Terms of Trade and Food Security Analysis

INTRODUCTION Assessing and monitoring the value of assets against what they can purchase in the market is an important component of food security analysis. On its own, the price of an asset is just a number. For example, the price of a goat is currently worth 15,000 CFAF at the Abalak market in Niger. Someone unfamiliar with Abalak would wonder: is this expensive for the local population? Only when an asset is viewed in relation to other goods, services or household income, does it become possible to assess the asset's exchange value, and it is the exchange value of the asset that affects the purchasing power and food access of the owner of the asset. For households that rely on markets for a significant portion of their food needs, the exchange value is of critical importance, and provides an indicator of purchasing power 1. The terms of trade (TOT) is a measure of the relative value of one commodity to another (or the inverse of their relative prices) and thus a measure of the exchange value of the good or service to be traded. The value of goods and assets, such as livestock, and the amount of cash or income that a household has, change over time and often follow a regular seasonal pattern. Wages, incomes, livestock and other commodity prices all tend to fluctuate over the season. Prices for a particular commodity will be highest when demand is high and supply is low; likewise, prices will be at their lowest point when demand is low and supply is high. The timing of harvests, degree of active marketing, and consumption of a particular commodity in a particular area influence the seasonal variability of prices. Most poor or food insecure households maintain very few stores of wealth or savings at any given time. The value of exchange for those limited assets is a key determinant of their ability to acquire their basic needs. Therefore, their ability to exchange their product, assets or labor and the relative value of that exchange is a critical indicator of their food security and thus typically an important component of food security analysis. The objective of this guidance is to provide a systematic and complete overview of terms of trade and its application to food security analysis and reporting. Instead of looking at price levels and trends of discrete commodities, the terms of trade allows analysts …