Volatility and Price Transmission from World Prices to the Ecuadorian Coffee Market

Andrés R. Jácome, Alberto Garrido

Abstract


Growers are the most vulnerable agents in price movements of agricultural commodities markets. The behaviors of margins do not usually evolve beneficially in an asymmetric price transmission (from world to domestic market) setting. Therefore, markets volatility affects the growers’ benefits and decisions. The Ecuadorian coffee market operates in a competitive environment, but the government intervenes in the domestic market with sector policies and support programs. This paper evaluates the volatility exposure for the Ecuadorian coffee market and the asymmetric price transmission for the period 2001 - 2012. With an Autoregressive conditional heteroscedasticity model, we estimated the volatility for the two Ecuadorian coffee varieties: Arabica and Robusta. The volatility results showed the high level exposure of growers in the market. To test the asymmetric price transmission, we used the Han and Seo (2002) methodology. We evaluated the period 2001 – 2012 for the Arabica and Robusta coffee varieties, using International Coffee Organization and domestic prices. The results showed different adjustment speeds to the regimes in the long-run equilibrium. The government could implement policies and programs to mitigate the negative effects of world prices transmission and the exposure to volatility of growers.

 


Keywords


Ecuador; coffee market; volatility; asymmetric price transmission.

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