Vertical Price Transmission between Grains and Processed Foods: Does Price Stability in Grains Market Stabilize Prices of Processed Foods?

(The Case of Cereals and Bread and Other Prepared Foods in Addis Ababa)

Abstract

Nowadays, food inflation has become a common phenomenon in Ethiopia. The soaring food price is expected to affect food security of especially poor households. Bread and other prepared foods are among the major food items facing this problem for which demand is higher and consumers are much responsive to the price change, as the situation intends to affect the livelihood of majority of the people. Hence, the aim of this paper is to show the extent to which cereals market is efficiently coordinated with market of bread and other prepared foods, in Addis Ababa. In order to figure out this, secondary data of monthly price series was extracted from Central Statistical Agency for the period from September, 1996 to April, 2012 (having 188 observations). The data was analyzed using Johansen’s and Julius co-integration test, vector error correction model and threshold error correction model coupled with other descriptive approaches. Findings of the study reveals that price of cereals and bread and other prepared foods are co-integrated having simultaneous causality; however, different results were found related to symmetry/asymmetry in price transmission between prices of the two categories of commodities, depending on the period of adjustments. The result shows that there is symmetric price transmission in the long-run implying that policies targeted on stability of prices of grains such as cereals may stabilize prices of processed commodities like bread and other prepared foods, slowly. However, this is not the case if immediate price stability is required in the two markets because there is asymmetric price transmission between the two commodities, in the short- run. Therefore, separate policy measures are recommended if we are interested in immediate (urgent) price stability in the two markets.