Unraveling the Underlying causes of Price Volatility in World Coffee and Cacao commodity Markets

In recent years, Commodity Dependent Developing Countries (CDDCs) have faced multiple global food, energy and climate crises, compounded by the recent financial and economic crises which have increased their vulnerability to excessive price volatility in commodity markets. Moreover, structural vulnerabilities in most CDDCs render their economies more vulnerable to increased commodity market turbulence than developed countries, given their comparatively lower income and high dependence on commodity exports. Therefore, this paper empirically examines the patterns and underlying causes of excessive price volatility for two major soft commodities of critical importance to many of the poorest CDDCs: coffee and cocoa. It aims to identify interactions, similarities and causalities between coffee and cocoa prices on the one hand and, oil and futures prices on the other hand. Analyzing coffee and cocoa historical prices proves that, their means and volatilities are time-dependent, hence the use of GARCH type models. It is also found that, coffee's volatility has uneven reactions to markets positive or negative shocks. Oil price spillovers on coffee and cocoa are assessed with cointegration and causality models. Long-run causality is found between oil price, and coffee and cocoa prices but, only cocoa has an equilibrium relationship with oil in the long-term. Despite turmoil in the policies regulating the financial instruments; the speed of adjustment between the cash and the futures markets, measured with cointegration and error correction models, reflects efficiency in cocoa and coffee futures markets. Given the results, this study proposes some policy recommendations to manage price risk in cocoa and coffee exporting countries.