Transmission of World Food Prices to Domestic Market: The Ethiopian Case

Kelbore, Zerihun Getachew (2013): Transmission of World Food Prices to Domestic Market: The Ethiopian Case.

Abstract

This paper investigates the integration of the Ethiopian grain market to the world market; and within country grain markets integration. To this end, two cereal crop markets: wheat and maize, have been investigated. For maize the integration into the world market is analyzed using the US and SAFEX exchange markets as a world market; for wheat Paris and Chicago exchange markets are considered a wheat world market. The analysis has been conducted using a cointegration method: Johansen (1988) procedure. The results show that the Ethiopian grain market is integrated into the world market, albeit to the once geographically proximate to it. And further, we found that the elasticity of the price pass through between the world and domestic markets has appeared to be more than unitary when evaluated at the mean prices of the two food crops. The analysis of domestic market integration is conducted using principal component analysis (PCA). The result shows that both wheat and maize markets are fairly integrated. However, the results demonstrate that in wheat market, of the traditionally known deficit markets Mekelle has shown an improvement in integration as its mean prices and price variability appear to be in line with the central market, but the maize market result has preserved the deficit market status. In the other deficit market, Dire Dawa, the mean prices of wheat and maize appear to be higher and more volatile than the central market. The other most striking result is that despite huge infrastructural improvement markets further from the central market exhibit higher level of price volatility than markets within a 300km distance from the central market, Addis Ababa. It has also been observed that the price differential between the central market and other local markets has shown a declining trend over time, and found to be stationary. This implies that the markets are more likely to converge in the long run, provided the market infrastructure continues to develop so as to reduce market information asymmetry that we believe has contributed to differences in price differentials and price volatility across markets

• Item Type: MPRA Paper
• Language: English
• Keywords: world market, domestic market, Price transmission, market integration , cointegration, PCA
• Subjects: F - International Economics > F1 - Trade; F - International Economics > F1 - Trade > F15 - Economic Integration; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F42 - International Policy Coordination and Transmission; O - Economic Development, Innovation, Technological Change, and Growth > O5 - Economywide Country Studies > O55 - Africa; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q1 - Agriculture > Q17 - Agriculture in International Trade; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q1 - Agriculture > Q18 - Agricultural Policy ; Food Policy

References

Abdulai, A., 2000. Spatial price transmission and asymmetry in the Ghanaian maize market. J. Dev. Econ. 63, 327–349.

Ardeni, P. G. (1989). Does the Law of One price Really Hold for Commodity Prices? American Journal of Agricultural Economics 71: 661-669.

Baffes, J. and B. Gardner. 2003. The Transmission of World Commodity Prices to Domestic Markets under Policy Reforms in Developing Countries.” Journal of Policy Reform. 6. 159-180.

Conforti, P. 2004. Price Transmission in Selected Agricultural Markets. FAO Commodity and Trade Policy Research Working Paper No. 7. Food and Agriculture Organization.

Dawe, D. 2008. Have Recent Increases in International Cereal Prices Been Transmitted to Domestic Economies?: The Experience in Seven Large Asian Countries. ESA Working Paper No. 08-03. Development Economics Divisions, Food and Agriculture Organization.

Dercon, Stefan, 1994. “Food Markets, Liberalization and Peace in Ethiopia: An Econometrics Analysis,” Centre for the Study of African Economies, Oxford.

Engle, R.F. and Granger, C.W.J. (1987). Cointegration and Error Correction: Representation, Estimation and Testing. Econometrica 55: 251-276.

Fackler, P.L., and B.K. Goodwin. 2001. Spatial price transmission. In Handbook of Agricultural Economics, (ed.) B. Gardner and G. Rausser. Volume 1, Chapter 17. Elsevier Science.

Franzel, S., F. Colburn, and G. Degu. 1989. Grain marketing regulations: Impact on peasant production in Ethiopia. Food Policy14: 347-358.

Gardner, B.L. & Brooks, K.M., 1994.Food prices and market integration in Russia: 1992-93. American Journal of Agricultural Economics, 76, 641-646.

Gilbert, C. L. and C. W. Morgan. 2010. Food Price Volatility. Philosophical Transactions of the Royal Society. 365, 1554: 3023-3034.

Gilbert, C.L. 2011. Grain Price Pass,Through,2005,2009. In: Prakash, A. (ed.), Safeguarding Food Security in Volatile Global Markets. Rome, FAO.

Hazell, P. et al. 1990. The relationship between world price instability and the prices farmers receive in developing countries, Journal of Agricultural Economics, 41: 227-243

Holmbeg, J. 1977. Grain Marketing and Land Reform in Ethiopia: An Analysis of the Marketing and Pricing of Food Grains in 1976 after the Land Reform. Research Report 41. The Scandinavian Institute of African Studies.

Ianchovichina, E., J. Loening, and C. Wood. 2012. How Vulnerable Are Arab Countries to Global Food Price Shocks. World Bank Policy Research Working Paper 6018. Washington D.C.

Imai, K., R. Gaiha, and G. Thapa. 2008. Transmission of World Commodity Prices to Domestic Commodity Prices in India and China. Brook World Poverty Institute (BWPI) Working Paper No. 45.Manchester.

International Monetary Fund (IMF). 2011. “Target What You Can Hit: Commodity Price Swings and Monetary Policy” in World Economic Outlook September 2011. IMF: Washington D.C.

Isard, P. 1977. How far can we push the ‘law of one price’?, American Economic Review, 67, pp. 942–948.

Johansen, S. 1988. Statistical analysis of cointegrating vectors. Journal of Economic Dynamics and Control 12: 231-254.

Keats, S., S. Wiggins, J. Compton, and M. Vigneri. 2010. Food Price Transmission: Rising International Cereals Prices and Domestic Markets. Overseas Development Institute (ODI) Project Briefing No. 48.ODI: London.

Lirenso, A. 1994. Liberalizing Ethiopian Grain Markets. In Papers of the 12th International Conference of Ethiopian Studies, ed. H. Marcus, and G. Hudson. East Lansing: Michigan State University.

Lirenso, A. 1995. “Grain Market Reform and Food Security in Ethiopia,” paper presented at the World Bank Seminar, Washington, D.C., June 15, 1995.

Mendoza, M.S., and M.W. Rosegrant 1995a. Pricing Behavior in Philippine corn markets: Implications for market efficiency, Research Report 101. International Food Policy Research Institute, Washington, DC.

Minot, N. 2011. Transmission of World Food Price Changes to Markets in sub-Saharan Africa. International Food Policy Research Institute, Discussion Paper 1059.Washington D.C.

Monke, E., and T. Petzel. 1984. Market integration: An application to international trade in cotton, American Journal of Agricultural Economics 66:481-487.

Morisset, J. 1998.Unfair trade? The increasing gap between world and domestic prices in commodity markets during the past 25 years. The World Bank Economic Review, Vol. 12, No. 3, 503-26.

Mundlak, Y. and D. Larson. 1992. On the Transmission of World Agriculture Prices. World Bank Economic Review. 6, 3: 399-422.

Negassa, A. and R. Myers, 2007. Estimating Policy Effects on Spatial Market Efficiency: An Extension to the Parity Bound Model. American Journal of Agricultural Economics 89 (2): 338-352.

Quiroz, J. and Soto, R. 1993. International price signals in agricultural markets: do governments care?, mimeo, The World Bank, October

Quiroz, J. and R. Soto. 1995. International Price Signals in Agricultural Markets: Do Governments Care? World Bank Mimeo.

Rapsomanikis, G., D. Hallam, and P. Conforti. 2004. “Market Integration and Price Transmission in Selected Food and Cash Crop Markets of Developing Countries: Review and Applications.” in Commodity Market Review 2003-2004. Food and Agriculture Organization: Rome.

Rashid, S. 2004. “Spatial Integration of Maize Markets in Post-Liberalized Uganda.” Journal of African Economies 13 (1): 103–133.

Rashid, S., and S. Lemma. 2010. Strategic Grain Reserve in Ethiopia: Institutional Design and Operational Performance. International Food Policy Research Institute, Discussion Paper 1054. Washington, D.C.

Rashid, S. 2011. Inter-commodity Price Transmission and Food Price Policies: An Analysis of Ethiopian Cereals Markets. IFPRI Discussion paper 1079. Washington, D.C.: International Food Policy Research Institute.

Ravallion, M., 1986. Testing market integration, American Journal of Agricultural Economics, 68(2), 292-307.

Timmer, C. P. 2008. Causes of High Food Prices. ADB Economics Working Paper Series No. 128.ADB: Manila.

Van Campenhout, B., 2007. Modelling trends in food market integration: Method and an application to Tanzanian maize markets. Food Policy 33 (1), 112–127.

World Food Program (WFP). 1989. Mid-term Evaluation by a WFP/FAO/ILO/UN Mission of Project Ethiopia 2488/(Exp. II): Rehabilitation of Forest, Grazing, and Agricultural Lands, Vol. 1. Addis Ababa: World Food Program.