Export parity price

What Is Export Parity Price?

The export parity price is the theoretical price a producer receives or can expect to receive for a product destined for sale in the global marketplace. It represents the value of a commodity at the point of origin, accounting for all costs incurred to get it to an international border for export. This concept is fundamental to international trade and commodity pricing, particularly for countries with a surplus of a given product. The export parity price helps determine the competitiveness of a country's goods on the world stage, influencing decisions on production and trade volumes. Understanding the export parity price is crucial for producers, policymakers, and traders to assess profitability and market incentives within a globalized market equilibrium.

History and Origin

The concept of parity pricing, including the export parity price, emerged from the need to understand price relationships between geographically separated markets, especially for agricultural and raw materials. As global trade expanded, driven by advancements in transportation and communication, it became essential to analyze how local prices of commodities related to their international values. This analytical framework gained prominence with the establishment of international trade agreements aimed at promoting fair trade practices and reducing distortions. For instance, the World Trade Organization (WTO) and its Agreement on Subsidies and Countervailing Measures (SCM Agreement), established in 1995, have played a critical role in regulating government support, such as subsidies, which can influence export prices. The SCM Agreement largely prohibits subsidies contingent on export performance, highlighting the international community's effort to ensure prices reflect true market conditions rather than artificial interventions.⁴

Key Takeaways

• The export parity price is the net price a producer receives for a product sold internationally, after deducting all export-related costs.
• It serves as a benchmark for determining whether exporting a commodity is profitable compared to selling it in the domestic market.
• Calculation involves the Free on Board (FOB) price minus internal transport, handling, and other costs to the export point.
• This pricing mechanism is vital for agricultural producers and commodity-exporting nations to inform production and trade policies.
• Factors like logistics costs, tariffs, and global supply and demand significantly influence the export parity price.

Formula and Calculation

The export parity price (EPP) is calculated by taking the international Free on Board (FOB) price of a commodity and subtracting all costs incurred from the point of production to the export facility or port. The FOB price represents the value of goods loaded onto a vessel at the port of shipment, with the seller bearing costs until that point.

The basic formula for the Export Parity Price is:

Where:

• FOB Price: The international price of the commodity at the point of export (e.g., a major international port). This is the price at which the goods are loaded onto the exporting carrier, with the seller responsible for all costs up to that point, including internal transport to the port and loading.
• Domestic Transportation Costs: Expenses associated with moving the product from the farm or factory to the export terminal or port. These costs are a major component of overall trade costs and can significantly impact the competitiveness of goods in international markets.³
• Handling Costs: Charges for packaging, loading, unloading, storage, and other logistical services at the origin point and port.
• Other Local Export Costs: Any additional costs specific to the exporting country, such as taxes, administrative fees, or quality inspection charges.

These calculations help a producer determine the effective price they receive, net of the expenses required to participate in global trade.

Interpreting the Export Parity Price

Interpreting the export parity price involves comparing it with the local market price or the cost of production to determine the profitability and incentive for export. If the calculated export parity price for a commodity is higher than its price in the domestic market or its production cost, it signals a strong incentive for producers to export, potentially leading to increased export volumes. Conversely, if the export parity price is lower, it suggests that exporting may not be profitable, discouraging international sales and potentially diverting more goods to the local market.

This analysis is crucial for identifying opportunities for arbitrage and understanding potential trade flows. For instance, a low export parity price could indicate an oversupply in the international market, strong competition, or high domestic logistics costs, prompting producers to seek alternative sales channels or re-evaluate their production strategies. Policymakers also use export parity price insights to design interventions, such as improving transportation infrastructure or negotiating trade agreements, to enhance export competitiveness.

Hypothetical Example

Consider a wheat farmer in a landlocked country preparing to sell their harvest. The global market price for wheat at a major international port (FOB price) is $300 per metric ton. To get the wheat from their farm to the port, the farmer incurs the following costs:

• Domestic transportation (trucking to border, rail to port): $50 per metric ton
• Handling and loading at intermediate points and port: $15 per metric ton
• Local export documentation and fees: $5 per metric ton

Using the export parity price formula:

So, the export parity price for this farmer's wheat is $230 per metric ton. If the farmer's cost of production is $200 per metric ton, selling for export would yield a profit of $30 per metric ton, providing a clear incentive to engage in international trade. If, however, the local market price for wheat was $240 per metric ton, the farmer might choose to sell domestically, as it offers a slightly higher net return than exporting in this scenario, assuming all other factors are equal.

Practical Applications

The export parity price is a fundamental tool across various sectors involved in international trade and commodity markets.

1. Agricultural Policy and Planning: Governments and agricultural organizations use EPP to assess the competitiveness of domestic produce against international benchmarks. It helps in formulating policies related to price support, trade incentives, and food security. For example, understanding the EPP can inform decisions on export promotion or buffer stock management.
2. Commodity Trading: Traders in the global supply chain utilize EPP to identify profitable trading opportunities. By comparing the EPP from various origins with destination market prices, they can decide where to source and sell to maximize returns, taking into account transportation and other associated costs. The International Monetary Fund (IMF) regularly publishes data on primary commodity pricing, which provides a foundation for such analyses.²
3. Investment Decisions: For businesses looking to invest in new production facilities or expand existing ones in export-oriented sectors, analyzing the EPP helps in assessing long-term viability and potential returns. It sheds light on the overall cost structure and the net revenue expected from international sales.
4. Market Analysis: Economists and analysts use EPP to understand market dynamics, predict trade flows, and evaluate the impact of global price changes on local economies. The responsiveness of trade to transportation costs, for instance, is a significant factor in shaping trade patterns, as higher costs can make exports less competitive.¹ This analysis is key to understanding how factors like freight rates affect a country's comparative advantage.

Limitations and Criticisms

While the export parity price is a valuable analytical tool, it has several limitations and faces criticisms.

Firstly, the calculation of the export parity price relies heavily on accurate data for international prices and all associated costs. In reality, these costs, particularly logistics and handling, can fluctuate significantly due to fuel prices, port congestion, or unforeseen disruptions in the global supply chain. Furthermore, official or reported international prices may not always reflect the actual transaction prices, which can vary based on volume, buyer-seller relationships, and specific market conditions.

Secondly, the EPP assumes a degree of perfect competition and efficiency in markets, implying that producers can freely access international markets and that prices are transparent. However, real-world markets often exhibit imperfections, including market power held by large buyers or sellers, trade barriers, and non-tariff barriers that are not easily quantifiable in the EPP formula. Policies such as subsidies or quotas can also distort price signals.

Thirdly, the impact of currency exchange rates can introduce volatility and complexity. EPP is typically calculated in a reference currency (e.g., USD), but producers operate in local currencies. Fluctuations in exchange rates can drastically alter the profitability of exports, even if the foreign currency FOB price remains stable. This adds a layer of risk that a simple EPP calculation may not fully capture.

Lastly, the concept may not fully account for qualitative factors such as product quality, brand reputation, or specific market demands that can allow some exporters to command higher prices or maintain market share despite less favorable EPP calculations.

Export Parity Price vs. Import Parity Price

Export parity price and import parity price are two complementary concepts in international trade that define the theoretical price range for a domestically produced good when influenced by global markets.

The key difference lies in the direction of trade and the costs considered. The export parity price reflects the netback a producer receives from selling out of the domestic market to the international market, subtracting local costs from the international selling price. Conversely, the import parity price represents the cost of bringing an imported good into the domestic market, including international purchase price, freight, insurance, and local import duties or handling, which determines the highest price a local producer could charge before imports become cheaper. Together, they define a range within which the local price of a traded commodity is expected to lie, influenced by the global market.

FAQs

What does "parity" mean in "export parity price"?

"Parity" means equality or equivalence. In the context of export parity price, it refers to the idea that the price a producer receives for a good for export should be equivalent to the international price, after accounting for all local costs involved in getting that good to the border or port for shipment. It establishes a benchmark for evaluating profitability against a global standard for a specific commodity pricing.

Why is the export parity price important for a country?

The export parity price is crucial for a country because it helps assess the competitiveness of its goods in global markets and informs national trade policies. By understanding the EPP, a government can determine if its producers are receiving a fair return from exports, identify inefficiencies in the export process (like high domestic logistics costs), and implement measures to boost export performance and promote international trade.

Does the export parity price include tariffs or subsidies?

The core calculation of the export parity price, based on the FOB price, typically does not directly include tariffs levied by the importing country, as those are costs borne by the buyer in the destination market. However, any local taxes or export duties imposed by the exporting country would be included as "Other Local Export Costs." Similarly, government subsidies to exporters would increase the net revenue received by the producer, effectively raising their "received" export parity price, making exports more attractive.

How do changes in transportation costs affect the export parity price?

Changes in transportation costs have a direct and significant impact on the export parity price. If domestic transportation costs (e.g., from farm to port) increase, the export parity price will decrease, reducing the net revenue received by the producer. This makes exporting less profitable and can diminish a country's competitiveness in the global market. Conversely, a decrease in transportation costs will raise the export parity price, encouraging more exports.