Structural Vector Autoregressive (SVAR) Analysis of Maize Prices and Extreme Weather Shocks

Abstract

Food prices have experienced enormous movements and volatility in the recent past which can be predominantly attributed to climate change. Extreme weather events such as drought, flooding and heat waves have adverse effects on agricultural production in areas where agriculture is weather reliant. Among the extreme weather events experienced in Kenya is a drought in 2008/09 which led to a record increase in food prices. It is against this backdrop that this study sought to investigate the dynamic relationship between maize prices and extreme agro-climatic indicators. The study uses structural vector autoregressive (SVAR) tools; Granger causality, Impulse Response Function (IRF) and Forecast Error Variance Decomposition (FEVD) to examine the dynamic relationship between extreme weather indicators (minimum and maximum temperature and precipitation) and wholesale maize prices. Using different lag length determinant criterion, reduced-form VAR (2) is highlighted as the best model to fit the study data past weather and maize prices information over a data period spanning from January 2000 and December 2016. The study established that there exists granger causality between maize prices and weather variables. Agro-climatic indicators are therefore significant in predicting future maize prices. Principally, this significance can be inferred from the reliance of local agricultural production on phenological patterns. Maize price shocks exhibited inflationary effects on future maize prices, while a shock in weather variables has depreciating effects after three months. With regard to forecast variance, 30-39% of maize price variations resulted from its own shocks. The rest is attributed to precipitation (29-39%); maximum temperature (24-26%); and minimum temperature (7-8%).