Saffron price dynamics in Iran: Influence of the standardized precipitation index with Copula functions

Abstract

This study investigates the relationship between climatic variability, represented by the Standardized Precipitation Index (SPI), and saffron prices in Iran’s key producing regions of Torbat Heydarieh and Torbat Jam from 1991 to 2022. We employed a rigorous Copula-based framework, specifically the Frank Copula to model the joint probability distribution of saffron prices and SPI. According to our analysis, there is a significant negative correlation between higher SPI values and lower saffron prices. The probability of prices falling below the long-term average of 1000 $\${kg}^{-1}$ is 62%, regardless of weather conditions. During wet periods in Torbat Heydarieh, this probability increases to 73%, while it drops to 36% in dry periods. In Torbat Jam, the probabilities are similarly notable: 72% for wet periods and 30% for dry periods. The findings demonstrate that drought conditions, while expected to result in price spikes due to reduced supply, also decrease the perceived downside risk of prices. These insights enhance the understanding of the complex interplay between climate and agricultural pricing dynamics, emphasizing the necessity for integrated risk management strategies among stakeholders. Furthermore, they underscore the urgency for research into the psychological dynamics of traders' behaviors and the broader climate impacts on agricultural commodities.