Are the Indian Arabica and Robusta coffee prices cointegrated? A vector error correction approach

The purpose of the paper was to know whether Arabica and Robusta coffee were in long run equilibrium. The prices paid to growers are flat in this decade and at the present level of growth, consumption would overtake production by 2050. Hence, this paper aims to investigate the seasonality, cointegration, transmission and speed of adjustment of prices to shocks in the post-liberalization period. Johansen's cointegration tests, Granger causality tests and Vector error correction method (VECM) were used for the same. Secondary data (1990–2018) was collected from International Coffee Organization and Coffee Board databases. The results indicated that storing of produce would generate a maximum return of around seven per cent in Robusta. Cointegration and causality estimates revealed that the Arabica and Robusta prices were cointegrated and Robusta prices affected Arabica prices. The price shocks as a result of high variation in production (10%) and price from Robusta markets transmits to Arabica markets. VECM estimates suggested that Arabica prices adjusted 18 per cent and 5 per cent to converge towards long run equilibrium. Thus, the study concluded that the fruits of market liberalization have borne and there is still room for improvement as speed of adjustment was very low.