Analysis of Price Shock Transmission: Case of the Wheat-Bread Market Value Chain in Ethiopia

This study assesses the degree of vertical price transmission along the wheat-bread value chain in Ethiopia. This is pursued by applying a vector error correction model (VECM) and an impulse response analysis using monthly price data for the period 2000 –2015. The empirical findings indicate that significant cointegration exists across prices of the different stages along the value chain. In particular, there is a strong price shock transmission for the price pair international–local wholesale wheat prices. This suggests that international wheat price shocks could have significant consequences for the Ethiopian economy, given that the country is not only a net importer of wheat but it also imports a sizable amount vis-à-vis the domestic production. Although price shocks are transmitted along the value chain to a different extent, the speed of adjustment is quite slow. For instance, less than 6% of the disequilibrium in bread prices is eliminated in one month, implying that it takes longer that one year for bread price to virtually restore to its long-run equilibrium value after a shock. The results also reveal that causal relationships exist between prices at different market stages. To this end, the impulse response analysis shows diverse responses to shocks, with some shocks producing weak and temporary adjustments while others producing stronger and persistent changes. We found that producer and wholesale market levels play a dominant role in the wheat value chain, implying that policies may give particular attention to these markets.