Analysis of vertical price transmission in the South African potato markets

Abstract

Potato is the most important vegetable crop in South Africa in terms of contribution to the gross value of agricultural production, export earnings and contribution to food supply base and food security in the SACU region. Despite the importance of this commodity, very little is known about the nature of price transmission between different levels of potato value chain in South Africa. The study aims to determine the nature of price transmission in the South African potato market. The objectives of the study are to investigate the existence of long-run equilibrium relationship between producer, wholesale and retail prices; to determine characteristics of the relationship; and to determine the direction of price causality. The study made use of Error Correction Model and Granger Causality test. The Empirical results reveal the existence of price asymmetry in the South African potato value chain. Furthermore, the results show that retail prices are more responsive producer price increases than they are to producer price declines. The Granger causality test shows that prices in potato value chain are determined mainly at the wholesale level (i.e. at the National Fresh Produce Markets). The study recommends further research focusing on price transmission for other basic food commodities and that the government retains and strengthens the existing food price monitoring system.