Determination of regional and aggregate price elasticities in the Pyrethrum industry

Abstract

Pyrethrum production has over time been declining. This decline is a serious problem given that it reflects loss of foreign exchange earnings. The aim of this study was therefore to identify and analyse the factors responsible for this decline in pyrethrum production. A supply responsiveness approach was adopted in the study and a Nerlovian "partial adjustment" model was used. The choice of the price specification which enters the farmers' decision-making process (and hence in the model formulation) was made after experimenting with various alternative price specifications. The influence of technology, lagged dependent variable, delayed payments and rainfall variable on pyrethrum production was also analysed. The results showed that pyrethrum farmers are highly responsive to changes in pyrethru, prices and that there are regional variations in response to different price specifications. Further, it was found that all the other variables considered in this study had major influence on pyrethrum production. It was recommended on the basis of the findings of this study that the government has three policy options of boosting pyrethrum production. First, the high price supply responsiveness makes the use of a price subsidy programme possible. Secondly, the government could aim at improving technology through encouragement of the adoption of better yielding clones/cultivars. This could be achieved through government subsidies in the provision of these planting materials. Thirdly, the government could ensure that payments to growers are promptly met. This could be done through the establishment of a "revolving fund" from which payments to growers could be made so as to avoid elayed payments