The Future of Smallholder Farming in Eastern Africa - Uganda ...

5.2. Determinants of grain prices
In the previous discussion, an attempt was made to indicate the nature of grain markets and
the behavior of grain prices. Understanding the behavior of daily market grain prices requires
a critical investigation of the determinants of these prices.
First, it is important to know how brokers set their selling price at the central market. The
survey results show that about 69 percent of brokers used the price of the previous day in
setting the current price for grain (Annex Table 2.12). Most brokers (78 percent) also take
into account the prices of other brokers in setting their current sales prices (Annex Table
2.21).
Another important factor is related to supply and demand conditions. Brokers undertake
personal evaluation of total arrivals before the market opens at 6 a.m. Reports of arrivals
from clients and records of trucks at the entry gate are also used in assessing the magnitude of
supply to the central market (Annex Table 2.15). On the demand side, brokers use, among
other things, reports of regular buyers, personal observations of total buyers in the market,
specific dates of the month (e.g., pay period), holiday seasons, and entry or presence of large
buyers in the market (Annex Table 2.17). Most brokers do not incur financial costs in getting
information about demand, supply, and price levels in the market. The only investment they
need is a bit of their time and personal effort, although the quality of information they collect
is likely to be low.
The ability of any market to function efficiently with respect to pricing depends in large part
on the information available to market agents. Price determination requires information on
daily demand, supply, quality of grain, previous stocks, and policy and related variables (such
as time of government intervention). Government intervention in the grain market drives up
grain prices. It has been documented that changes in daily price variability are crucially
related to daily supply (which consists of new daily supply and the previous day’s stocks),
daily demand, extent of competition, and other factors.
In order to examine the competitive behavior of a market in a differentiated market structure,
we used a hedonic model, which is a popular framework in grain marketing. The model
specifies that price is a function of both supply and demand. The marginal implicit price of a
characteristic is determined by differentiating the hedonic with respect to that characteristic,
implying an empirical specification of the hedonic model of the form:
P
t
= f ( p
1,
p , Dp,
Dh)
t −
d
…………………………………………………………….. (5.6)
where Pt is the wholesale price of a given crop type on any given market day, Pt-1 is the
closing price of the previous day, Pd is the average opening price (price registered at 6:00
a.m.), Dp is the dummy for the date of the month (1 if the date coincides with pay period and
0 otherwise), and Dh is the dummy for a holiday (1 if a major holiday is approaching and 0
otherwise). The dummies are interpreted as differences from the price of the pay period and