Navigating the Conundrum of Agricultural Commodity Price Fluctuations and Household Welfare in Tanzania

Abstract

Agricultural commodity price fluctuations pose a complex challenge for developing countries, engendering a predicament akin to Timmer's policy conundrum - the confluence of desiring lower prices to benefit consumers and higher prices to bolster production. This research endeavours to untangle this dilemma by examining the impact of changes in agricultural commodity prices on household welfare in Tanzania, employing a non-separable agricultural model. Drawing on four waves of national panel survey data spanning from 2008 to 2015, elasticities as the basis for analysis were calculated. Subsequently, these elasticities inform the compensating variation framework, facilitating an assessment of both the static and dynamic repercussions of shifts in agricultural commodity prices on household welfare. Notably, this evaluation considers household net-market positions and strata. Our findings, derived from an exploration of static and dynamic effects, demonstrate that households' welfare experienced degradation owing to diminished prices of agricultural commodities in comparison to scenarios featuring elevated agricultural prices. Evidently, the extent of these effects varies among different household strata and net-market positions. These outcomes underscore the adverse impact of modest fluctuations in agricultural commodity prices on the well-being of household farmers. This, in turn, accentuates the policy imperative of fostering agricultural growth and transformation. Thus, opting for reduced agricultural prices does not align with households' preferences. The discoveries in this article advocate for policies centred on augmenting market access and elevating agricultural product prices, potentially leading to substantial enhancements in household welfare. Further exploration is warranted to delve into areas such as the interconnectedness of welfare effects stemming from changes in agricultural commodity prices with households, integrating considerations of consumption, production, and shadow wages, particularly in the context of the Covid-19 pandemic.