An Evaluation of Transmission of World Maize Prices Into Kenya’s Domestic Market

Abstract

In Eastern and Southern African region maize grain prices is recorded highest in Kenya. There has been a reduction of prices of agricultural commodity from their recorded peak in 2008, but, this has not been the case in Kenyan maize prices. This then necessitates a study on transmission of world prices into Kenyan maize prices. By broadly examining the level of price transmission between the global and domestic maize markets in Kenya. Thus, this study assessed the integration of maize markets in Kenya, and evaluated the international maize prices transmission into domestic markets in Kenya. The deflated wholesale monthly price data spanning January 2002 to December 2020 was used. The data for maize prices data for Nairobi, Nakuru, Eldoret, Kisumu and Mombasa was sourced from Ministry of Agriculture, Livestock, Fisheries and Cooperatives Kenya, while the international wholesale maize prices was obtained from the FAO, GIEWS database. Co-integration, Granger Causality and Error Correction models were employed to test for market integration and price transmission. A strong integration was found between world and domestic maize markets as indicated by a high long-run elasticity of 0.60. The speed of price adjustment is relatively fast implying that 60 percent of the maize prices variations of the world are transmitted to Kenyan markets in long-run, on average it takes a month to correct 13 percent of the deviations from equilibrium. Hence, the improvement of rural areas infrastructure to accelerate movement of goods and services should be done by government of Kenya. The government should not engage in Maize trade as this distorts competitive functioning of maize markets. These results provide evidence on the need for policy makers to formulate policies which avoids market exploitations and reduce distortions. This will help in enhancing efficiency of the maize marketing system.