The Impact of Market Reform Programmes on Coffee Prices in Tanzania

Abstract

This paper presents an empirical investigation of the effect of collapse of International Coffee Agreement (ICA) and liberalization of coffee  marketing in Tanzania on coffee prices. The motivation for this analysis
is that the ICA regulatory system reduced price volatility by encouraging the build-up of stocks during surplus years and its demise meant allowing coffee prices to vary based on the market forces of supply and demand.
Also the purpose of liberalizing coffee marketing in Tanzania was to enhance market efficiency and increase prices paid to domestic producers. Since the liberalization of coffee markets occurred after the collapse of
the ICA there is likelihood that prices paid to domestic producers were higher but more volatile after the reforms. This likelihood is tested using descriptive and inferential statistics in conjunction with an ARCHM model. Data used are time series for producers’ prices in Tanzania and were obtained from the International Coffee Organisation (ICO). Results show that there was a significant decline in coffee prices after the collapse of the ICA and market liberalisation (P<0.05). Results also show that the  volatility of coffee price increased significantly after the demise of ICA (P<0.05) but this volatility did not persist over the entire post-liberalisation period. To mitigate these problems there is a need to: improve coffee quality through harnessing the support in training and knowledge transfer provided by certified exporters, the public sector and international  co-operation and; handle and value separately the high-value coffee at the auction to allow fair pricing.

Key words: Market liberalisation; ICO; Producer Prices; ARCH-M model