Transmission of World Food Prices to Domestic Market: The Ethiopian Case

This paper investigates the integration of the Ethiopian grain market to the world market; and within country grain markets integration. To this end, two cereal crop markets: wheat and maize, have been investigated. For maize the integration into the world market is analyzed using the US and SAFEX exchange markets as a world market; for wheat Paris and Chicago exchange markets are considered a wheat world market. The analysis has been conducted using a cointegration method: Johansen (1988) procedure. The results show that the Ethiopian grain market is integrated into the world market, albeit to the once geographically proximate to it. And further, we found that the elasticity of the price pass through between the world and domestic markets has appeared to be more than unitary when evaluated at the mean prices of the two food crops. The analysis of domestic market integration is conducted using principal component analysis (PCA). The result shows that both wheat and maize markets are fairly integrated. However, the results demonstrate that in wheat market, of the traditionally known deficit markets Mekelle has shown an improvement in integration as its mean prices and price variability appear to be in line with the central market, but the maize market result has preserved the deficit market status. In the other deficit market, Dire Dawa, the mean prices of wheat and maize appear to be higher and more volatile than the central market. The other most striking result is that despite huge infrastructural improvement markets further from the central market exhibit higher level of price volatility than markets within a 300km distance from the central market, Addis Ababa. It has also been observed that the price differential between the central market and other local markets has shown a declining trend over time, and found to be stationary. This implies that the markets are more likely to converge in the long run, provided the market infrastructure continues to develop so as to reduce market information asymmetry that we believe has contributed to differences in price differentials and price volatility across markets