Exchange rate policy, structural breaks, and predictability of sugarcane prices

Abstract

Sugarcane price uncertainty has been a contentious issue in Fiji’s sugar industry for the past few decades. We study the predictability of sugarcane prices by examining time-series properties of the historical prices data over the sample period 1975 to 2019 allowing for structural breaks. We employ the unit root test of Zivot-Andrews (1992) and the structural break test of Bai and Perron (1998) and find robust evidence that sugarcane prices are characterized as stationary (mean-reverting) processes with structural breaks occurring in 1986 and 2011. The estimated break dates coincide with exchange rate policy decisions such as the devaluation of the Fijian dollar by the Reserve Bank of Fiji. Our findings provide new insights that given concerns of price uncertainty in Fiji's sugar industry, historical data is useful for forecasting sugarcane prices, implying that sugarcane prices, in fact, are predictable. The results also reveal that shocks only have transitory effects on sugarcane prices, and devaluation is an important source of shock to sugarcane prices.