Investigating Volatility in Coffee Prices Along the Ethiopian Coffee Value Chain

Abstract

The coffee sub-sector is a major contributor to the Ethiopian economy. In addition to accounting for approximately 40 per cent on average of total export earnings, coffee production provides a livelihood for a large proportion of the Ethiopian population in the form of jobs for farmers, local traders, transporters and exporters. Volatility in the price of coffee thus influences a large proportion of the population all along the coffee commodity chain within Ethiopia. This study uses the Autoregressive Conditional Heteroscedasticity/Generalized Autoregressive Conditional Heteroscedasticity (ARCH)/(GARCH) approach to quantify the volatility in the price of coffee. A distinction is made between producer, wholesale and export prices in order to compare the price risk as faced by the respective participants in the coffee chain. The volatility in coffee prices within Ethiopia is also compared to the volatility levels in Brazilian coffee prices, since Brazil is a major coffee producing country in the world. Coffee prices within Ethiopia were found to be more volatile than in Brazil. Producer prices were found to be the most volatile, followed by wholesale prices and export prices respectively. The high level of volatility in producer prices emphasises the need for efficient price risk management tools that should be available to coffee producers in Ethiopia.