Price Volatility of Black Pepper in Kerala: Could Institutional Mechanism such as Contract Agreement be a Solution?

Black pepper, the oldest and best known spice in the world, is a highly traded commodity and prone to price fluctuations. The present paper focuses on the extent of volatility in prices of black pepper at the macro-level and explores at micro level whether an institutional support such as a contract agreement could be a solution to the problem of price volatility. The study shows that the intra-annual volatility indices for black pepper prices decreased marginally after trade liberalisation in India, whereas the inter-annual volatility has increased in the post-liberalisation era. These fluctuating prices increases the uncertainty faced by the farmers in their planting decisions and in earning reasonable as well as stable returns. The study also identified disease and pest incidence as the major constraint in black pepper production, whereas price volatility ranked to be the fourth constraint. The study also analysed the effect of an institutional contract agreement by comparing the outcomes such as price received, net-income and replanting decisions. Using Heckman endogeneity adjustment model the study shows that membership of farmers in such an institution has led to better price realisation. Even though the members received slightly higher prices when compared to non-members, there was no significant difference in net income. The members showed higher replanting in years with lower prices. It was found that a contractual agreement alone could not protect the farmers from price fluctuations.