The Role of Energy on the Price Volatility of Fruits and Vegetables: Evidence from Turkey

Harun Uçak, Alanya Alaaddin Keykubat University

Esin Yelgen, Alanya Alaaddin Keykubat University

Yakup Arı, Alanya Alaaddin Keykubat University

Volatility in food prices and the reasons behind this volatility have recently become a trending topic of discussions throughout the world, while they are often discussed in literature as well. In this regard, pricing process of sub-product groups must also be analyzed in addition to general food prices. Indeed, due to the difficulties in storing these products for a long period, changing vegetable and fruit prices might well cause producers and consumers to be deeply affected by price volatility. On the other hand, it is also highly important to examine the reasons that may affect the price fluctuations of these products. Fresh fruit and vegetables sector is considered one of the most essential sectors in the agricultural industry as it is vital for sustaining human life. In this context, the United Nations declared the year of 2021 as the “International Year of Fruits and Vegetables”, highlighting the importance of fruits and vegetables in nourishment, the problems experienced in the process from production to consumption, food wastes and losses, the importance of farming in the fight against famine and small family businesses generating incomes.

Thus, the factors that underlie price changes in agricultural markets is currently a hot topic. Prices in agricultural markets have recently been affect-ed by macroeconomic factors such as exchange rate, inflation (Algieri, 2016), interest rates, energy prices and demand for biofuels, monetary policies, financial investments and speculations, sudden trade restrictions or lack of information, transaction costs, agricultural policies and international prices (Kalkuhl et al., 2016; Algieri, 2016; Kornher and Kalkuhl, 2013). This study will focus on Turkey from an empirical perspective within its scope. While the country stands out in fruit and vegetable production across the world, Turkey is experiencing frequent price volatility at recent times. According to the World Food Organization’s 2019 statistics, Turkey is the 4th largest producer of fresh vegetables in the world (Statista, 2021a). In addition, it is the 6th largest producer of fresh fruits in the world (Statista, 2021b). Therefore, Turkey is one of the most important agricultural producers in the world. However, Turkey’s currency is one with the highest volatility among emerging market markets and this causes fluctuations in the fruit and vegetable price indices. Besides, fluctuations in energy prices due to the volatility of the exchange rate and global markets has become significant as energy is an input item in production processes. Consider-ing upward fluctuations in particular, the practices for direct sale points and mediators in the supply chain have been heavily discussed in recent years. In the same vein, the fluctuations in food prices have been the hot topic in Turkey too due to the recent global crises, the climate change and foreign-source dependency on energy.

It is stated that the reason behind these fluctuations in agricultural product prices is the increasing production input prices by farmers. Besides seasonal effects on the price fluctuations in agricultural commodities, it can be observed that increasing energy prices have a direct or indirect aggravating effect on the costs of agricultural inputs such as fertilizers, chemicals, irrigation, production, storage and transportation (Fasanya and Akinbowale, 2019; Tadasse et al., 2016; Algieri, 2016). Moreover, the use of modern technology applications in agriculture also increases energy consumption. The use of agricultural machinery and pesticides requires the consumption of fossil fuels, and indeed, intense energy consumption is particularly observed in the field of pesticide production (Öztürk et al., 2010). Besides, price volatility in the categories of electricity, coal, petroleum products and natural gas has an extremely deep negative impact on the economic performance of Turkey, as an energy importer. As a matter of fact, oil and natural gas reserves are limited in Turkey leading to foreign-source dependence in the field of energy. Thus, it is observed that Turkey has been the country with the fast-est increase in energy demand among the Organization for Economic Cooperation and Development (OECD) countries in the past 20 years. Within this framework, Turkey ranks second in the world after China in the increase in electricity and natural gas demands. Exist-ing energy sources cannot unfortunately meet Turkey’s increasing energy needs and thus, the country meets nearly 74% of its energy needs via imported sources (MFA, 2020). Considering that Turkey is a country dependent on imports of oil in its consumption, there is an urging need to address the effects of changing energy prices on the performance of several sectors and industries (Algan et al., 2017).

On the other hand, the increase in energy prices in recent years is one of the most crucial cost items threatening agricultural production (Yıldırım, 2020). Hence, the fluctuations in these costs reflect on product prices and cause difficulties in production plans (Fasanya and Akinbowale, 2019: 186; Tadasse et al., 2016: 63; Algieri, 2016: 210).For the reasons mentioned above, this study aims to investigate the effects of changes in energy prices on other price indices for Turkey. In this regard, we analyzed the volatility spillover between the Energy Price Index (EPI), the Fruit Price Index (FPI) and the Vegetable Price Index (VPI) using monthly data sets from January 2007 to December 2019 by two different methods: The Kanas (1998) Approach for volatility spillover effect and the Diebold-Yilmaz (2009, 2012) spillover index, analyzed respectively. As for the content of the study, the second section consists of an extensive literature review. This part is followed by a detailed description of the methodology. The fourth section summarizes the data set used in the study. In the fifth part, empirical results of the analyses are given in two subsections. Finally, the last section covers comments, discussions and policy recommendations based on the study results.

DOI: https://doi.org/10.36253/bae-10896

Read Full Text: https://oaj.fupress.net/index.php/bae/article/view/10896

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