Analysis of Price Shock Transmission: Case of the Wheat-Bread Market Value Chain in Ethiopia

This study assesses the degree of vertical price transmission along the wheat-bread value chain in Ethiopia. This is pursued by applying a vector error correction model (VECM) and an impulse response analysis using monthly price data for the period 2000-2015. The analysis considers different market levels starting from international wheat market and domestic wheat producers at the upstream to domestic bread market at the downstream of the value chain. The empirical findings indicate that significant cointegration exists across prices of the different stages along the value chain. There is a transmission from international prices to domestic prices at downstream markets, in particular flour and bread prices. Prices at upstream markets are largely influenced by the domestic wholesale market. In general, the speed of adjustment is quite slow with a half-life of about one year for restoring the equilibrium price. As price margins between the different market stages in the value chain have substantially decreased in the last 15 years, higher transmission, and thus, exposure to international market shocks can be expected in future. Last but not least, the results also reveal that causal relationships exist between prices at different market stages-with the wholesale market identified as the key market level where prices and price expectations are formed.