Discussion Paper No. 183 of 2015 on Supply Response of Kenya's Primary Exports to Price and Non-Price Factors: The Case of Coffee and Tea

Abstract

This paper sought to empirically estimate the export supply response of coffee and tea in Kenya. The export supply models for both coffee and tea exports were developed and estimated using the Nerlovian technique. The paper used annual data for the period 1980 to 2014 while E-Views was used in fitting and testing of the models. The model estimates suggest that the supply of coffee exports is significantly influenced by its price, production, agricultural Gross Domestic Product (GDP) and real estate growth in the short-run, while in the long-run, only production is significant. The results also indicated that coffee exports in the previous year were important predictors of coffee exports. However, real exchange rate and openness index were not important predictors. On the other hand, estimates of the tea model revealed that own price, agricultural GDP, production and lagged tea exports were statistically significant determinants of export supply in the short-run, while in the long-run, production and agricultural GDP were statistically significant predictors. The overall conclusion is that long-run elasticities are larger when compared with the short-run ones, since agricultural policies take time to affect the agricultural sector due to time lags in production. There is need to establish stabilization measures to keep farmers producing enough quantities for large scale exports. In addition, improved productivity in tea and coffee is key in improving the quantity and quality of coffee and tea exported.