Rice Market Integration and Price Transmission in Burundi

Abstract

Rice is economically important food security crop. It constitutes an essential food for the majority of the population in Burundi. It ranks third cereal produce behind maize and sorghum. Burundi‟s rice price realized an increase of almost 60 % from 2000 to 2013 while production and imports increased by 80% and 300%, respectively. The 2007-2008 world financial crisis, which resulted in food price increase, had a huge impact on rice price in Burundi. The price of rice continues to increase yet the purchasing power of the Burundians has remained low. In an effort to better understand pricing behavior in the food industry it is necessary to investigate the nature of price transmission in local markets of Burundi. The analysis of spatial price transmission allows one to better understand the overall functioning of the markets. The extent and speed with which shocks are transmitted between different levels of the marketing chain and spatial separate markets can have important implications for pricing practices and may reflect the level of competition in the market. The aim of this study was three fold: to analyse short-run and long-run spatial rice retail price relationships between spatial separated markets; to examine the nature of price transmission between retail spatial separate rice markets; and to estimate the extent of world price transmission to Burundi market. Four domestic rice markets namely Bujumbura, Muyinga, Gitega and Ruyigi, as well as world prices were considered in the study. The methodological framework used in this research was based on the law of one price (LOP). Augmented Dickey Fuller (ADF) and Phillips Perron (PP) unit root tests were used for testing the variables for the presence of unit roots. Two types of adjustment models, namely threshold autoregressive (TAR) and momentum threshold autoregressive (M-TAR) models were used to investigate price transmission in spatial separate markets. Monthly retail price of rice were collected from June 2001 to August 2015. Such secondary data came from various sources such as National Institute of Economic Statistics of Burundi (ISTEEBU), FAO and World Bank. The research findings indicated that there was short and long run relationship between domestic markets. Price transmission between domestic market pairs was asymmetric, in the sense that negative shocks were eliminated faster than positive shocks. It was found that world price was cointegrated with Burundi price with asymmetric adjustment but unlike domestic markets, Burundi price respond more swiftly to price decrease than to price increase in world price. The study recommends that the government of Burundi should improve the flow of information by putting into place a rice marketing board and reduce the asymmetric information in local rice markets.