Investigation of Cereals World Price Transmission to Iran Domestic Markets: Application of Armington and Pass-Through Elasticities

Given the importance of cereals in Iranian households’ baskets, scarcity and fluctuation of this product can reduce welfare of the society. Since the demand for this product comes from two channels of domestic production and imports, it is vital not only to control and monitor its production but also to take into account the grains global market and trade, as well as the factors affecting the imports of these products. This is because of the fact that any price change can easily be transmitted to the importer countries such as Iran. In this context, this study aims to investigate global maize price transmission to Iran and the possible substitutability between domestic and imported grains by applying Armington and Pass-Through elasticities, Moreover, factors affecting grain imports are studies for the sake of policy implication.
For the purposes of this study, the Armington and Pass-Through elasticities four major grains markets, including wheat, barley, maize and rice, were calculated as follow: Where d and m stand for domestic production and imports, respectively and p and q denote corresponding prices and quantities for selected products. The main function of estimated armington and Pass-Through elasticities as follow: In this study, we used the ADF test to test stationary of variables. Realizing static variables in level and first difference, I (0) and I (1), we used ARDL approach to investigate long-run and short-run relation between variables. The following equation was estimated to examine factors affecting the grain imports to the country: Where lM is log of imports of cereals, lGDP is log of GDP, lP is log of relative prices, lE is log of the exchange rate, lT is log of tariffs on imported cereals and lDP is log of domestic production.The required data include imports and domestic production of grain (wheat, barley, rice and maize), domestic and world price of grain GDP, exchange rate for 1981 to 2011 and were collected from the Statistical Center of Iran and FAO.
According to the results of this study, Armington elasticity indicates that the imported wheat is substitute for domestic wheat. The log-run Armington elasticities for wheat, corn and barley are found to be 0.41, 0.314 and 0.076, respectively. The small elasticity for barley shows a kind of independency of its domestic market to the world market. The corresponding elasticity coefficients for rice are -0.341 and -0.193 in the long-run and short-run, respectively. Accordingly, imported rice is complement with domestic rice. Findings also indicate that in the long-run the GDP and domestic production have significant effects on import demand of maize, barley and rice. The GDP and tariff rates have significant effect on wheat import demand. Due to the fact that the Iranian state exclusively imports wheat, the tariff rate exhibits an unexpected sign for this product. In the short run, GDP is the most influential variable. According to the results, income has positive and significant effect on the demand for imported maize and in the short-run one percent increase in income results in 1.78 percent increase on maize imports. Furthermore, wheat error correction factor of -0.5 reveals that half of the difference between short-run and long-run equilibrium will be resolved each year. The speed of adjustments for barley, maize and rice are very high. Therefore, any shock to their imports back into balance will return.
Based on the findings of this study, domestic grains are not substitutes for imported grains and thus we cannot rely on imports at least in the short run. Policies that make domestic grains more expensive will result in increasing the share of imports. Reduction of tariffs is recognized as an effective tool for trade liberalization. To support domestic production, the government should seek policies that cause imports to decrease. Tariff barriers can lead to this end; however, the policy needs to be taken together with protectionist policies. In contrast, reduction of tariffs for these products may be imposed if the purpose is primarily to capture domestic demand. Because of the complementary relationship between domestic and imported rice as well as high cost of production, imports of these products is one of the fastest and most common ways to capture the domestic demand, however, the government should support domestic producers by relevant policies such as guaranteed prices and by providing their basic needs at the international level.