Academic journal article Journal of Economic Cooperation & Development

Price Volatility of Food and Agricultural Commodities: A Case Study of Pakistan

Academic journal article Journal of Economic Cooperation & Development

Price Volatility of Food and Agricultural Commodities: A Case Study of Pakistan

Article excerpt

(ProQuest: ... denotes formulae omitted.)


The prices of major food and agricultural commodities have risen dramatically since the end of 2006 to middle of 2008 both internationally and domestically. These prices of food and agricultural commodities were characterized by price volatility and presented serious challenges to market participants such as consumer, producers and investors. They have affected growth at the macroeconomic level of the developing countries more than developed economies. (Aizenman & Marion, 1993; Ramey & Ramey, 1995). Moreover, the large food and agricultural commodity price swings has negative effect on balance of payments, imports and exports, government budget, inflation, and poverty (Roache, 2010).

The observed variability in global food and agriculture commodity prices over the period 2006-2009, comprising the 2006-2008 price spike has revived the debate about the causes and consequences of such sharp and pronounced price variations. In a number of studies, economists such as Abbot et al. (2008), Mitchell (2008), Cooke and Robles (2009) and Gilbert and Morgan (2010a) have discussed the factors behind the global 'price spike' of 2008. These involved changes in supply and demand factors. On the demand side, the fast economic growth in Asian economies and particularly in China was emphasized. On the supply side, the underinvestment in agriculture as well as low commodity inventory levels of recent years were mentioned as contributory factors. Other macroeconomic and financial factors were considered to influence food and agricultural commodity price volatility includes: changes in oil prices, changes in the world money supply, and changes in the value of the dollar. Other factors which were also quoted include climate change, trade policies, the feedback between price expectation and market responses and speculation in futures and options trading in food and agriculture commodity markets (Mitchell, 2008; Cooke & Robles, 2009; Gilbert & Morgan, 2010a).

In case of Pakistan, food and agricultural price index have shown volatility during the period of 2006-2008 and the price of almost every food and agricultural commodity has risen to a historical high over the past few years (Hye, Malik, & Mashkoor, 2010; Hye & Siddiqui, 2010). The prices of the main food staples like wheat, maize and rice have increased sharply. The prices of meat, fruits, vegetables, oils and ghee also have risen sharply with a double increase in the prices of butter and milk (Hye & Siddiqui, 2010). According to FAO-OECD (2011), volatility in food and agriculture commodity prices in developing countries like Pakistan are caused by high energy costs, high oil prices and weather conditions. Other factors like exchange rates, interest rates and fertilizer prices are also considered for causing fluctuations in food and agricultural commodity prices (Mushtaq et al. 2011 and Hye et al., 2010).

This paper focuses on sources of food and agriculture commodity price volatility in Pakistan. It investigates whether the key macroeconomic factors can explain variations of the shocks that drive the evolution of food and agriculture commodity prices by using GARCH models.

The structure of the paper is as follows: Section 2 presents the empirical review. Section 3 presents model specification and methodology. Section 4 shows data and preliminary analysis. Section 5 reports estimated GARCH models. Section 6 provides a conclusion.

2.Empirical Review

In empirical literature, many studies have discussed sources of food and agricultural commodity price volatility.

Increase in agricultural input prices, namely fertilizer and crude oil increases the expenditures of producers, which ultimately raises the prices of agricultural outputs (Herrmann, 2009). High cost of domestic food production is due to the high cost of inputs, especially fertilizer and transportation cost. …

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