EC-FAO – Food Security Information for Action
Market Assessment and Analysis
Parity Pricing
Parity pricing is used to compare prices across borders. Parity price analysis is a
standard method of equating (or comparing) prices in one place with those in another,
typically across international borders. There are two types of parity prices: import parity
and export parity.
Parity pricing refers to making prices of a commodity in one location equivalent to the
same commodity in another location, usually in a different country. It accounts for the
difference in prices of a given commodity across distances or across borders.
Import parity price is the value of a commodity bought from another country in a
location within the country (usually the port of entry). It can help to determine whether
importing a particular commodity is cheaper or more expensive than producing and
procuring it within the country at a given location within the country. Import parity prices
are measured as the Cost, Insurance and Freight (CIF) price.
Export parity price is the value of a commodity sold at a specific location in a foreign
country but valued at a specific location in the country from which it originated. It
measures whether a country’s exports are competitive with the same commodity
produced in another country. Exports are valued as Free on Board (FOB) price.
Which parity price applies to which situation depends on which side of the transaction
you stand or whose incentives you want to consider. An importer is interested in the
import parity price and this will serve as an indicator of whether it is worth it to buy the
commodity, pay for shipping, handling and local transport costs. An exporter is interested
in the export parity price and this will serve as an indicator of whether their commodity is
competitive with the same type of commodity located in a market across the border.
Once all costs associated with moving the commodity to that foreign market are
deducted from the price at the foreign location, is there a price difference remaining?
Example of the Use of Parity Pricing
Consider cotton being exported from Ouagadougou, Burkina Faso to Liverpool,
England.
In the eyes of an importer in Liverpool, the import parity price of the same cotton is
the local price of cotton in Ouagadougou plus all transport and insurance costs to ship
the cotton to Liverpool plus unloading charges at the port.
However, from Burkina Faso’s point of view, it is more useful to calculate the export
parity price valued at Ouagadougou, because we want to compare it with other cotton
prices in Liverpool and see if our export price is competitive, after adjusting for
shipping costs.
Also we want to compare it with local prices and determine whether there is an
incentive to export cotton to Liverpool or not.
For the cotton to be competitively priced, an importer, after paying shipping costs,
must find it cheaper or equivalently priced when comparing it to alternative cotton
imports prices in Liverpool.
Also, if the export parity price in Ouagadougou is higher than the local price of cotton
then it is worthwhile exporting to Liverpool, otherwise we might as well sell the cotton
locally.
FEWS NET (2007) “Calculating Parity Prices.” Market Guidance No 2.
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EC-FAO – Food Security Information for Action
There are standard formulas for calculating parity prices. CIF and FOB prices are
available for a number of major ports or trade hubs. Large-scale and commercial traders
frequently use these prices in making purchase and sales decisions. The South Africa
Futures Exchange (SAFEX) regularly reports parity prices relevant to South African trade.
Elements of CIF (Cost Insurance Freight) and FOB (Free on Board)
Item Element
CIF Includes:
• FOB cost at point of export
• Freight charges to point of import
• Insurance charges
• Unloading from ship to pier at port
Excludes:
• Import duties and subsidies
• Port charges at port of entry for taxes, handling,
storage, agents’ fees, and the like
FOB Includes:
All costs to get goods on board – but still in harbor of
exporting country:
• Local marketing and transport costs
• Local port charges including taxes, storage, loading,
fumigation, agents’ fees and the like
• Export taxes and subsidies
• Project boundary price
• Farm-gate price
Source: William A. Ward, “Calculating Import and Export Parity Prices,” Training
material of the Economic Development Institute, CN-3 (Washington D.C.: World Bank,
1977)
Parity prices for South Africa can be used to evaluate how likely it would be for South
African grain to fill a food gap within the region, a country or a particular sub-national
region of a country within the region. In some sub-national border regions, local maize
from Malawi, Zambia and Tanzania may be more competitive than South African maize.
In this case, such local maize flows would reduce somewhat the need for formal and
informal cross border flows from South Africa to fill national food gaps.
FOB USA and Argentine maize prices compared to white maize SAFEX nearby
Jan 2000 – April 2007
International and SAFEX prices
The combined effects of high international grain prices as well as limited availability in
South Africa have acted to dramatically increase South African domestic prices of
maize as indicated by price movements since January on SAFEX. Prices for the nearby
contract increased steadily in May and June after having dropped to US$233/MT in
April, from a peak of US$261/MT in March. The SAFEX prices are moving in tandem
with international prices, which are driven by overall global demand. Rising
international prices, and hence import parity, is likely to keep SAFEX prices at much
higher levels for most of the marketing year, making South Africa’s maize less
competitive when compared to neighboring Malawi, Zambia and Tanzania.
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EC-FAO – Food Security Information for Action
FEWS NET
Data source: SAFEX and SAGIS
Unfortunately, the data on all other costs are often missing so it may only be possible to
make a partial adjustment with existing data. Additional data could be collected to
complete the calculations or estimated costs could be used and noted. Finally, even
where it is impossible to calculate reasonably accurate parity prices due to data
limitations, an analysis of markets should consider the influence that these types of costs
would have on prices and narrowing the price gap between markets and countries.
Import Parity Price for Imported Rice to Northern Togo
USD/MT Where price differences exist, once
Vietnam Rice 15% Brokens (FOB) 150 accounting for transaction costs,
Ocean Freight to Ho Chi Minh, commodity flows can still be
Vietnam to Lome, TOGO 90 impeded by government restrictions,
Sub-Total – Cost and Freight 240 banditry and civil unrest, seasonally
Import Duty (5%) 12 inaccessible road access as well as
Sales Tax (15%) 36 market participants’ real or
Processing Fees 2 perceived risks.
Port Handling Fees 3.5
ECOWAS Charges (.5% of C&F) 1.2 Calculating parity prices, accounting
for price differentials and utilizing
ITSH (Bulk handling charges) 2
information on trade flows, including
Sub-Total 296.7
cross border flows provides a more
Inland freight to Dapango 70
accurate picture of supply. The
Storage & Handling in 10
improved assessment of supply,
CIF & SH Dapango $377.7
gives a more accurate estimate of
Cost of Locally Produced Rice $350
food gaps which can help streamline
the humanitarian response – better tailor the response (food, cash, policy action), target
areas and populations requiring food and reduce the overall volume and costs of the
programme.
