The Impact of Food Price Shock on Heterogeneous Credit Constrained Firms

Abstract

The paper analyzes how rising food and energy prices affect heterogeneous firm access to inputs and production under credit market imperfections. We estimate a firm credit constraint equation using a unique firm level panel data and find that, on average, small individual firms (IF) are more credit constrained than large corporate firms (CF). Using the estimated parameters, we simulate the effect of the recent food price shock on the world markets. Our results suggest that in the presence of credit market imperfections, the less credit constrained CF benefit relatively more from food price increase than IF, as they are able to expand their production more flexibly. These findings have important policy implications for countries with significant market imperfections. In the case of the food price shock, not only consumers but also producers, which on average are more credit constrained than producers in developed countries, may lose their market shares and hence their income in the long run.

Credit Constraints, Heterogeneous Farms and Price Volatility

“…According to Table 6, most of the estimated coefficients are larger for CF compared with IF. This result suggests that IF are more credit-constrained than CF, which confirms the findings of Ciaian and Kancs (2008).…”

“…The distributional consequences on the supply side have been studied to a much lesser extent (a notable exception is Ciaian and Kancs, 2008), although changes in the relative input and output prices affect farmers too. According to Binswanger and Rosenzweig (1986), changes in agricultural prices induce two types of adjustments at farm level: profit-maximizing farms adjust their Credit constraints, heterogeneous farms and price volatility production scale and product mix.…”