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The Effect Of Monetary Changes On Relative Agricultural Prices

5249 words - 21 pages

Agrekon, Vol 46, No 4 (December 2007)

Asfaha & Jooste

The Effect of Monetary Changes on Relative Agricultural Prices
TA Asfaha1 and A Jooste2 Abstract Relative change in agricultural prices determines farmers` investment decisions, productivity and income. Thus, understanding the factors that influence agricultural prices is fundamental for sustainable growth in this sector and the rest of the economy. This paper investigates the short- and long-run impacts of monetary policy changes on relative agricultural prices in South Africa by employing Johansen cointegration analysis and the Vector Error Correction Model (VECM) respectively. The results of Johansen cointegration analysis reject the ...view middle of the document...

The fact that primary agriculture only contributed between 3 to 5 per cent to the GDP of South Africa over recent years understates the actual
Post graduate student in the Department of Agricultural Economics, Department of Agricultural Economics, University of the Free State, Nelson Mandela Drive, Bloemfontein, 9301, 2 Senior Manager: National Agricultural Marketing Council and Affiliate Professor in the Department of Agricultural Economics, University of Free State. Private Bag X935, Arcadia, Pretoria, 0001,


Agrekon, Vol 46, No 4 (December 2007)

Asfaha & Jooste

importance of this sector in the local economy. This phenomenon has received attention from various researchers in the past, e.g. Brand (1969); Döckel & Groenewald (1970); Faux (1990); Van Rooyen, Carstens and Nortje (1996); and Asfaha and Jooste (2006). These authors and others agree that agriculture’s strategic importance lies in its forward and backward integration with the rest of the economy, the establishment and maintenance of food security, foreign exchange earnings and employment. Added to the aforementioned is the strategic position of the agricultural sector in that most land in South Africa is currently utilized by agriculture and should hence play a vitally important role in economic development in rural areas to alleviate poverty. It is therefore not surprising that agriculture is recognized in terms of the Accelerated and Shared Growth Initiative for South Africa (Asgisa) as one of the sectors that can and should play a role to achieve government’s economic growth targets, consequently alleviating extreme rural poverty. A recent study by Rodrik (2006:23) within the framework of Asgisa emphasizes the importance of monetary policy in enhancing economic growth in South Africa. The question that arises is the extent to which changes in monetary policy affect the agricultural sector. The impact of macroeconomic factors on the agricultural sector already received attention in agricultural economics literature in the second half of the 1970s (see for example, Schuh, 1974; Tweeten, 1980; Bessler, 1984; Chambers, 1984; Orden, 1986; Barbhart, 1989; Orden and Fackler, 1989). These studies provide evidence of significant linkages between money supply, interest rate, exchange rate, agricultural and manufacturing prices. More importantly, these studies suggest that any changes in macroeconomic policy should impact agricultural prices, farm incomes and agricultural exports. For instance, high agricultural price volatility caused partially by macroeconomic policy changes increases the uncertainty faced by farmers and affects their investment decisions, with important implications for farm debt, farm incomes and agricultural productivity (Kargbo, 2005). Furthermore, one has to consider changes in monetary policy within the broader economic context in that changes in monetary policy to induce favorable change in the industrial sector, for...

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