Abstract

Obrian Ndhlovu and Venkatesh Seshamani

This paper investigated the relationship between output and price of cotton in Zambia. The paper was guided by three specific objectives: to establish the extent to which output affects cotton prices; to determine whether cotton production trails prices; and to determine the time lag by which production responds to prices. The paper used annual data on cotton output and price from 1999 to 2014 to estimate the regression models linking the two variables. The models involved regressing output on current price and varying lagged values of the price as well as regressing the price ratio on output. The paper found no significant evidence of output affecting the domestic price of cotton. On the other hand, strong evidence was found on price affecting cotton output with a lag. That is, current price was found to impact significantly on succeeding year’s output. There was a strong indication of farmers basing their decisions on naive expectation in which only the immediate past price and not the trend is taken into account when deciding how much cotton to produce. The key lesson was that this year’s price will strongly affect next year’s output and that the effect will quickly die out.