Abstract
Egypt is considered a net wheat importer, with the Egyptian market being vulnerable to future wheat markets because of the effect future market price discovery can have on the stability of spot prices. This study assesses the relationship between Egyptian wheat spot prices and future wheat prices in Paris (MATIF) and USA (CBOT). Markov switching-vector error correction methods are used to estimate two regimes by splitting the sample into high and low volatility regimes. This study also examines the dynamic conditional correlation between the prices considered using the asymmetric DCC-GARCH. Results suggest a high volatility regime observed, especially during the extreme market events of the food crisis in 2007-08 and 2010 and following the two revolutions in Egypt in 2011 and 2013 and the time of the economic reform in 2016. This leads to an unstable market and negative impacts on consumers’ welfare and food affordability, meaning that futures markets failed to hedge spot wheat market against price volatility. In addition, results from impulse response functions indicate that a 1% shock in futures markets will lead to a positive shock in the wheat spot market, while for the low volatility regime no significant effect.
Highlights
Egypt has been suffering from food insecurity for a long time because of natural resources scarcity, economic instability, political upheaval and an excessive reliance on food imports
The GDP growth rates decreased from 5.1% in 2010 to 3.6% in 2017, while inflation measured through the consumer price index grew by 29.8% in 2017 and the unemployment rate remains consistently high at 12.5% (Central Bank in Egypt, 2017)
There are several studies found evidence that future markets lead to stabilizing spot prices in developed countries, and makes the food markets working efficiently (Dower and Anderson, 1977; Danthine, 1978; Streit, 1980; Gupta and Mayer, 1981; Theissen, 2012; Kim and Lim, 2019), while this study explores the efficiency of future markets in food commodities in Egypt as one of the developing countries
Summary
Egypt has been suffering from food insecurity for a long time because of natural resources scarcity, economic instability, political upheaval and an excessive reliance on food imports. As in Egypt, after the global food crisis and successive crisis, the food markets of these countries suffered evident price distortion, especially for wheat, which was significantly affected by the price volatility. A study by Iannotti and Robles (2011) assessed the negative impact of energy intake associated with food price shocks in Latin America during the 2006 to 2008 period They confirmed that increases in the prices of basic foods commodities (rice, wheat and maize) negatively affected energy intake, especially for poorer households. The fourth section is devoted to the empirical analysis implemented to assess the relationship and the continual volatility correlation between futures and spot prices in the Egyptian wheat market. The last section of this article offers concluding remarks and policyrecommendations
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