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Decomposing Producer Price Risk: A Policy Analysis Tool With An Application To Northern Kenyan Livestock Markets

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  • Barrett, Christopher B.
  • Luseno, Winnie K.

Abstract

This paper introduces a simple method of price risk decomposition that determines the extent to which producer price risk is attributable to volatile inter-market margins, intra-day variation, intra-week (day of week) variation, or terminal market price variability. We apply the method to livestock markets in northern Kenya, a setting of dramatic price volatility where price stabilization is a live policy issue. In this particular application, we find that large, variable inter-market basis is the most important factor in explaining producer price risk in animals typically traded between markets. Local market conditions explain most price risk in other markets, in which traded animals rarely exit the region. Variability in terminal market prices accounts for relatively little price risk faced by pastoralists in the dry lands of northern Kenya although this is the focus of most present policy prescriptions under discussion. Producer price volatility concerns producers and governments in a wide range of industries and nations. In settings where producers have little or no access to financial markets through which they can effectively hedge against price risk, governments are often keen to find cost-effective means to reduce producer price volatility. Yet such volatility can arise from any of several sources, so identification of effective intervention strategies depends fundamentally on locating the source(s) of variability in producer prices. This paper introduces a simple method of price risk decomposition intended to serve as a policy analysis tool for precisely that purpose. This method determines the extent to which producer price risk is attributable to volatile inter-market margins, intra-day variation, intra-week (day of week) variation, or variability in terminal market price. We apply the method to livestock markets in northern Kenya, a setting of dramatic price volatility where price stabilization is a live policy issue. The remainder of the paper proceeds as follows. Section I introduces our price risk decomposition method. We then demonstrate its utility with an application to livestock markets in the drylands of northern Kenya in a series of three sections. Section II describes the context and some of the current policy debate surrounding livestock price stabilization in Kenya. Section III presents the data and key limitations of this particular sample. The empirical results appear in Section IV along with discussion of these estimates. Section V concludes.

Suggested Citation

  • Barrett, Christopher B. & Luseno, Winnie K., 2002. "Decomposing Producer Price Risk: A Policy Analysis Tool With An Application To Northern Kenyan Livestock Markets," Working Papers 14753, Cornell University, Department of Applied Economics and Management.
  • Handle: RePEc:ags:cudawp:14753
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    References listed on IDEAS

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    1. Fafchamps, Marcel & Gavian, Sarah, 1997. "The Determinants of Livestock Prices in Niger," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 6(2), pages 255-295, July.
    2. John G. McPeak & Christopher B. Barrett, 2001. "Differential Risk Exposure and Stochastic Poverty Traps Among East African Pastoralists," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 83(3), pages 674-679.
    3. Barrett, Christopher B., 2002. "Food security and food assistance programs," Handbook of Agricultural Economics,in: B. L. Gardner & G. C. Rausser (ed.), Handbook of Agricultural Economics, edition 1, volume 2, chapter 40, pages 2103-2190 Elsevier.
    4. Christopher B. Barrett & Francis Chabari & DeeVon Bailey & Peter D. Little & D. Layne Coppock, 2003. "Livestock Pricing in the Northern Kenyan Rangelands," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 12(2), pages 127-155, June.
    5. Christopher B. Barrett, 1996. "Market Analysis Methods: Are Our Enriched Toolkits Well Suited to Enlivened Markets?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(3), pages 825-829.
    6. Fackler, Paul L. & Goodwin, Barry K., 2001. "Spatial price analysis," Handbook of Agricultural Economics,in: B. L. Gardner & G. C. Rausser (ed.), Handbook of Agricultural Economics, edition 1, volume 1, chapter 17, pages 971-1024 Elsevier.
    7. Smith, Kevin & Barrett, Christopher B. & Box, Paul W., 2000. "Participatory Risk Mapping for Targeting Research and Assistance: With an Example from East African Pastoralists," World Development, Elsevier, vol. 28(11), pages 1945-1959, November.
    8. C. Barrett & K. Smith & P. Box, 2001. "Not Necessarily In The Same Boat: Heterogeneous Risk Assessment Among East African Pastoralists," Journal of Development Studies, Taylor & Francis Journals, vol. 37(5), pages 1-30.
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    Citations

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    Cited by:

    1. Bellemare, Marc F. & Barrett, Christopher B. & Osterloh, Sharon M., 2005. "Household-Level Livestock Marketing Behavior Among Northern Kenyan and Southern Ethiopian Pastoralists," Working Papers 14749, Cornell University, Department of Applied Economics and Management.
    2. repec:eee:jfpoli:v:76:y:2018:i:c:p:33-43 is not listed on IDEAS
    3. Campbell, Bruce M. & Gordon, Iain J. & Luckert, Martin K. & Petheram, Lisa & Vetter, Susanne, 2006. "In search of optimal stocking regimes in semi-arid grazing lands: One size does not fit all," Ecological Economics, Elsevier, vol. 60(1), pages 75-85, November.
    4. Simons, Andrew M., 2016. "What is the optimal locus of control for social assistance programs? Evidence from the productive safety net programme in Ethiopia," ESSP working papers 86, International Food Policy Research Institute (IFPRI).
    5. Marc F. Bellemare & Christopher B. Barrett, 2006. "An Ordered Tobit Model of Market Participation: Evidence from Kenya and Ethiopia," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 88(2), pages 324-337.
    6. Ugo Pica-Ciamarra & Luca Tasciotti & Joachim Otte & Alberto Zezza, 2011. "Livestock Assets, Livestock Income and Rural Households : Cross-Country Evidence from Household Surveys," World Bank Other Operational Studies 17890, The World Bank.
    7. repec:eee:jfpoli:v:74:y:2018:i:c:p:172-198 is not listed on IDEAS
    8. Bizimana, Jean-Claude & Bessler, David A. & Angerer, Jay P., 2016. "The 2010-2011 Drought Impacts on Cattle Market Integration in the Horn of Africa: A preliminary Evaluation using VAR and Structural Break Analysis," 2016 Annual Meeting, February 6-9, 2016, San Antonio, Texas 229991, Southern Agricultural Economics Association.

    More about this item

    Keywords

    Demand and Price Analysis; O1; Q13; Q18;

    JEL classification:

    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • Q13 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Markets and Marketing; Cooperatives; Agribusiness
    • Q18 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Policy; Food Policy

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