Transmission of global wheat prices to domestic markets in Kenya: A cointegration approach

Abstract

This paper evaluates the extent to which changes in international wheat prices are transmitted to domestic markets in Kenya using an error correction model (ECM) that employs monthly producer price data for the period 2002 to 2020. Domestic wheat markets in Kenya were found to be strongly integrated while, international wheat markets were cointegrated with domestic prices at the port of Mombasa. The long-run elasticity of price transmission was estimated at 0.91, which implies that 91% of the changes in international wheat prices are transmitted to domestic markets in Kenya. The speed of adjustment was estimated at -0.069, which implies that it takes about 14 months for the changes in the international wheat price to be fully transmitted to the Kenyan domestic market. Wheat farmers in Kenya seem to be insulated from international price shocks given the long period of time it takes for domestic markets to adjust to international price changes. Even though not explicitly analysed, government border policies, market and infrastructure impediments seem to be underlying causes of the incomplete price pass-through, along with the low speeds of adjustments. Our analysis suggests that the main constraint to a complete pass-through is the existence of price-setting power at the producer level of the wheat market in Kenya. Investments in infrastructure development and the promotion of liberal trade policies can improve the transmission of international wheat price signals to domestic markets in Kenya.