Analyzing the Effect of Increase in Exchange Rate on Cost Price of Agricultural Products

مجله اقتصاد و توسعه کشاورزی

Article 6, Volume 34, Issue 2 - Serial Number 48, July 2020, Pages 201-221   

Document Type: Research Article

DOI: 10.22067/jead2.v34i2.86055

Authors

Z. Sarabi; V. Ansari^* ; H. Salami; S.S. Hosseini

Department of Agricultural Economics, University of Tehran, IRan

Abstract

Introduction: The exchange rate in Iran has experienced considerable increase with some fluctuations over last two decades. This has resulted in an increased cost of food production in Iran. Since, further increase in exchange rate is expected in the future, it is important to determine which groups of agricultural products, produced in different agricultural sub-sectors, are more sensitive to these changes and also to specify the major paths through which exchange rate increase is transmitted to different agricultural products. The main objective of this study is to provide explanations for these questions.
Materials and Methods: To achieve the objectives of the study, a social accounting matrix (SAM) has been constructed based on the latest Iranian Input-Output Table released in 2011 by the Statistical Center of Iran. This SAM is a 110× 110 matrix and consists of different accounts.  Three accounts for factors of production (labor, land and capital), 6 household accounts (rural and urban households divided into three groups of low, middle and high income), one government account, one capital account, one account for rest of the world, and finally, one account for commodities which includes 49 domestic commodities and 49 imported commodities. To trace the effects of changes in exchange rate on prices of different products, the matrix of SAM is transformed to a SAM-based price analytical model. Then, the structural path decomposition approach is used to specify the major paths through which the effects of increase in exchange rate are transferred to major agricultural products in different sub-sectors.
Results and Discussion: Results of this study revealed that livestock and poultry products are the most responsive products to a shock on the exchange rate. Thus, the effect of the shock on the prices of these products is significant. Forestry and agricultural services are in the second place from this point of view. Crop farming products, fish and other fisheries products, and horticultural products are ranked on the next place. Since producing livestock and poultry products extensively depend on the imported feed materials, the production cost and consequently, the prices of the first group of products experience the highest increase. Subsidizing feed materials, following an exchange rate shock, or direct payment to the low income households’ group might be a way to mitigate the negative effects of the exchange rate shock on food security in Iran. The results of structural path analysis indicate that the effects of increase in exchange rate on the prices of agricultural products are mostly transmitted through increasing import prices in six main economic sectors namely; “materials and chemical products”, “crop farming products”, “food products” “textiles, leather and their products”, “the machinery and equipment” and “hotel and restaurant services”. However, impacts of the above sectors on prices are not the same in all agricultural subsectors. Price of “crop farming products” is mostly affected by prices of imported “crop farming products” as well as “materials and chemical products”. Prices of “horticultural products” and “forestry and agricultural services” are mainly affected by increasing prices of imported “materials and chemical products”. On the other hand, price of “livestock and poultry products” changes considerably with increase in import prices of “crop farming products (raw materials)” and “food products”. Finally, price of “fish and other fishing products” is mostly affected by price of imported “food products”.
Based on the results of structural path analysis, the paths through which exchange rate shock are transferred to the cost of production and consequently prices of agricultural products are two separate channels. Increase in import prices of “materials and chemical products”, “crop farming products” and “food products” is transmitted to the prices of agricultural products as these products are utilized as inputs in production process of agricultural products directly or indirectly. On the other hand, an increase in import prices of “textiles, leather and their products” and “the machinery and equipment” indirectly affects production cost of agricultural products by first stimulating an increase in prices of primary factors, following increased cost of living for owners of these inputs.
Conclusion: To decrease the negative impact of exchange shock on prices of food products, different policies can be adopted, depending on the sectors playing the main role in increasing the cost of production and the path through which the shock is transmitted. Generally, subsidizing feed materials, following an exchange rate shock, through allocation of preferred exchange rate or supplying these materials with a subsidized price is recommended for the products such as poultry products in which most of the feeding materials are imported. On the other hand, direct payment to the low income households’ group might be a way to mitigate the negative effects of the exchange rate shock on food security in cases that most of the increased cost of production comes from increase in the cost of primary inputs.

Keywords

Exchange rate; Cost price; Food products; Social accounting matrix; Structural path decomposition

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