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IFPRI Discussion Paper No. 1079, April, Shahidur Rashid (2011)

The paper examines the intercommodity price relationships to evaluate which of the major cereal crops are important in contributing to price volatility in Ethiopia. The paper concludes that maize is the most significant contributor to price volatility.

The phenomenon of inter-commodity price relationships and shock transmissions are very relevant from a policy standpoint in developing nations. Cereals account for a major share of agricultural value-added and prices are volatile in such countries. The liberalization of markets to stabilize prices has not been successful in many countries and in some cases, has even led to increased price volatility.

Ethiopia is such a case in point where all cereal products are non-tradeable, price volatility is high and intervention programs like food aid and food-based programs are large. Monthly cereal price volatility is one of the highest in the world and has worsened since 2000. The authors of this paper seek to understand such intercommodity price relationships and shock transmissions. They build on previous models to analyze the long-run price relationships between the commodities of wheat, maize and teff in order to examine the significance and persistence of such shocks.

The authors address the issues by (i) analyzing price relationships among multiple commodities across various locations, and (ii) testing which of the three commodities are significant in driving the long-run variability. The price data for the cereal crops were collected from the Ethiopian Grain Trading Enterprise (EGTE).

The sampled locations of the markets represented the key production and populated regions of Ethiopia.

They reveal some key findings in the paper. Firstly the authors find that shocks to either maize or wheat will impact both markets whereas any shocks to the teff market will have little impact on the wheat and maize markets. Shocks to both maize and wheat will also have very little impact on teff and adverse shocks in either the maize or wheat market will not be dispelled within a three-year horizon. The authors explain that their finding is consistent with the market structure in Ethiopia.

Teff is known to be more resilient to climate shocks and its production has not undergone any dramatic technological changes like maize and wheat. The coefficient of variation, which measures variability, indicate that both the yield and price of teff are more stable than the other cereal crops in Ethiopia. By contrast, maize and wheat has shown more volatility in terms of growth and adverse shocks.

The study then attempts to provide a rationale for the results. The findings reveal that shocks to the maize market appear to have a much larger impact overall. The authors posit that since maize is the major contributor in long run commodity price volatility, it is imperative that price stabilization schemes be targeted towards maize – such schemes might be more effective if they are focused on stabilizing the price of maize. The focus on maize has a particular relevance because of the decline in maize prices in early 2002, where prices fell by 80 percent. Farmers faced a fall in their producer prices which meant that the ratio of input prices to producer prices increased in 2002. Data afterwards suggested that total maize production declined sharply for four years in a row and since maize has the highest yield rates among the other crops, this was a major loss.

The authors conclude the paper by outlining several policy proposals. They suggest that the price instability of maize and wheat should be fixed within a given price band to help promote the grain-sector development. Temporary policies such as minimum price support and food rationing could be considered as well in the light of another crisis. The authors stress that if implemented properly, a defined price band can bring transparency to the market and also promote the adoption of modern technology in production. In addition the government, development agencies and partners could coordinate to improve crop forecasting and the disbursement of food aid to avoid such adverse effects of cereal market fluctuations.