A Model of Farm Price Levelling when Variability comes from Export Demand, Illustrated with Coffee Marketing Margin Data in Papua New Guinea, 1999-2010

Abstract

In this paper a new model of short-term price levelling behaviour is introduced, for the case of variability arising from demand-side factors rather than supply-side factors. The key components are the direction of the information flow in the market, and the ability of value chain participants to adjust their demand for and supply of market services. The model is illustrated using data from the Papua New Guinea coffee industry. Almost all PNG coffee is exported to a wide range of countries. The industry has a competitive marketing structure with many active producers and buyers of various sizes. There is keen competition for the limited supply of coffee, but inefficiency in the pricing mechanism has long been a concern to many producers in the industry, in particular the smallholder coffee producers. They argue that increases in world coffee prices have not been fully passed on to growers, with exporters and processors able to hold their buying prices stable in the face of rising world market prices. In this study marketing margin analysis is used to investigate and test hypotheses related to price levelling, and in addition, the influence of marketing costs and throughput, on the aggregate industry margin, and the exporting margin and processing margin components. Average monthly price data over the period January 1999 to December 2010 are used. Using simple regression models, at the whole chain level short-run price levelling is confirmed and both aggregate costs and total volume of exports are significant determinants of the size of the margin. Short-run price levelling is also confirmed at both the exporting and processing stages, but in the preferred models, while throughput is an important determinant of exporter and processing margins, costs have a significant but negative effect on margins. Partial adjustment processes are important in determining margins at all stages.