Agricultural Commodities' Price Transmission From International to Local Markets in Developing Countries

The transmission of commodities prices from the international to local markets is an interesting and deeply investigated topic. A fast and strong link between the two levels of the market is seen by economists as a sign of local market efficiency, allowing actors to respond fast to signals coming from the international market. However, the empirical evidence on the topic is very mixed, ranging from a very weak linkage between the two market prices to a high-speed and almost complete transmission. The present paper aims to advance the knowledge on the topic by focusing on the price transmission of four main cereals – maize, rice, sorghum, and wheat – in 23 developing and fragile economies. Employing a recent World Bank dataset with prices for several local markets in select countries, we estimate panel vector autoregressions (PVAR) to analyze the pass-through effects of international price shocks on local food prices. We find evidence for a relatively strong price transmission elasticity for all commodities except sorghum. Furthermore, the observed transmission of shocks is almost immediate. We present the policy implications for these findings.