Impact of Monetary and Macroeconomic Factors on Wheat Prices in Pakistan: Implications for Food Security

By Mushtaq, Khalid; Ghafoor, Abdul et al. | The Lahore Journal of Economics, Summer 2011 | Go to article overview

Impact of Monetary and Macroeconomic Factors on Wheat Prices in Pakistan: Implications for Food Security


Mushtaq, Khalid, Ghafoor, Abdul, Abedullah, Ahmad, Farhan, The Lahore Journal of Economics


Abstract

This paper attempts to evaluate the impact of monetary and macroeconomic factors on real wheat prices in Pakistan for the period 1976-2010, using Johansen's co-integration approach. The Augmented Dickey-Fuller test reveals that all the variables used are first-difference stationary, except the trade openness indicator, which is second-difference stationary. There is also a long-run equilibrium relationship among these variables. The results indicate that real money supply, openness of the economy, and the real exchange rate have a significant effect on real wheat prices in the long run. The impulse response function shows that a trade openness shock impacted wheat prices to some extent and that it took three to four years for prices to become stable, following the shock. The findings of the study suggest that the policy thrust should focus on increasing wheat supply in the country by enhancing production or by liberalizing trade. Efforts should also be directed toward stabilizing the value of the Pakistani rupee against foreign currencies, especially the US dollar.

Keywords: Wheat prices, co-integration, Pakistan.

JEL Classification: E00, E31.

(ProQuest: ... denotes formulae omitted.)

1. Introduction

Pakistan's economy has exhibited a low food-inflation environment over the last several years (single-digit inflation rate) with a sharp pickup during the last three years (Government of Pakistan, 2010). Several internal and external factors have contributed to the recent pickup in food inflation in Pakistan. These factors include: (i) an economic recovery resulting in a rise in the levels of income with a consequential surge in domestic demand, (ii) the continued pass-through effect of the previous rise in international oil prices, and (iii) a sharp pickup in the international prices of essential commodities. A major factor in the rise in inflation is the continuously upward adjustment of administered prices, such as the support prices of wheat. Because of the importance of wheat, successive governments have intervened heavily in wheat markets, procuring wheat at administratively set prices to support farmers' incomes, and subsidizing wheat sales to flour mills or directly to consumers with the objective of stabilizing prices at levels affordable to consumers (Niaz, 1995). Recently, the government increased the price of wheat to stop its illegal leakage from the country. This could have direct implications for food security in the country because wheat is the staple food of a majority of the population.

The high volatility of food prices is of concern to the public and policymakers because such price movements deter increased agricultural productivity and tend to intensify inflationary pressures. Food price volatility also increases the uncertainty faced by farmers and agribusiness firms. In particular, prices are considered a true indicator of resource allocation and, as such, price volatility affects farmers' investment decisions, with serious ramifications for the land under cultivation, debt, farm incomes, and productivity. The shocks to money supply, exchange rates, and trade policies have significant impacts on food prices, real incomes, and per capita domestic food production (Kargbo, 2005).

This study aims to empirically estimate the impact of monetary and macroeconomic factors on wheat crop prices in Pakistan. The paper is organized as follows: Section 2 reviews related studies on food prices, Section 3 presents an empirical framework, Section 4 discusses the empirical results obtained, and Section 5 concludes the study.

2. Review of the Literature

The impact of monetary and macroeconomic factors on the agricultural sector, particularly the pricing of agricultural products, has received considerable attention in recent international research. However, investigating the impact of these variables on agricultural prices is a relatively new research area in Pakistan, and the studies available in this area are limited. …

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