Price transmission in the era of global food market turmoil : the case of maize and wheat commodities in Ethiopia

Abstract

This study pursued the following three objectives: (1) to test the presence of Asymmetric Price Transmission (APT) among integrated wholesale maize markets during the post-agricultural market liberalisation period from July 2004 to March 2016; (2) to understand the influence of government interventions on the performance of maize and wheat grain markets; and (3) to examine the effect of domestic supply and demand dynamics on the maize market using a partial equilibrium modelling framework. In pursuit of the first objective, this study estimated an Asymmetric Vector Error Correction Model (AVECM). Findings from the inter-regional maize market integration analysis indicated that all maize market pairs considered in this study were cointegrated with the central Addis Ababa wholesale maize market. Spatial maize market integration has not only improved, but there has been an improved complete pass-through of price signals, with no evidence of positive APT in the regional wholesale maize markets in Ethiopia. Despite the widely held belief by consumers and government that traders’ inappropriate price adjustment contributes to the persistence of soaring food prices in Ethiopia, we found no evidence to support this argument. Instead, wholesale maize traders tend to adjust homogenously to increases and decreases in maize price deviations from the central Addis Ababa maize market. Hence, the widely held perception that considers traders as constituting a main contributor to the recent soaring food price situation in Ethiopia is just a misconception. In this study, it is argued that the recent surge in grain prices in Ethiopia has little to do with APT in maize markets. The second objective employed a regime-dependent Vector Error Correction (VECM) model to examine the extent of the integration of Ethiopian wheat and maize markets with the world market and the effect of policy interventions on the spatial integration of food markets. Findings of the cointegration analysis indicate that domestic wheat and maize markets are strongly integrated with the world market during a period in which the government intervenes, as opposed to periods of low intervention. Despite the presence of a long-run relationship and absence of APT, domestic wheat prices are distorted by the government’s secretive and unplanned interventions. Domestic wheat prices have surpassed the ceiling price during periods of heavy government interventions (i.e. since 2008). We argue that the increasing price gap between domestic and world wheat markets since 2008 is due to trade flow restrictions caused by foreign exchange rationing and subsidised wheat distribution. A single commodity partial equilibrium approach was used to investigate the maize price formation and a likely impact of a bumper harvest and drought shocks on the maize market. Findings from the behavioural equations reveal that farmers respond very little to price in planning their maize acreage. Rather, the analysis demonstrated that rainfall and technological progress were relatively more important for higher maize acreage growth. Regarding the supply side shocks (a bumper harvest and drought) on maize prices, we found that a 20 per cent increase in maize yield could reduce nominal maize price by 81 per cent. This implies a decrease in maize price level of 238 per cent (110 USD/t) below the export parity price. This makes maize exports profitable, and shifts the trade regime from autarky to an export parity regime. On the other hand, the effect of drought could increase maize prices by 61 per cent in the short run (within the year). The effect could result in the domestic wholesale maize price moving over the upper threshold import parity price by 46 per cent (126 USD/t). As a result, maize imports would become profitable.