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Unravelling the underlying causes of price volatility in world coffee and cocoa commodity markets

Maurice, Noemie and Davis, Junior (2011): Unravelling the underlying causes of price volatility in world coffee and cocoa commodity markets.

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In recent years, Commodity Dependent Developing Countries (CDDCs) have faced multiple global food, energy and climate crises, compounded by the recent financial and economic crises, which have increased their vulnerability to excessive price volatility in commodity markets. Moreover, structural vulnerabilities in most CDDCs render their economies more vulnerable to increased commodity market turbulence than developed countries, given their comparatively lower income and high dependence on commodity exports. This paper aims to empirically examine the patterns and underlying causes of excessive price volatility for two major soft commodities of critical importance to many of the poorest CDDCs: coffee and cocoa. It aims to identify interactions, similarities and causalities between coffee and cocoa prices on the one hand and, oil and futures prices on the other hand. Our analysis of coffee and cocoa historical prices shows that, coffee price volatility has uneven or varied impact depending on the nature of the market shock. Oil price spillover effects on coffee and cocoa markets are also assessed using cointegration and error-correction models. Long-run causality is found between oil prices, and coffee and cocoa prices but, only cocoa has an equilibrium relationship with oil in the long-term. Given the results, this study proposes some policy recommendations for managing price risk and addressing regulation in cocoa and coffee exporting countries.

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