figure 5: where MUVROWP denotes the import unit value under a hypothetical scenario where imports Graphs show the median unit value (import value of wheat and maize from within the LAC region / import quantity) of all import transactions for experience the same percentage price increase in wheat / maize in a given month. Transactions are 2022 as imports from the rest of the world: reported in USD values and local currency values are calculated based on average monthly exchange rates. All data is normalized to Jan 2021. MVROW denotes the value of imports from the rest of the world, MQLAC is the quantity of imports from Figure 6: LAC, MUVLAC is the unit value of imports from LAC, Average annual import prices are defined as the and MUVROW is the unit value of imports from the total value of imports divided by the total quantity rest of the world. of imports in that year. The impact of the change in regional import shares is defined as Figure 7: The graphs show the median unit value (import value / import quantity) of all import transactions for wheat / maize in a given month in US$. where MUVCLAC denotes the average import unit value under a hypothetical scenario where the quantity import shares between LAC and the rest Figure 8: of the world remain the same in 2022 as in 2021 while unit prices for imports from LAC and the rest The x-axis value is defined as of the world perform as observed in 2022. and the y-axis value is where MQm denotes import quantity in month m and MVm denotes import value in month m. THE 2022 GLOBAL FOOD PRICE SHOCK IN CHILE AND COLOMBIA 19 Prosperity Insight Figure 9: Average annual import prices are defined as the total value of imports divided by the total quantity of imports per year and region of origin. Figure 10: Import shares are defined as quantity of imports from LAC divided by total imports. Figure 11: Shipping costs are reported separately in the customs raw data. Graph shows the total value of shipping costs divided by total import quantity in a given month. Figure 12: The monthly Herfindahl concentration index is calculated as where MQi denotes the quantity imported by importer i in a given month and MQtotal denotes the total import quantity in that month. Figure 13: The monthly price differential is calculated as P75[MUV]-P25[MUV] Where P75[MUV] and P25[MUV] respectively denote the 75th and 25th percentiles of the unit values of all import transactions of wheat or maize in a given month. THE 2022 GLOBAL FOOD PRICE SHOCK IN CHILE AND COLOMBIA 20 Prosperity Insight Annex 1b: Transaction level imports and global price data: Chile wheat 0.60 Imports from LAC, bubble size = quantity 0.55 Imports from ROW, bubble size = quantity World market price wheat 0.50 0.45 0.40 US$ / kg 0.35 0.30 0.25 0.20 THE 2022 GLOBAL FOOD PRICE SHOCK IN CHILE AND COLOMBIA 21 Prosperity Insight Annex 1c: Transaction level imports and global price data: Chile maize 0.45 Imports from LAC, bubble size = quantity Imports from ROW, bubble size = quantity World market price maize 0.40 0.35 US$ / kg 0.30 0.25 0.20 THE 2022 GLOBAL FOOD PRICE SHOCK IN CHILE AND COLOMBIA 22 Prosperity Insight Annex 1d: Transaction level imports and global price data: Colombia wheat 0.60 Imports from LAC, bubble size = quantity 0.55 Imports from ROW, bubble size = quantity World market price wheat 0.50 0.45 0.40 US$ / kg 0.35 0.30 0.25 0.20 THE 2022 GLOBAL FOOD PRICE SHOCK IN CHILE AND COLOMBIA 23 Prosperity Insight Annex 1e: Transaction level imports and global price data: Colombia maize 0.45 Imports from LAC, bubble size = quantity Imports from ROW, bubble size = quantity World market price maize 0.40 0.35 US$ / kg 0.30 0.25 0.20 Prosperity Insight THE 2022 GLOBAL FOOD PRICE SHOCK IN CHILE AND COLOMBIA ECONOMICS, TRADE AND INVESTMENT | MACROECONOMICS, TRADE AND INVESTMENT | MACROECONOMICS, TRADE AND INVESTMENT D INVESTMENT | MACROECONOMICS, TRADE AND INVESTMENT | MACROECONOMICS, TRADE AND INVESTMENT | MACROECON 24 ECONOMICS, TRADE AND INVESTMENT | MACROECONOMICS, TRADE AND INVESTMENT | MACROECONOMICS, TRADE AND INVESTMENT D INVESTMENT | MACROECONOMICS, TRADE AND INVESTMENT | MACROECONOMICS, TRADE AND INVESTMENT | MACROECON