Decomposing Producer Price Risk: A New Policy Analysis Tool with an Application to Northern Kenyan Livestock Markets

Cornell University Dept. of Applied Economics & Management Working Paper

23 Pages Posted: 4 Nov 2002

See all articles by Christopher B. Barrett

Christopher B. Barrett

Cornell University - Charles H. Dyson School of Applied Economics & Management

Winnie Luseno

RTI International

Date Written: May 2002

Abstract

This paper introduces a simple method of price risk decomposition that determines the extent to which producer price risk is attributable to volatile inter-market margins, intra-day variation, intra-week (day of week) variation, or terminal market price variability. We apply the method to livestock markets in northern Kenya, a setting of dramatic price volatility where price stabilization is a live policy issue. In this particular application, we find that large, variable inter-market basis is the most important factor in explaining producer price risk in animals typically traded between markets. Local market conditions explain most price risk in other markets, in which traded animals rarely exit the region. Variability in terminal market prices accounts for relatively little price risk faced by pastoralists in the dry lands of northern Kenya although this is the focus of most present policy prescriptions under discussion.

Suggested Citation

Barrett, Christopher B. and Luseno, Winnie, Decomposing Producer Price Risk: A New Policy Analysis Tool with an Application to Northern Kenyan Livestock Markets (May 2002). Cornell University Dept. of Applied Economics & Management Working Paper, Available at SSRN: https://ssrn.com/abstract=329628 or http://dx.doi.org/10.2139/ssrn.329628

Christopher B. Barrett (Contact Author)

Cornell University - Charles H. Dyson School of Applied Economics & Management ( email )

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Winnie Luseno

RTI International ( email )

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