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Economic analysis of coffee supply in Kenya Gatete, Claver K.

Abstract

A reduced form supply equation, derived from the structural functions that underlie the coffee supply, is estimated for Kenyan coffee producers. This is because the standard Nerlovian supply response model is not appropriate for a perennial crop such as coffee. The results of the estimated function are used to estimate the changes in producer surplus of the coffee farmers in Kenya. Separate estimates are obtained for estate producers and smallholders because of the fundamental differences in the technologies employed by these two groups. In addition, marketing chains for the two groups are different. Although our final reduced form supply function has the Nerlove's supply reduced equation form, it has the structural nature of a perennial crop. It is different from that obtained by Greenfield and Wickens (1973) and Parikh (1979) in that it includes a risk variable and uses total acreage instead of investment. This study also differs from other studies done on Kenyan coffee supply (Maitha, 1971, Ford, 1971 and Akiyama, 1987) because of the incorporation of a risk variable and the derivation of the expected price using a weighted average revenue price from sales to the International Coffee Organization (ICO) member and nonmember markets when quotas were in effect and the world market otherwise. The results show that coffee farmers have an inelastic response to price and the elasticities fall within the range of those obtained by past studies except the estates' elasticities which are very low. The model uses bootstrapping techniques to analyze the changes in producer surplus caused by a change in producer price of the coffee farmers in Kenya. The bootstrap results show that the bias in producer surplus estimators is quite significant and the coefficient of variation is very high which demonstrates that changes in producer surplus measures can be estimated quite imprecisely. The bootstrap technique provides an accurate method of measuring changes in producer surplus and thus provides a way of measuring the welfare changes of a policy that is intended to increase the producer price. The application of this technique to coffee supply in Kenya assuming a government policy that increases the producer price by 15% results in a bigger percentage change in producer surplus of the smallholders than the estates who have quite low price elasticities.

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