Decomposing Changes in Agricultural Price Gaps

This paper develops a method for decomposing changes in agricultural producer prices. The method builds on a procedure used by the World Bank, with the key variables in the decomposition being trade prices, exchange rates, and agricultural trade policies. The main ways by which we expand on the World Bank decomposition procedure are by broadening the analysis of policy effects, and by adding the effect from incomplete transmission of changes in border prices and exchange rates to producer prices, and the effect on prices from interactions between variables as they change simultaneously. We demonstrate the decomposition method by using the Russian poultry market in the late 1990s, and find that the dominant factor in changing the producer price was the large depreciation of the ruble. Many developing and transition economies have fluctuating exchange rates. The decomposition method presented in this paper could be used to test the hypothesis that exchange rate movements are the main cause of changes in these countries' agricultural commodity prices. Another hypothesis that the method could help test is that an important factor in affecting countries' agricultural prices is incomplete transmission of changes in trade prices and exchange rates to domestic prices, where the incomplete transmission is mainly caused not by policy, but rather by undeveloped market infrastructure.