to a drought as the supply effect dominates, but this is something we test in the analysis. The pattern may differ across crops depending on their elasticity of demand. For example, the increase could be more muted for teff, which has a high elasticity compared to sorghum and maize (Tafere _et al._ , 2010).

When markets are not autarkic, trade is possible, and hence prices are not determined by local market conditions only. Consider for example, when there is one other market, market _j_ , with which market _i_ can trade. When local conditions are such that the local market clearing price in market _i_ at time _t_ would be very high relative to market _j_ , trade from market _j_ becomes profitable— increasing supply and lowering prices in market _i_ . When local conditions are such that the local market clearing price in market _i_ at time _t_ would be very low relative to market _j_ , it becomes profitable to supply other markets with grain from market _i_ , reducing supply and increasing the price in market _i_ . Local supply and demand conditions determine prices within a band (the size of which is determined by the cost of trading between market _i_ and _j_ ). Outside this band, prices are determined by prices prevailing in other markets.

What does this mean for the impact of weather on prices? If there is some heterogeneity in weather conditions across markets, as is the case in Ethiopia where weather conditions vary considerably across the country, trade can limit the positive or negative impact of weather on prices.

With this in mind, we present four questions that we explore using a unique data set on weather shocks and prices in rural markets across Ethiopia from 1996 to 2012. The data set combines monthly retail price data for six grains collected from 82 rural markets with data on rainfall losses in the rural district surrounding the market.<sup>8</sup> In addition, data on participation of the district in a rural safety net program that started in 2005, and on market access in 2000, 2005 and 2011 are also included.

# **Question 1: Is there an inflationary impact of weather shocks on grain prices, and when in the season is it largest?**

The impact of weather shocks on supply and demand is unlikely to be uniform across the season. Most of the concern is around higher prices occurring during the lean season, but if prices increase earlier in the season the impacts of rainfall shortfalls may be felt by households much earlier than expected. The demand effect may not be observed immediately, unless households immediately adjust their consumption in response to lower harvests. If this is the case, we may observe weather having a stronger positive impact on prices immediately after the harvest, which dissipates as demand effects are increasingly observed. Additionally, in a market where there is poor connectivity to other markets, the supply effect may be particularly pronounced early on, until other markets start supplying the deficit market.

> 8 Specifically, the percentage of crop yield calculated to be lost in the woreda due to rainfall shortfalls. A detailed discussion on how the rainfall losses are estimated is presented in the ‘Data Section’.

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