A Comparison of World and Domestic Price Volatilities of Oilseeds: The Ethiopian Case

Zerihun G Kelbore

doi:10.22610/jebs.v7i2(j).573

Abstract

This study investigates and compares oilseeds price volatilities in the world market and the Ethiopian market. It uses a monthly time series data on oilseeds from February 1999 to December 2012; and analyses price volatilities using unconditional method (standard deviation) and conditional method (GARCH). The results indicate that oilseeds prices are more volatile, but not persistent, in the domestic market than the world market. The magnitude of the influence of the news about past volatility (innovations) is higher in the domestic market for Rapeseed and in the World market for Linseed. However, in both markets there is a problem of volatility clustering. The study also identified that due to the financial crisis the world market price volatilities surpassed and/or paralleled the higher domestic oilseeds price volatilities. The higher domestic oilseeds price volatility may imply that the price risks are high in the domestic oilseeds market. As extreme price volatility influences farmers` production decision, they may opt to other less risky, low-value and less profitable crop varieties. The implications of such retreat is that it may keep the farmers in the traditional farming and impede their transformation to the high value crops, and results in lower income hindering the poverty reduction efforts of the government. This is more important to consider today than was before, because measures undertaken to reduce poverty must bring sustainable change in the lives of the rural poor. For this reason, agricultural policies that enable farmers cope with price risks and enhance their productivity are crucial.

Highlights

Prices of agricultural commodities undergoing rapid adjustments were in the spotlight following the food crises in late 2007 and 2008, and again more recently in the summer and fall of 2010, raising concerns about increased price volatility, whether temporal or structural
Between 2006 and 2008, oilseeds export and import declined following the financial crisis implying that the decline in imports, that was as high as 24 thousand metric tonnes in 2006, was covered by the increased domestic supply that would have been exported
We have investigated and compared price volatilities of oilseeds in the domestic market and in the world market

Summary

Introduction

Prices of agricultural commodities undergoing rapid adjustments were in the spotlight following the food crises in late 2007 and 2008, and again more recently in the summer and fall of 2010, raising concerns about increased price volatility, whether temporal or structural. It is important to distinguish between the ex ante effects of volatility and ex post effects of extreme outcomes. The ex ante effect of volatility is that it induces farmers decisions towards or away from risky activities, whereas the ex post effect results from farmers adjustment of their expectations of future incomes in response to current earnings, or their current expenditure plans to the income short falls that they find difficult to cope with (Dehn et al, 2005). The same study shows that poorer farmers consider weather-related risks, yield risks, illnesses of household members and weak demand for their off-farm labor as the main sources of their risks, price risks appear more important for commercially oriented farmers with surplus production and cash crop incomes. Evidences from coffee exporting developing countries, Nicaragua and Dominican Republic, show that price risks are the main sources of income risk (Ibd.)

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Results

Conclusion