On the Relevance of World Agricultural Prices

Two questions are asked about the relationship between domestic prices and world prices of agricultural commodities: are variations in world prices transmitted to domes-tic prices, and do these variations in world prices constitute an important component of variations in domestic prices? Domestic prices are regressed on world prices in various forms, taking into account the possible effects of exchange rates and inflation. The empirical analysis is based on data from the Food and Agriculture Organization of the United Nations for 58 countries for 1968-78 and for the countries of the European Community for 1961-85. The results show that most of the variations in world prices are transmitted and that they constitute the dominant component in the variations of domestic prices. Agricultural products are on the whole tradable, and every country trades in some agricultural products. In the absence of intervention it is expected that domestic prices of such products will vary with world prices. It is well known, however, that agriculture is subjected to considerable intervention, which cre-ates a gap between world prices and domestic prices and which generates cross