Sources of Producer Income Instability in Kenya

The objective of this paper is to examine the sources of producer income instability for marketed commodities in Kenya. Producer income instability can increase foreign exchange administrative costs, create domestic budgetary problems, lead to inefficiencies in resource use, and even to political upheavals. Using a variance decomposition methodology, demand was identified as the major contributor to export earnings instability for ooffee, hides and skins, beans and peas, and canned pineapples. Supply was the major contributor of export earnings instability for tea and pyrethrum extract. With respect to domestic producer income instability, supply was the major culprit for most commodities. Supply was the major source of instability for tea, maize. wheat, and fluid milk, while demand was the major source of instability for coffee. Producer income instability of export crops was relatively constant over the study period (1%4-83), whereas income instability of domestic crops, and, hence, the instability-minimizing share of exports, rose over the same period. Limitations of the study include the use of aggregate data, selection of methodologies that ignore structure, and using only marketed commodities for analysis.