The Influence of Exchange Rate Changes on Agricultural Prices: The Case of Cocoa and Maize in Ghana (1966-2008)

Abstract

Exchange rates are a key determinant of the domestic prices for agricultural goods and therefore affect the quantity of these goods produced for domestic consumption and export. Accordingly, in competitive domestic markets with complete market integration with foreign markets, exchange rate changes are fully reflected in the domestic currency prices of traded goods. However, agricultural policy instruments such as intervention mechanisms tend to insulate domestic markets and impede exchange rate transmission. The study examines the influence of nominal exchange rate changes in Ghana on the annual domestic producer prices of cocoa, a traditional export crop, and maize, a non-traditional export crop from 1966 to 2008. Nominal exchange rate changes in Ghana were found to reflect the gradual shift from a fixed to a flexible exchange rate regime since independence. Using an Autoregressive Distributed Lag model, it was discovered that exchange rate transmission was extremely low for both crops. Therefore, it did not have a statistically significant effect on domestic producer prices of cocoa and maize in Ghana. Whiles market intervention was found to be the cause of this phenomenon in the case of cocoa, the very nature of maize as a non-traditional export with low export supply accounted for the lack of exchange rate transmission in the maize sub-sector. Consistently, world price transmission to domestic producer prices of both crops was also not statistically significant.