Introduction to IMPACT

Models

• Models are logical constructs that represent systems

• Models can:– Simplify a complex system– Provide insights to the inner workings of a system

• Models cannot explain everything

Model Vocabulary

• Agents: Actors within the system (consumers, farmers, governments)

• Variables: Conditions defining the state of the agents (income, farmland, technology)– Exogenous Variables: Inputs to the model, defined by the

designer (population, income)– Endogenous Variables: Outputs of the model (food

demand, commodity prices)• Assumptions: Rules about interactions between

agents and variables (equilibrium, max climate change yield reductions)

Economics

• Study of the allocation of scarce resources• There are many allocation methods• In Trade Theory the market is predominant

– A market is the process of negotiation between buyers and sellers, which determines the prices for goods and services

Economic Trade Models

• Many types of trade = Many trade models• Defining Model Scope

– What is traded (general vs. partial equilibrium)– Who are the agents (micro vs. macro)– Market location (local, regional, global)– Types of analysis (normative or positive)

• IMPACT’s scope:– Partial equilibrium focused on Ag. Sector– Macro Agents – Global markets– Both normative and positive analysis

Defining IMPACT: Agents

• 159 geopolitical regional governments• Consumers are region level agents and are

defined as either urban or rural• Farmers are FPU-level agents and are defined

by production technology (irrigated, rainfed, etc.)– FPUs (Food production units) are subnational

geospatial units

Defining IMPACT: Exogenous Variables

• Socio-demographic change (Population, GDP)• Consumer and producer preferences

(elasticities)• Productivity and technology change (IPRs)• Climate change and yield response• Starting Point (base values) and time horizon

Defining IMPACT: Endogenous Variables

• Agriculture Sector Projections for:– Commodity Prices– Commodity Production and Demand– Crop Areas and Yields– Food Availability

Defining IMPACT: Assumptions

• Equilibrium (supply=demand)• Demand is a function of consumer preferences,

commodity prices, and budgetary constraints• Supply is derived from area-yield functions and

is a function of existing land, crop prices, changes in technology, and the availability and cost of inputs

• Suppliers are profit maximizers and consumers are utility mazimizers

• The products and services consumed at a given price

Explaining Demand

• The products and services consumed at a given price

• Consumers face budgetary constraints

Explaining Demand Deriving the Demand Curve

QTea

QCoffee

QCoffee

P Coff

ee

• The products and services consumed at a given price

• Consumers face budgetary constraints– Must make trade offs based on

preferences (elasticity)

Explaining Demand Deriving the Demand Curve

QTea

QCoffee

QCoffee

P Coff

ee

Inelastic Demand

Elastic Demand

Price

Quantity

Price

Quantity

Explaining Supply

• The products and services supplied at a given price

Simplified Supply Curve

Price

Quantity

Explaining Supply

• The products and services supplied at a given price

• Suppliers must determine how to best utilize inputs for profit maximization.

Simplified Supply Curve

Price

Quantity

Maize

Wheat

Explaining Supply

• The products and services supplied at a given price• Suppliers must determine how to best utilize inputs

for profit maximization. – Production Possibility Frontier – Set of possible

outputs from available inputs and technology

Maize

Wheat

Maize

Wheat

Maize

Wheat

Better Wheat Fertilizers More Arable Land

Explaining the Market• Markets are where consumers and producers

negotiate prices. Prices will fluctuate until equilibrium is reached (supply=demand)

• Why assume equilibrium?– What happens at price P2?

Simplified Supply Curve

P

Q

S

D

P0

P2

P1

Q1 Q2 Q0

- Consumers want Q1- Producers produce Q2- There is a surplus of Q2-

Q1

Explaining the Market• Markets are where consumers and producers

negotiate prices. Prices will fluctuate until equilibrium is reached (supply=demand)

• Why assume equilibrium?– What happens at price P2?

Simplified Supply Curve

P

Q

S

D

P0

P2

P1

Q1 Q2 Q0

- Consumers want Q1- Producers produce Q2- There is a surplus of Q2-

Q1- Producers will have to

lower prices to sell excess production

Explaining the Market• Markets are where consumers and producers

negotiate prices. Prices will fluctuate until equilibrium is reached (supply=demand)

• Why assume equilibrium?– What happens at price P2?

Simplified Supply Curve

P

Q

S

D

P0

P2

P1

Q1 Q2 Q0

- Consumers want Q1- Producers produce Q2- There is a surplus of Q2-

Q1- Producers will have to

lower prices to sell excess production

Explaining the Market• Markets are where consumers and producers

negotiate prices. Prices will fluctuate until equilibrium is reached (supply=demand)

• Why assume equilibrium?– What happens at price P1?

Simplified Supply Curve

P

Q

S

D

P0

P2

P1

Q1 Q2 Q0

- Consumers want Q2- Producers will produce

Q1- There is now a shortage

Q2-Q1

Explaining the Market• Markets are where consumers and producers

negotiate prices. Prices will fluctuate until equilibrium is reached (supply=demand)

• Why assume equilibrium?– What happens at price P1?

Simplified Supply Curve

P

Q

S

D

P0

P2

P1

Q1 Q2 Q0

- Consumers want Q2- Producers will produce

Q1- There is now a shortage

Q2-Q1- Excess demand will

push prices up till production meets demand

Explaining the Market• Markets are where consumers and producers

negotiate prices. Prices will fluctuate until equilibrium is reached (supply=demand)

• Why assume equilibrium?– What happens at price P1?

Simplified Supply Curve

P

Q

S

D

P0

P2

P1

Q1 Q2 Q0

- Consumers want Q2- Producers will produce

Q1- There is now a shortage

Q2-Q1- Excess demand will

push prices up till production meets demand

22

Activity-Commodity Framework

• IMPACT 3 is a structural model– Describes the production process in a reduce form

• Activities– Represent production processes

• Farms, ranches, processing plants

– Demand factors of production

– Produce commodities

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Activity-Commodity Framework

• Commodities are:– Produced– Traded– Consumed– Can be endogenous

or exogenous• Maize has endogenous production and demand• Oilseeds have endogenous production and both

endogenous and exogenous demand (biofuels)• Fertilizers could be considered an exogenous

commodity

24

Crop Example

Activity• Soybean

Farm(jsoyb)

• Demands land, fertilizer, labor

Activity Output• Soybean

Commodity(csoyb)

25

Processed Commodity Example

Activity• Soybean

Processing (jsbol)

• Demands soybeans (csoyb) at market price

Processed Commodities• Soybean Oil

(csbol)• Soybean

Meal (csbml)

Complete Oilseed Activity-Commodity Chain

Activity• Soybean

Farm(jsoyb)

• Demands land, fertilizer, labor

Activity Output• Soybean

Commodity(csoyb)

Activity• Soybean

Processing (jsbol)

• Demands soybeans (csoyb) at market price

Processed Commodities• Soybean Oil

(csbol)• Soybean

Meal (csbml)

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IMPACT Prices

• Prices are Endogenous– Ensure Global Supply = Global Demand

• Each country has three markets:– Farm gate– National– International

• Price wedges (marketing margins, taxes, subsidies) between markets

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• Prices that are paid by traders for activity outputs– Price at farm or factory gate

• Equal to the sum of input costs of an activity and any ad valorem producer subsidy (PSE)– PSEs originally are from OECD sources and have been

adjusted and mapped to IMPACT countries and activities

Producer Prices

Producer Price

• Price at Farm/Factory Gate

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• Prices consumers pay in national markets for commodities– Includes transportation costs, as well as taxes and tariffs

• Consumer Subsidies are targeted and applied in the demand equations

Consumer Prices

Producer Price

• Price at Farm/Factory Gate

Consumer Price

• Commodity prices consumers face

Marketing Margin

30

Consumer Prices

Producer Price

• Price at Farm/Factory Gate

Consumer Price

• Commodity prices consumers face

World Price

Marketing Margin

Marketing Margin

Trade Regime

31

• Consumer prices are set to either the country’s export price or its import price

• This switch allows commodities to change from globally traded to non-traded endogenously

Consumer Prices

To trade or not to trade?

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• Commodities can be globally traded or non-traded

• This option can be set exogenously– E.g. sugar beets

• Or endogenously through the followinginequality

Tradability in IMPACT

PC

Export Price

Import Price

𝑃𝐸=𝑃𝑊 × (1− 𝑡𝑒 )×(1−𝑀𝑀𝑒) 𝑃𝑀=𝑃𝑊 × (1+𝑡𝑚 )×(1+𝑀𝑀𝑚)< <P

EPM