1. Introduction to IMPACT

2. 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

3. 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)

4. 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

5. 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

6. 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

7. 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

8. Defining IMPACT: Endogenous Variables Agriculture Sector Projections for: – Commodity Prices – Commodity Production and Demand – Crop Areas and Yields – Food Availability

9. 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

10. The products and services consumed at a given price Explaining Demand

11. The products and services consumed at a given price Consumers face budgetary constraints Explaining Demand

12. The products and services consumed at a given price Consumers face budgetary constraints – Must make trade offs based on preferences (elasticity) Explaining Demand

13. Explaining Supply The products and services supplied at a given price

14. Explaining Supply The products and services supplied at a given price Suppliers must determine how to best utilize inputs for profit maximization. Maize Wheat

15. 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

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

17. 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? -Consumers want Q1 -Producers produce Q2 -There is a surplus of Q2- Q1 -Producers will have to lower prices to sell excess production

18. 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? -Consumers want Q1 -Producers produce Q2 -There is a surplus of Q2- Q1 -Producers will have to lower prices to sell excess production

19. 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? -Consumers want Q2 -Producers will produce Q1 -There is now a shortage Q2-Q1

20. 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? -Consumers want Q2 -Producers will produce Q1 -There is now a shortage Q2-Q1 -Excess demand will push prices up till production meets demand

21. 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? -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 22

23. 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 23

24. 24 Crop Example Activity Soybean Farm (jsoyb) Demands land, fertilizer, labor Activity Soybean Farm (jsoyb) Demands land, fertilizer, labor Activity Output Soybean Commodity (csoyb) Activity Output Soybean Commodity (csoyb)

25. 25 Processed Commodity Example Activity Soybean Processing (jsbol) Demands soybeans (csoyb) at market price Activity Soybean Processing (jsbol) Demands soybeans (csoyb) at market price Processed Commodities Soybean Oil (csbol) Soybean Meal (csbml) Processed Commodities Soybean Oil (csbol) Soybean Meal (csbml)

26. Complete Oilseed Activity- Commodity Chain Activity Soybean Farm (jsoyb) Demands land, fertilizer, labor Activity Soybean Farm (jsoyb) Demands land, fertilizer, labor Activity Output Soybean Commodity (csoyb) Activity Output Soybean Commodity (csoyb) Activity Soybean Processing (jsbol) Demands soybeans (csoyb) at market price Activity Soybean Processing (jsbol) Demands soybeans (csoyb) at market price Processed Commodities Soybean Oil (csbol) Soybean Meal (csbml) Processed Commodities Soybean Oil (csbol) Soybean Meal (csbml)

27. 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 27

28. 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 28 Producer Prices Producer Price

29. 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 29 Consumer Prices Producer Price Consumer Price Commodity prices consumers face Marketing Margin

30. 30 Consumer Prices Producer Price Consumer Price World Price Marketing Margin Trade Regime

31. 31 Consumer Prices To trade or not to trade?

32. Commodities can be globally traded or non-traded This option can be set exogenously – E.g. sugar beets Or endogenously through the following inequality 32 Tradability in IMPACT PCPC Export Price Import Price < < PEPE PMPM