Quantifying the impact of international food price spillovers on South Africa domestic market: Short- and long-term dynamics and transmission channels

Working Paper 926

Abstract

This study quantifies the degree of return and volatility risk transmission from the global food market to the South African food market for the period from January 2010 to December 2023. It employs the TVP-VAR-based frequency connectedness to quantify and observe the evolution of both return and volatility risk transmission from the global food market to the South African food market. It also uses the quantile regression technique to identify the main driving factors of both return and volatility spillover from the international food market into the South African market. Results show a slightly higher level of return connectedness than volatility connectedness among the food markets and that shocks from the global food market dominate shocks from the South African food market. While return shocks appear to be more of a short-term phenomenon, volatility shocks are mainly driven by long-term factors. The degrees of shocks transmission are significantly higher when we use the five main global food types (meat, dairy, cereals, oil, and sugar) instead of the composite index of global food prices, especially in terms of volatility. In addition, an increase in geopolitical risks, equity market returns in South Africa, oil prices, and the COVID-19 pandemic were the main drivers of the transmission of return risk from the global food market to the South African food market. However, the depreciation of the Rand value decreased the spillover level. Regarding volatility risk transmission, the gold price, the South African equity, and the fixed income market return are the main drivers of volatility shock transmission from the global food market into the South African food market. The study recommends that South Africa strengthen domestic food production and diversify to build resilience against global food market shocks, especially by supporting vulnerable crops like barley, sorghum, and wheat. Policymakers should also implement strategic reserves, develop short-term risk management tools, integrate energy and food policy, monitor financial-commodity market linkages, and apply macroprudential regulations to mitigate the impact of global return and volatility spillovers on local food markets.

JEL:C13,C32,E31