Open Access Open Access  Restricted Access Subscription or Fee Access

RELATIONSHIP BETWEEN OIL PRICES, EXCHANGE RATES AND MAIZE PRICES IN KENYA

Conrad Wambugu, James Ngang’a

Abstract


Purpose: The purpose of this study was to determine the Relationship between oil prices, Exchange rates and maize prices in Kenya

Methodology: The study adopted exploratory and descriptive design. Exploratory research was used to understand the relationships among the variables of this research. Descriptive research was used to understand the current situation. The population used for the 3 variables are; Abu Dhabi National Oil Corporation (ADNOC) crude oil prices for oil prices, Central Bank of Kenya for KES/USD exchange rates and Food Agricultural Organization (FAO) Nairobi (due to missing data for Eldoret) wholesale maize prices per metric ton for maize prices.

Results: The study findings revealed that these three markets namely the crude oil market, the foreign exchange market and the commodity market have separate risk management dynamics and should be administered individually. Central Bank of Kenya prudential guidelines (2008) on risk management that came into effect this year, mandate financial institutions to use derivatives to manage risk by using different kinds of instruments like foreign exchange derivatives interest rate derivatives, commodity based derivatives etc. though implementation has not started. However, current risk management strategies in the financial market allow for hedging against adverse movement in foreign exchange market. This would drastically reduce the costs of imports especially petroleum products and its derivatives that go into production.

Policy recommendation: The study recommended creation of a commodity exchange that would add value to commercial participants such as farmers and millers with benefits accruing to consumers. This could prove difficult in the beginning especially in policy guidelines and implementation but would prove worthwhile in the end. Some of the steps taken towards a fully-fledged commodity exchange is the introduction of the Warehouse Receipt System (WRS). This allows farmers to concentrate on farming as they store their produce for future selling and also as security for loans in commercial banks.Procurement policies should be reviewed especially in regards to the oil sector. Although the government through the Kenya Gazette, 2012 has granted a 30% import quota of refined petroleum products to oil marketer National Oil Corporation of Kenya and 100% import quota of crude oil to Kenya Petroleum Refinery Limited (KPRL) hence giving them volumes needed to hedge in the international market, steps should be taken to widen the scope of players to involve the private sector to participate.

 

Keywords: Relationship, oil price, Exchange rates and maize prices in Kenya

Purpose: The purpose of this study was to determine the Relationship between oil prices, Exchange rates and maize prices in Kenya

Methodology: The study adopted exploratory and descriptive design. Exploratory research was used to understand the relationships among the variables of this research. Descriptive research was used to understand the current situation. The population used for the 3 variables are; Abu Dhabi National Oil Corporation (ADNOC) crude oil prices for oil prices, Central Bank of Kenya for KES/USD exchange rates and Food Agricultural Organization (FAO) Nairobi (due to missing data for Eldoret) wholesale maize prices per metric ton for maize prices.

Results: The study findings revealed that these three markets namely the crude oil market, the foreign exchange market and the commodity market have separate risk management dynamics and should be administered individually. Central Bank of Kenya prudential guidelines (2008) on risk management that came into effect this year, mandate financial institutions to use derivatives to manage risk by using different kinds of instruments like foreign exchange derivatives interest rate derivatives, commodity based derivatives etc. though implementation has not started. However, current risk management strategies in the financial market allow for hedging against adverse movement in foreign exchange market. This would drastically reduce the costs of imports especially petroleum products and its derivatives that go into production.

Policy recommendation: The study recommended creation of a commodity exchange that would add value to commercial participants such as farmers and millers with benefits accruing to consumers. This could prove difficult in the beginning especially in policy guidelines and implementation but would prove worthwhile in the end. Some of the steps taken towards a fully-fledged commodity exchange is the introduction of the Warehouse Receipt System (WRS). This allows farmers to concentrate on farming as they store their produce for future selling and also as security for loans in commercial banks.Procurement policies should be reviewed especially in regards to the oil sector. Although the government through the Kenya Gazette, 2012 has granted a 30% import quota of refined petroleum products to oil marketer National Oil Corporation of Kenya and 100% import quota of crude oil to Kenya Petroleum Refinery Limited (KPRL) hence giving them volumes needed to hedge in the international market, steps should be taken to widen the scope of players to involve the private sector to participate.

 

Keywords: Relationship, oil price, Exchange rates and maize prices in Kenya

Purpose: The purpose of this study was to determine the Relationship between oil prices, Exchange rates and maize prices in Kenya

Methodology: The study adopted exploratory and descriptive design. Exploratory research was used to understand the relationships among the variables of this research. Descriptive research was used to understand the current situation. The population used for the 3 variables are; Abu Dhabi National Oil Corporation (ADNOC) crude oil prices for oil prices, Central Bank of Kenya for KES/USD exchange rates and Food Agricultural Organization (FAO) Nairobi (due to missing data for Eldoret) wholesale maize prices per metric ton for maize prices.

Results: The study findings revealed that these three markets namely the crude oil market, the foreign exchange market and the commodity market have separate risk management dynamics and should be administered individually. Central Bank of Kenya prudential guidelines (2008) on risk management that came into effect this year, mandate financial institutions to use derivatives to manage risk by using different kinds of instruments like foreign exchange derivatives interest rate derivatives, commodity based derivatives etc. though implementation has not started. However, current risk management strategies in the financial market allow for hedging against adverse movement in foreign exchange market. This would drastically reduce the costs of imports especially petroleum products and its derivatives that go into production.

Policy recommendation: The study recommended creation of a commodity exchange that would add value to commercial participants such as farmers and millers with benefits accruing to consumers. This could prove difficult in the beginning especially in policy guidelines and implementation but would prove worthwhile in the end. Some of the steps taken towards a fully-fledged commodity exchange is the introduction of the Warehouse Receipt System (WRS). This allows farmers to concentrate on farming as they store their produce for future selling and also as security for loans in commercial banks.Procurement policies should be reviewed especially in regards to the oil sector. Although the government through the Kenya Gazette, 2012 has granted a 30% import quota of refined petroleum products to oil marketer National Oil Corporation of Kenya and 100% import quota of crude oil to Kenya Petroleum Refinery Limited (KPRL) hence giving them volumes needed to hedge in the international market, steps should be taken to widen the scope of players to involve the private sector to participate.

 




This Abstract was viewed 235 times | PDF Article downloaded 63 times

Keywords


Relationship, oil price, Exchange rates and maize prices in Kenya

Full Text:

PDF

References


Arrow, K.J. & Debreu, G. (1954). Existence of equilibrium for a competitive economy. Econometrica,22.Retrievedfrom http://www.stanford.edu/class/msande311/arrow-debreu.pdf

Brooks, C. (2008). Introductory econometrics for finance (2nd ed.). Cambridge, UK: Cambridge University Press.

Campiche, J L., Bryant, H.L., Richardson, J.W. & Outlaw, J.L. (Eds.). (2007). Proceedings from AAEA ’07: Examining the evolving correspondence between petroleum prices and agricultural commodity prices. Portland, OR: TAMUS.

Cassel,G.(1914).Money and foreign exchange. Available from http://203.200.22.249:8080/jspui/bitstream/123456789/826/1/Money_and_foreign_exchange_after_1914.pdf

Central Bank of Kenya. (2008). Prudential guidelines for institutions licensed under the banking act. Nairobi, Kenya: Government Printing Office.

Creswell, J.W. (2009). Research design: Qualitative, quantitative and mixed methods approaches. London, UK: SAGE.

Cuthberton, K., Hall, S.G. & Taylor, M.P. (1990). Applied econometric technique. Michigan, USA: University of Michigan Press.

Dickey,F.A. & Fuller, W.A. (1981). Distribution of the estimators for autoregressive time series with a unit root. Journal of the American Statistical Association, 79(366). Retrieved from http://www.deu.edu.tr/userweb/onder.hanedar/dosyalar/1979.pdf

Engle ,R. F. & Granger, C. W. J. (1987). Co-integration and error correction: Representation, estimation and testing. Econometrica, 45(2). Retrieved from http://www.jstor.org/discover/10.2307/1913236?uid=3738640&uid=2&uid=4&sid=21100983161763

Fun, J. (2011). Top three exchange theory. Go Articles. Retrieved from http://goarticles.com/article/Top-Three-Exchange-Theory/3969997/

Giddy, I.H. (1976). An integrated theory of exchange rate equilibrium. Journal of Financial and Quantitative Analysis, 11(5). Retrieved from www.jstor.org/stable/2330587

Goschen, G.J. (1879). The theory of the foreign exchanges. London, UK: Effingham Wilson & Co.

Granger, C.W.J. (1988). Developments in the study of cointegrated economic variables. Oxford bulletin of Economics and Statistics, 48(3). Retrieved from http://homepage.ntu.edu.tw/~kslin/macro2009/Granger%201986.pdf

Gujarati, D. (2003). Basic econometrics (4th ed.). New York, NY: McGraw Hill Company.

Hakkio, C.S. (1992). Is purchasing power parity a useful guide to the dollar. Economic Review, 3. Retireved from http://www.frbkc.org/PUBLICAT/EconRev/EconRevArchive/1992/3Q92hakk.pdf

Hanson, K., Robinson, S. &Schluter, G. (1993). Sectoral effect of a world oil price shock: Economy wide linkages to the agricultural sector. Journal of Agricultural and Resource Economics, 18(1). Retrieved from http://ageconsearch.umn.edu/bitstream/30818/1/18010096.pdf

Harri, A., Nalley,L. & Hudson, D. (2009). The relationship between oil, exchange rates and commodity prices. Journal of Agricultural and Applied Economics, 41(2). Retrieved from http://ageconsearch.umn.edu/bitstream/53095/2/jaaeip13.pdf

Hashemi-j, A. (2009). The international fisher effect: Theory and application. Investment Management and Financial Innovations, 6(1). Retrieved from http://businessperspectives.org/journals_free/imfi/2009/imfi_en_2009_01_Hatemi-J.pdf

Irungu, G. (2011. November 11). Why central bank had uphill task in stabilizing the shilling. The Business Daily, pp 12, 13.

Harold, H. (1931). The economics of exhaustible resources. Journal of Political Economy,39. Retrieved from http://msl1.mit.edu/classes/esd123/2003/bottles/Hotelling.pdf

Hubbert, M. K. (1956).Nuclear energy and fossil fuels. Available from http://energycrisis.biz/hubbert/1956/1956.pdf.

Johansen, S. (1992). Testing structural hypotheses in a multivariate cointegration analysis of the PPP and the UIP for UK. Journal of Finance, 40, 1375-1384.

Kagwe, W. (2012, February 2). Futures exchange to open this year, The Star. Retrieved

from http://www.the-star.co.ke/business/local/60777-futures-exchange-to-open-this-year

Kamau, M., Olwande, J. &Githuku, J. (Eds.). (2010) Proceedings from TI ’10: Consumption and expenditure on key food commodities in urban households: he case of Nairobi. Nairobi, Kenya: Tegemeo Institute.

Kenya Gazette Supplement. (2011). The price control (essential goods) act (Kenya Gazette supplement No. 121 Acts No 26). Nairobi: Kenya. Government Printing Office.

Kenya Gazette Supplement (2012). Energy importation of petroleum products quota allocation amendment (Kenya Gazette Supplement Legal Notice No 25). Nairobi: Kenya. Government Printing Office.

Kenya National Bureau of Statistics. (2006). Kenya integrated household budget survey. Retrieved from

http://www.knbs.or.ke/pdf/Basic%20Report%20%28Revised%20Edition%29.pdf

Kenya National Bureau of Statistics. (2012). Leading economic indicators. Retrieved from: http://www.knbs.or.ke/news/lei062012.pdf.

Keynes, J.M. (1924). A tract of monetary reform. Available from

http://203.200.22.249:8080/jspui/bitstream/123456789/2209/1/A_tract_on_monetary_reform.pdf

Kirimi, L., Sitko, N., Jayne, T.S., Karin, F., Muyanga, M., Shehan. M…..Bor, G. (2011). A farm gate to consumer value chain analysis of Kenya’s maize marketing system. Tegemeo Institute, 44. Retrieved from

http://www.tegemeo.org/documents/work/WP44-A-Farm-Gate-to-Consumer-Value-Chain-Analysis-of-Kenya-Maize-Marketing-System.pdf

Mishkin, F.S. (2006). Economies of monry, banking and financial markets (8th ed.). Boston, MA: Addison-Wesley.

Okulo, L. (2011, September 28). Central bank to introduce forex controls. The Star. Retrieved from

http://www.the-star.co.ke/national/national/42068-central-bank-to-introduce-forex-controls

Onumah, G. (2010). Promoting agricultural commodity exchanges in ghana and Nigeria: A review report. Retrieved from

http://www.unctad.info/upload/SUC/EcowasGhanaCerealMarkets/Presentations/COMEX_Report_Onumah_en.PDF

Ridley, D. .(2011). Hotelling’s law. Available from

http://faculty.fuqua.duke.edu/~dbr1/research/Hotellings-Law.pdf

World Bank (2012). Kenya economic update. Retrieved from:

http://siteresources.worldbank.org/INTAFRICA/Resources/257994-1335471959878/kenya-economic-update-june-2012.pdf

Yu, T.H.E., Bessler, D.A. & Fuller, S. (2006). Proceedings from AAEA ’06: Cointegration and causality analysis of world vegetable oil and crude oil prices. Long Beach, CA: AAEA.

Zhang, Q. & Reed, M. (Eds.). (2008). Proceedings from SAEA ’08: Examining the impact of the world crude oil price on China’s agricultural commodity prices: The case of corn, soybean and pork. Dallas. TX: EDIRC


Refbacks

  • There are currently no refbacks.


Paper submission email: info@carijournals.org

This journal follows ISO 9001 management standard and licensed under a Creative Commons Attribution 3.0 License.

Copyright © www.carijournals.org