The effect of drought on consumer welfare

South Africa is characterised by frequent drought periods with 2015 receiving the lowest annual average rainfall of 403mm since 1904. This has a negative impact on physical agricultural production with maize being the most affected by the recent 2015 drought. The effect of drought on maize production also influences its price formation along the maize marketing chain. This paper with the use of Cointegration and Error Correction Model (ECM) attempts to estimate the effects of drought on price formation in the white maize marketing chain. Maize meal is a staple food for most South Africans and it constitutes a large share of consumer�s expenditure on food, particularly poor consumers. The study found that drought plays a significant role in the price formation of the white maize marketing chain. During a drought period, any price changes from the producers are transmitted faster than a recovery period. However, during the latter period, any cost savings from the producer price are not passed onto the consumers. This results in consumers paying more for maize meal during a recovery period when prices are expected to decline, with poor consumers being affected the most. JEL Classification: D11, Q13, Q54