Replaced with revised version of poster 07/21/11.Trade Liberalization, Future Prices, Price Transmissions, Ugandan Coffee Growers, Demand and Price Analysis, International Relations/Trade, Research Methods/ Statistical Methods, F13,

Musumba, Mark

Sen Gupta, Rajorshi

English

Research Papers in Economics

Price Transmission to Ugandan Coffee Growers in a Liberalized 
Market 
 
Authors 
Mark Musumba 
Department of Agricultural Economics 
Ph.D  Candidate and Graduate Assistant  
Division of Research and Graduate Studies 
Texas A&M University 
College Station, TX 77843-1113 
musumba@tamu.edu  
 
Rajorshi Sen Gupta 
Department of Agricultural Economics 
Tom Slick Graduate Fellow 
Texas A&M University 
College Station, TX 77843-2124 
rajorshi@tamu.edu  
 
 
Poster prepared for presentation at the Agricultural & Applied Economics Association’s 2011 AAEA & NAREA Joint Annual Meeting, Pittsburgh, 
Pennsylvania,  July 24-26, 2011 
 
 
 
Copyright 2011 by [Mark Musumba, Rajorshi Sen Gupta]. All rights reserved. Readers may make verbatim copies of this document for non-commercial 
purposes by any means, provided that this copyright notice appears on all such copies. Background 
• Uganda is the second largest coffee producer 
and the largest Robusta producer in Africa. 
 
• Coffee contributes 23.4% of Uganda’s GDP and 
half its export earning; a quarter of Uganda’s 
population depend on coffee sector. 
 
• Coffee price volatility has been a fact of life 
because of supply and demand side shocks. 
 
• In 1990/1 market liberalization lead to the 
disappearance of the cooperative channel and a 
vast majority of coffee is now marketed through 
private traders. 
 
• Cooperatives shielded coffee growers from price 
fluctuations but the post liberalization, farmers 
face the risk associated with price volatility in the 
world market. 
 
• Growers principally rely on the composite 
Indicator price provided by the UCDA to bargain 
for a fair price. 
 
• Uganda exports 86% of its coffee to the EU 
countries where Spain and Belgium import the 
largest share. 
 
• The coffee futures markets, Intercontinental 
Exchange in New York and London International 
Financial Futures and Options Exchange, are 
mainly used as benchmarks for Arabica and 
Robusta Coffee  respectively.  
T70: Price Transmission to Ugandan Coffee Growers in a Liberalized Market 
 
References 
Fry, J.M., B. Lai, and M. Rhodes. 2010.  The Interdependencies of 
Coffee Spot  and Futures Markets. UEL Royal Docks Business 
School , Docklands Campus, University of East London. 
 
Greene, W. H. 2003.  Econometric Analysis. 5th ed. Upper Saddle 
River: Prentice Hall. 
 
International Coffee Organization  Statistics at  http://www.ico.org/ 
 
Spirtes, P. C. Glymour and R. Scheines.  2000. Causation, Prediction 
and Search. Cambridge, MA, MIT Press. 
 
Wang, Z. and D.A. Bessler. 2006. “Price and Quantity Endogeneity 
in Demand   Analysis: Evidence from Directed Acyclic Graphs,” 
Agricultural Economics 34:87-95. 
Abstract 
Ugandan Coffee  Development Authority 
(UCDA) provides price information in terms 
of Indicator price to coffee growers. The 
reliance on Indicator price is a narrow 
approach. Growers need better information 
to deal with price volatility in a liberalized 
market. Retail prices at the major coffee 
importing countries in Europe and future 
prices of coffee may provide improved 
information and hence greater bargaining 
power for growers. 
Time Series Plots of Coffee Prices  
 
Methodology 
 
I. Directed Acyclic Graphs (DAGs) are used to 
investigate the causal flows between the variables.  
 
 
 
 
 
 
 
II. Vector auto regression (VAR) was used to model 
the interdependencies in the coffee markets.  
 
 
 
 
 
 
 
Where is p=1 in this estimation.  
 
 
III. Impulse Response Functions were obtained to 
examine the response of the growers’ price to a one 
time only shock in every other price  
 
 
 
Results from VAR Estimation 
 
Dependent Variable : Price Paid to Uganda Growers (UGR) 
Variable  Coeff  Std Error  T-Stat  Signif 
UGR{1}  0.911  0.029  30.901  0.000 
BPR{1}  0.255  0.118  2.161  0.032 
SPR{1}  -0.190  0.094  -2.021  0.044 
IDP{1}  0.292  0.150  1.942  0.053 
LFR{1}  -0.030  0.060  -0.504  0.615 
NFR{1}  -0.209  0.125  -1.676  0.095 
Constant  -0.326  0.432  -0.753  0.452 
Impulse Response Functions 
Discussion and Conclusion 
 
1. Market prices are driven by supply and demand. In 2003, 
the world prices were at a 30 year low because of an 8 
percent increase in supply. 
 
2. The price spike in 2009 was due to reduction in supply from 
Brazil, the largest coffee producer. 
 
3. An increase in Belgium retail prices has a positive effect on 
the price paid to Ugandan growers but an increase in Spain 
retail price has a negative effect on the growers price. 
Belgium's effect is as expected, since it’s one of the largest 
importer.  
 
4. The impulse response functions indicate that a positive 
shock in the futures markets has a negative effect on the 
price paid to the growers. This can be explained by the 
fallacy of composition. The individual reaction of the 
growers to increase in futures prices leads to an aggregate 
increase in supply. Consequently, there is over supply of 
coffee and hence a fall in prices received by growers.  
 
5. An increase in Indicator price leads to increase in prices 
received by growers. However, Indicator price includes 
34% Robusta price, Columbian Mild Arabica 12%, 
Brazilian and other Natural Arabica 31%, other Mild 
Arabica 23% so the results should be interpreted with 
caution. 
 
 Acknowledgement 
We thank the International Coffee Organization for providing the        
data for this research. 
Mark Musumba              Rajorshi Sen Gupta  
PhD Candidate              PhD Candidate, Tom Slick Graduate Fellow 
Department of Agricultural Economics      Department of Agricultural Economics 
Texas A&M University             Texas A&M University  
musumba@neo.tamu.edu                    rajorshi@tamu.edu 
 
Objective 
Investigate  price transmissions to Ugandan 
growers and examine how they react to indicator, 
futures and retail coffee prices. What prices 
should growers look at in addition to Indicator 
price? 
Data 
Monthly data (in U.S. cents/pound) from 
January 1988 to June 2010 on the following: 
1. Price paid to Uganda Robusta growers (UGR) 
2. Retail Coffee Price in Belgium (BPR) 
3. Retail Coffee Price in Spain (SPR) 
4. Composite Indicator Coffee Price (IDP) 
5. London Coffee Futures (LFR) 
6. New York Coffee Futures  (NFR) 

Price Transmission to Ugandan Coffee Growers in a Liberalized Market

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