Price transmission system in Ethiopian coffee market

Sammanfattning: Price is the most vital element in market interaction. If there is an international free tradeand the domestic market of one country is interconnected with the international market,and if there is a price shocks in one market, the impact will have the same in the othermarket. This is the major concept of price theory and the concept of price transmissionexplored here.This paper analyses the price transmission system on the level of the producer, the auctionmarket and the foreign (international) market in the Ethiopian coffee market in the short aswell as in the long run. The study cover the periods from December 1991 to April 2009,based on 209 observations. Using the vector error correlation method and by using EVIEWSand STATA software, the study attempts to examine the three most important elements inprice transmission analysis. These are causality, speed of adjustment and asymmetricresponse.The finding of this study shows that, there is a long run cointegration between these threemarkets. The long run analysis further shows that if there is a 10% change auction market,the long run impact on the producer price is 9.56%, implies these two markets moves closelytogether in the long run. On the other hand, a 10% change in foreign price has only 6.5% and5.7% impact on the auction and producer market respectively in the long run.The result from the VEC model suggested that the adjustment coefficient for producer priceis only 3% if there is a shock in the foreign coffee market by one unit in the short run. Thismeans that only 3% of the shock is transmitted to the domestic market in each month. 3%adjustment coefficient is quite small and insignificant. This indicates that lagged producerprice is insignificant in the foreign market. The result on the VECM indicates that theproducer market and the foreign market are poorly dependent and have very weakrelationships to one another as comparing to auction to the foreign market. Because of this,the transmission period from producer market to foreign market takes more than 12months.This is a clear indication for the lack of market infrastructure, information asymmetry andpoor transportation system. A more organized market infrastructure may improve thesupply channel and thereby raise the farmer’s income.