Relative Price Variability and Inflation: Evidence from the Agricultural Sector in Nigeria

Obasi O. Ukoha

Working Papers from African Economic Research Consortium

Abstract: The main objective of this study is to establish quantitative relationships among the relative price volatility of agricultural commodities, inflation and agricultural polices in Nigeria. The data for the study, covering the period 1970a-2003, were obtained from publications of the Central Bank of Nigeria, Federal Office of Statistics, and Federal Ministry of Agriculture and Rural Development. Our results show that the effect of inflation on relative price variability among agricultural commodities in Nigeria is non-neutral. Inflation has a significant positive impact on relative price variability in both the long run and the short run. The findings suggest the need for policies that will buffer the agricultural sector from the effects of inflation in the short run, and in addition the crops subsector from the long-run effect of inflation. Similarly, policies that reduce the rate of inflation will minimize relative price variability among agricultural commodities and consequently reduce inefficiency, distortions and misallocation of resources in agriculture that might be caused by inflation. No data points in the study period showed negative inflation. As a result of this, the data could not provide evidence for the effect of deflation on relative price variability. Policies like the Green Revolution and structural adjustment programmes and post-SAP policies increased relative price variability among cash crops in the long run, but influenced food crop prices only in the short run. In addition to this, the Operation Feed the Nation project (OFN) had a significant positive short-run effect on food prices. Thus the agricultural policies under SAP, post-SAP and Green Revolution caused price changes that led to efficient reallocation of resources among cash crops in the long run and food crops in the short run. The policies should be considered in planning for the agricultural sector. On the other hand, the price control policy brought about a reduction in relative price variability among cash crops and consequently led to a misallocation of resources in the sector. Cash crop prices should be allowed to be determined by market forces of demand and supply, and no attempts should be made to fix prices administratively

Date: 2007-10-27
Note: African Economic Research Consortium
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