Testing price leadership in major regional maize markets in Ethiopia: implications for targeted market intervention

ABSTRACT

The central market hypothesis or price leadership role is an important concept of market integration, and it has relevant policy implications because it simplifies market price monitoring and intervention in the grain market. Knowledge about the presence of a central market and its price dynamic effects on satellite markets will assist the effectiveness of food assistance and other humanitarian food price support interventions. This is of particular interest to constant food aid recipients such as Ethiopia. This article intends to empirically investigate as to whether or not there is a central maize market that dictate and lead price information flow over the regional wholesale maize markets in Ethiopia. If such a dominant maize market exists, then how does its price affect the maize grain prices of major regional wholesale maize markets in Ethiopia? The extended VAR procedure of Toda and the Yamamoto Granger Causality approach is used to test the central maize market hypothesis. Furthermore, we use the system of seemingly unrelated regression model to examine the effects of the central market price on three wholesale regional maize market prices in Ethiopia. The results indicate that Addis Ababa wholesale maize market influences the maize price formation of all regional maize markets examined in this study. Therefore, interventions targeting the central wholesale market could successfully provide a buffer for local maize surplus and consumption markets against undesirable price shocks stemming from the central market.

KEYWORDS:

• central market
• Granger Causality
• maize
• price shocks
• price stabilisation

Acknowledgements

The authors gratefully acknowledge the financial support from the Bureau for Food and Agricultural Policy (BFAP). The article has benefited from the constructive comments from Sean Kalundu, Bertha Ljambo and Ruthira Naraidoo. Earlier versions of this paper were presented at the 54th Agricultural Economics Association of South Africa (AEASA). All errors remain our own.

Notes

1 Food aid was the major source of grain imports for Ethiopia until 2007. Between 2001 and 2007, 57 per cent of the average imported wheat by Ethiopia was food aid. The remaining 43 per cent was commercial wheat imports by private traders. However, from 2008 onwards, commercial imports have become the main source of wheat import. In 2013, Ethiopia imported 1.9 million tons of wheat; commercial import constituted 90 per cent, while the remainder 10 per cent was food aid (UN comtrade, 2015).

2 SSR is calculated as the ratio of domestic production to (production plus import minus exports).

3 Depending on the country’s production and consumption growth, commodity price formation depends on either of the three trade regimes: autarky, Import Parity Price (IPP) or Export Parity Price (EPP). If a country is a net importer of a commodity, then the price formation depends on the IPP. The domestic price should then be a function of world price, exchange rates, transportation costs, and possible import tax. In this trade regime, one would expect a high degree of price transmission from world to domestic market. On the other hand, if a country is a net exporter of a commodity, then the trade regime switches to EPP. Under this condition, the extent of price shocks transmission from world to domestic market become high. However, when a country reaches a self-sufficient position, domestic price formation lies within the price band of IPP and EPP. In an autarky trade regime, domestic price is determined by the interaction of domestic supply and demand conditions and is unrelated to international price shocks (Meyer et al., 2006).

4 Unit root test was estimated following the procedures proposed by Doldado et al., (1990). The ADF test equation having random walk with drift is specified as: .

5 Diagnostic tests were made using the Breusch-Godfrey (1978) test of serial correlation. The BG(2)-test has a p-value of 38.11 per cent, so the test failed to reject the null of no serial correlation against the alternative of second order autocorrelation.

6 Getnet et al. (2005) examine the spatial price integration between the central wholesale and local producer prices of white teff in Ambo market in Ethiopia. The focus of their study is different from the present study in terms of the type of crop, nature of market integration, and market location. It is therefore important to keep in mind that their results are only mentioned for the sake of comparison.