Stochastic Producer Prices and Shock Persistence in Agriculture: Implications for Food Policy and Price Information

Abstract

Unstable product prices arising from shocks increase the uncertainties of producers and bias their subsequent price expectations and production decisions. This problem is known to be at the back of declining use of improved techniques by food crop producers. This paper investigates the time series properties of producer price data observed during the post-liberalization period for two major food crops in Ethiopia in order to understand whether prices are stochastic and shocks are persistent. The results obtained suggest non-stationary stochastic price dynamics and shock persistence in which price uncertainty is inherent, with a possible impact of negative bias in the expectation and production decisions of generally risk averting farmers. From a food policy point of view, negative bias in farmers' price expectations and production decisions, whenever prices follow a downward scenario, implies that agricultural market policy instruments meant for the promotion of food crop production might have very few chance of success unless accompanied by a strong market information service on prices. Moreover, policy interventions are recommended only to the extent that their impacts are predictable under a condition of non-stationary stochastic product prices and they do not result in negative shocks.