The efficiency of bulk and fine/flavor cocoa markets: the case of Trinidad and Tobago

Abstract

Time-series methods are used to study the dynamics of bulk and fine/flavor (FF) cocoa bean prices among the markets. The study focuses on establishing where cocoa bean prices are discovered and whether FF cocoa price for Trinidad and Tobago (T&T) is established independently, through interaction, and/or dominated by any of the markets. It also investigates the impact of these prices on exports from Trinidad and Tobago. Four quarterly price series (London and New York futures, and Ecuador and T&T domestic prices) and exports from T&T are used over the period 1973-2000 to study possible cointegration or long-run relationships in the cocoa market. A dynamic error-correction model (ECM) using Johansen's procedure is estimated. Analysis of the estimated ECM is offered using directed graphs, impulse response functions and error decomposition analyses. The results of the cointegration analyses showed that except for T&T's price, the London, New York and Ecuador prices and exports from T&T formed two long run equilibrium relationships. Exports from T&T were not weakly exogenous. Error decomposition results indicated that London was exogenous, T&T was moderately exogenous, while New York and Ecuador were endogenous. Price in the New York market had a stronger influence on exports from T&T than did price in the London market. The impulse response functions showed that the London market had a strong influence on the other cocoa markets. Increased exports from T&T had small positive effects on the prices in all other markets. An export strategy for T&T may consider current and past London prices and its domestic prices in forecasting its own future price. The New York market should be considered in the export equation. A policy to encourage increased domestic production of FF cocoa is not unreasonable. Consideration may be given to additional product differentiation in order to capture new markets and/or to consider an industry with fewer, more intensively cultivated acreages with emphasis on the production of a high valued quality cocoa crop for the export market.