Effects of Policy Reforms on Price Transmission and Price Volatility in Coffee M;arkets: Evidence from Zambia and Tanzania
Price is the most critical factor in determining the way markets function. In a perfect market a price shock is transmitted to other vertically or horizontally connected markets within a given period of time. However, when markets do not function perfectly the speed and the magnitude of price transmission may be hampered. State controlled agricultural commodity markets prevent efficient price transmission, as a result, producer prices cannot not reflect world prices. Many developing countries have implemented measures to improve price transmission through agricultural market liberalisation policies and providing incentives for farmers. However, instead of prices being transmitted symmetrically, monopoly or oligopoly markets,government policies and high transaction costs may lead to asymmetric price transmission. The lead firms in commodity value chains tend to become reluctant to pass on prices that squeeze their margins. As a result, producers may not benefit from consumer price increases and similarly, consumers may not benefit from producer price decreases. This study takes a look at these issues in the analysis of coffee producer prices for Zambia and Tanzania. Coffee is an important export commodity in both of these countries and contributes significantly to the creation of foreign exchange and employment even if the total production is relatively low. Both countries have liberalised their coffee markets during the economic reforms of the late 1990s to differing extents. The effects of these reforms on coffee price transmission, price volatility and on coffee supply response are examined in this study.This dissertation consists of four papers that investigate various aspects of coffee markets for Zambia and Tanzania. First, the study investigates coffee value chains in both countries, paying attention to the governance structure and its implications for producer prices. Second, price transmission between coffee world prices and producers’ prices in Tanzania and Zambia is examined. The third paper examines price volatility in both countries and assesses the impacts of trade liberalisation policies on price volatility. The fourth paper analyses coffee supply response to coffee prices in Zambia.Results for Zambia indicate improved price transmission after the implementation of economic reforms. As expected, the transmission is asymmetric where price decreases are passed on quicker than price increases. In the case of Tanzania, results do not show any improvements after the economic reforms. Similar results are obtained from the volatility study where economic reforms led to an increase in coffee price volatility in Zambia, with negative shocks inducing more volatile prices than positive shocks. However, in Tanzania the inconsistent market reforms have had no significant effects on coffee price volatility. The study of coffee supply response for Zambia shows that in the long-run, coffee prices have negative although insignificant impacts on supply. This could be related to the fact that as a perennial crop supply tends to reach the market when prices are on the decline. However, in the short-run,coffee supply response changes are only significant for price decreases, indicating that coffee supply falls faster than it rises with respect to price changes. On the other hand, supply responds negatively to a stronger local currency and to price of maize,the main competing crop. However, the 1990s economic reforms in Zambia have had positive effect on coffee supply.These findings have important policy implications as they reveal a short and efficient value chain and governance structure that enables the producers to receive larger shares of the final coffee price. In addition, the results discuss favourable policies for improving transmission from world markets to producer prices over the post economic reform period although the transmission remains asymmetric. An efficient price transmission may work to the disadvantage of the growers in the short-run as prices become exposed to volatile world prices, but in the long-run, it may yield the desired outcome. The findings also show the importance of a liberalised currency for increased coffee supply.