MAKERERE UNIVERSITY

EFFECTS OF PRICE FLUCTUATIONS ON THE FINANCIAL PERFORMANCE OF

AGRIBUSINESS FIRMS IN UGANDA

BY

AKANKWASA EVELYNE
18/U/xxxxxxxxxxxxxxxxx/EVE
BAECON

SUPERVISED BY
DR.xxxxxxxxxxxxxx
(ACADEMIC SUPERVISOR)

A RESEARCH PROPOSAL SUBMITTED TO MAKERERE UNIVERSITY IN PARTIAL

FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF
A BACHELORS DEGREE OF ARTS IN ECONOMICS

MAY, 2021

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 CHAPTER ONE
1.0 Introduction
This chapter represents the background of the study, problem statement, objectives of the
study, research questions, scope of the study that is; subject scope, time scope,
geographical scope, significance of the study, and conceptual framework.

1.1 Background of the Study

Price fluctuation is a frequents rise and fall of commodity prices in the market as
a result of changes in the market situations, price fluctuation can be seasonal
whereby prices of commodities changes during certain season of the year due to the
increase in supply and demand. (Mchopa, 2012) Price fluctuation in the market can take a
short term due to a slight change in demand or supply of commodities in the
market. But it can also last long due to the increased inflation rate which highly
affects the prices of commodities in the market and its effect last long and limit the ability
of customers to purchase commodities in the market (Mchopa, 2012).

An organization’s financial performance on the other hand can be defined in terms of

how well a firm uses its assets from its core operations and generates revenues over a
given period of time. This is usually a measure that is compared to some given industrial
average standard of similar firms in the same industry. (Brealey et al., 2009)

The last two decades have been characterized by increase in the prices of agricultural
products (Mustapha and Culas, 2013). The most affected products are agricultural food
products whose prices have experienced fluctuation in the recent past. This price
volatility of agricultural products has attracted a lot of attention from various frontiers
including the economic and political ones. Most consumer goods are largely agricultural
and price fluctuations of these products directly affect the incomes of many who depend
on them as well as the living standards of those who depend on them (Ghosh, 2012).

Fluctuation of agricultural prices is not a preserve of one country or a specific economy

but rather an occurrence that has engulfed the number of countries around the globe.
Several countries both in the developed and in the developing world are grappling with

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agricultural price fluctuations that are caused by factors that sometimes beyond the
countries. In India for example instability in the prices of agricultural produce has been
experienced over some time and this has greatly affected the spending patterns of the
consumers. The fluctuations have also raised several questions on what the government
can do or the policies that can be put in place to achieve stability of agricultural prices
since they play a very significant role in the economic growth and development (Sarris,
2009).

Developing countries especially in Africa have also experienced continued fluctuations in

the agricultural prices in the past few decades. Mustapha and Culas (2013) Assert that
Africa has the largest population of the world’s hungry who are adversely affected by the
frequent fluctuations in agricultural prices. They further argue that price fluctuations not
only affect the people who directly depend on agricultural products but also those firms
that are conducting business in the agribusiness sector. Governments have been involved
in the deliberate attempts to ensure that the fluctuation of agricultural prices in Africa are
managed in order to achieve stability in the sector that contributes a lot towards the
economic growth of most African countries (Mustapha and Culas,2013).

Sarris (2009) indicates that prices of most agricultural commodities have generally
experienced a decline from the early 1980s to the present time. He further outlines that
real prices of bulk food commodities have had a decreasing trend; real prices of vegetable
oils have trended to decrease; the prices of various agricultural produce has kept on
decreasing for the last three decades in the Uganda market. One of the factors that were
found to contribute significantly to the fluctuations in the prices of agricultural
commodities is the non-use of the main inputs in the agricultural process. For instance the
main inputs such as fertilizers is not commonly used by most of the players in the
agricultural sector despite the fact that it is a very important enhancing agricultural
production (Ghosh, 2012). The type of trade policies that are adopted by most countries
contribute significantly towards the rate of agricultural price fluctuations. For instance in
Africa, most counties import grains more than they exports agricultural products
(Triki,and Affes, 2011).

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 1.2 Statement of the Problem
The stability of prices is very important in ensuring that different sectors in an economy
can enjoy predictable prices of commodities. However price fluctuations are common in
business as a result of changes in demand and supply (Frankfurt, and Main, 2009). The
issue of price volatility has assumed critical importance today in the context of
agricultural trade liberalization. One of the major arguments advanced against
agricultural trade liberalization is that it would lead to transmission of Uganda price
volatility into domestic markets. Extreme volatility in commodity prices, particularly of
food commodities, affects poor agricultural laborer’s and labor engaged in unorganized
sector adversely because their wages are not index-linked. Small farmers in countries like
Uganda with low propensity to save and poor access to efficient saving instruments
cannot cope with the revenue variability resulting from fluctuations in output prices.
They do not possess the requisite know-how for crop diversification and also lack access
to appropriate technology. Commodity price volatility poses problems also for the
governments and exporters of the primary commodity-producing developing countries
(Sekhar, 2013). Price fluctuations have also been experienced in Uganda and the impact
has been felt in a number of sectors. Research on price fluctuations reveals diverse
findings. This leaves a research gap that the main cause of this problem. Even in the
studies mentioned above only determinants has been addressed but not the effect of price
fluctuation on the financial performance of agribusiness firms. This leaves a research gap
that needs to be bridged. This study therefore covered this existing research gap by
investigating the effect of price fluctuations on the financial performance of agribusiness
firms in Uganda.

1.3 Purpose of the Study

The main objective of the study is to establish the effect of price fluctuations on the
financial performance of agribusiness firms in Uganda.

1.4 Objectives of the Study

i. To establish the determinants of price fluctuations of agricultural products in Uganda
ii. To establish the level of agribusiness firm performance in Uganda

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iii. To establish the relationship between price fluctuations and firm performance of
agribusiness in Uganda.

1.5 Research Questions

i. What are the determinants of price fluctuations of agricultural products in Uganda
ii. What is the level of agribusiness firm performance in Uganda
iii. What is the relationship between price fluctuations and firm performance of
agribusiness in Uganda

1.6 Scope of the Study

1.6.1 Subject Scope
This study will focus on the agricultural price fluctuations and their influence on
the financial performance of agribusiness firms in Uganda.

1.6.2 Time Scope

The study will look at a period of four months from May 2021 to July 2021. The
study will consider the statistics for the last five years.

1.6.3 Geographical Scope

The research will concentrate on agribusiness operating in Kampala metropolitan
area

1.7 Significance of the Study

The findings of the study will be beneficial to various groups of people. The
management of agribusiness in Uganda got more information and better
understanding of the determinants of agricultural price fluctuations. They got
access to information on the impact of price fluctuations on the financial
performance of the firms. This was important to the firms in decision making
concerning issues related with price fluctuations.

The policy makers both in the agribusiness and the government also benefited
from the findings of the study. They will be able to find information that provided
the basis upon which some policies were developed. This will assist in ensuring

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 that appropriate policies are formulated in order to enhance stability in
agricultural prices.

The findings of the study will also very important to those in the academic realm
who may be interested in conducting further research in agricultural price
fluctuations both now and in the future. The findings will provide relevant
literature that can inform future researchers and also provide them with more
insight on this concept.

1.8 Justification of the study

It has already been observed that there is research that has been carried
out on agribusiness and price fluctuations. Most of the studies have largely
focused on the causes of the price fluctuations with little or limited attention to the
effect of such fluctuations on the financial performance of agribusiness firms. On
the other hand the studies available in this area especially in Uganda have not
investigated the agribusiness industry. This makes this particular study unique and
different from the other since it seeks to address an issue that has not been
addressed before and also focuses on a sector that has not been given significant
focus.

10. Conceptual frame work

Jabareen (2009) defines a Conceptual framework as a network of concepts that
are related and interlinked in one way or another to provide an elaborate
understanding of some existing phenomenon. A conceptual framework is
therefore a product of the qualitative processes of theorizing the relationship that
exists between some independent and the dependent variable. The conceptual
framework explains the relationship of the effect of price fluctuation on the
financial performance of agribusiness firms in Uganda. The conceptual
framework of this study was founded on three independent variables which were:
Uganda commodity price fluctuation, Raw material price fluctuation and Labor
cost price fluctuation.

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Figure 1: Conceptual framework
Independent variable Dependent variable

Uganda commodity price Labor cost price fluctuation

fluctuation Change in specific (Change in wages and
commodity) salaries)

Raw material price fluctuation

(Change in fertilizer prices)

Labor cost price fluctuation

(Change in wages and salaries)

Labor cost price fluctuation

(Change in wages and
salaries)

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 CHAPTER TWO
LITERATURE REVIEW
2.0 Introduction
This chapter reviews the existing literature put forward by different scholars and
personalities on the effects of price fluctuations on the financial performance of
agribusiness firms in Uganda.

2.1 Definition of key concepts

Price fluctuation is a frequents rise and fall of commodity prices in the market as
a result of changes in the market situations, price fluctuation can be seasonal
whereby prices of commodities changes during certain season of the year due to the
increase in supply and demand. (Mchopa, 2012)

Financial performance on the other hand can be defined in terms of how well a firm uses
its assets from its core operations and generates revenues over a given period of time.
This is usually a measure that is compared to some given industrial average standard of
similar firms in the same industry. (Brealey et al., 2009)

2.2 Determinants of price fluctuations of agricultural products in Uganda

2.2.1 International Commodity Price Fluctuations

The international commodity prices play a very significant role in determining the level
or rate of price fluctuations in various countries around the globe. For instance the price
of oil in the international market is perhaps the reason why serious price fluctuations are
experienced in many countries around the globe (Frankel, 2013). He further argues that
international price fluctuations are mostly affected by macro variables that are difficult to
ignore in any given economy. When there are significant price fluctuations in
international commodity prices, even the local prices will also experience notable
fluctuations.

According to Wolf (2008) there has been serious fluctuation in international commodity
prices due to economic growth changes that are being experienced in some countries such

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as China. The demand for cheaper products from countries that have experienced growth
in production has had an impact on price fluctuations in a number of countries. The high
growth experienced in countries such as China after the 2008 economic recession has
greatly influenced international commodity price fluctuations in many countries. Kilian
and Lee (2013) also argue that the increased growth has also seen the storable inventories
of commodities in the global market increase and this has increased speculation which
has had an impact on international commodity price fluctuations.

South Centre (2005) argues that the international commodity prices are notoriously
volatile. This implies that the prices of various commodities are not stable in the
international market and therefore experience frequent variations. Brown (2008) while
agreeing with this position indicate that the price variations for international commodities
have been more frequent in the last thirty years than they have been in the last seventy
five years. This is an indication that international commodity price volatility has become
more intense than it was before. He further argues that most of the developing countries
around the globe largely depend on income from primary commodities for their foreign
exchange and they suffer most due to the frequent variations in international commodity
prices.

Unstable international commodity prices more often lead to macro-economic instability

and also other related problems within an economy. For any economy that highly
depends on primary commodities for income, it is highly likely to experience commodity
price variations that will definitely affect the living standards of the people and growth
rate as well. It estimated that more than 2.5 billion people directly or indirectly earn a
living from the agricultural sector either as farmers or as agro processors. Whenever there
are changes in the international commodity prices, macroeconomic stability becomes
evident and this is likely to affect many sectors and firms in an economy (Common Fund
for Commodities, 2005).

According to UNCTAD (2002), the volatility on international commodity prices has also
been caused by increasing production in some countries around the globe. The increased
production has also led to a decrease in the prices of some commodities and this puts

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commodity dependent countries or firms at a highly vulnerable situation. Firms that
depend on income from agricultural commodities are therefore likely to suffer frequent
financial shocks as a result of the high price volatility in the international market due to
high production.

2.2.2 Raw material price fluctuations

Becker and Posner (2013) argue that prices of raw materials into any production process
will greatly influence the level of price fluctuations in any sector of the economy. They
further argue that the prices of various natural resources are usually very volatile and are
likely to cause major fluctuations in prices of commodities that require such resources as
inputs. The inputs or raw materials are scarce and world’s population has always been on
the increase. This situation has also contributed to the fluctuations in commodity prices in
the recent past. Leybovich (2012) also concurs with the above position by arguing that
the prices of raw materials are very volatile and this is the main concern that any
manufacturer has to address. This implies that manufacturers have to find new ways of
coping with fluctuations in the cost of raw materials for them to remain competitive.

Changes in the demand and supply of raw materials play an important role in determining
the prices of commodities. The changes are the foundation of notable price fluctuations
that take place in the market for various commodities. For instance an increase in the
prices of raw materials will lead to a “cost push” type of inflation where the producers are
forced to increase the prices of end products due to an increase in the prices of raw
materials. Inflationary pressure is perhaps the reason why central banks of specific
governments increase real interest rates in order to avoid further price deviations
(Frankfurt and Main, 2009).

According to Thomas (2014) the past global recession has had a negative impact on most
manufacturing firms. Some of the effects include the fluctuation of energy prices as well
as the prices or raw materials. For manufacturing firms to remain in business, they have
to seek for alternative suppliers of raw materials thus shifting price fluctuations from one
sector of an economy to another. He further argues that price fluctuations especially for

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raw materials have no room for errors in planning since firms have to walk a thin line
between success and operating loss.

Hannu (2009) argues that products are usually made from different types of raw
materials. These raw materials have different prices which are subject to change from
time to time. The prices may either increase or decrease depending on the prevailing
market conditions. The cost of raw materials is very important to management accounting
since it is the basis upon which product costing is founded. Product costing enables a firm
to understand the costs that will be incurred and also to identify areas where cost
reduction can be made in order to make a product more affordable. However, as prices of
raw materials increase, product costing becomes a difficult exercise. The prices of raw
materials are therefore a major determinant of price changes.

Rizza (2010) asserts that the prices of raw materials in the international market have been
fluctuating without any indication of stability both now and in the future. She further
argues that this kind of uncertainty leaves firms with few alternatives since they heavily
rely on the prices and may not make accurate decisions. Firms therefore fail to make long
term decisions that are based on current pricing of raw materials because they cannot
predict what will happen in the future. The fluctuations in the prices of raw materials
affect not only the sourcing of the raw materials but also to a greater extent the profit
margins of a firm.

2.2.3 Labour Cost Fluctuations and Financial Performance

Those in charge of formulating economic policies have done close monitoring of a
reliable early indicator of inflation. As a result of this close attention changes in hourly
compensation in form of wages and salaries of workers has received greater attention. On
average, compensation represents about two-thirds of the total cost of production, and
economic theory suggests that an increase in the rate of compensation growth will lead to
accelerating price inflation unless the increase is offset by greater productivity growth or
a squeeze on profits. For instance throughout the 1990s, both the employment cost index
(ECI) which measures the rate of change in employers’ hourly costs of providing wages,

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salaries, and benefits as well as the consumer price index (CPI) have risen at moderate
rates relative to the previous decade (Braver, 2010).

A link between compensation and prices has the potential of causing positive or negative
results. For instance, firms whose compensation costs are rising more rapidly than the
volume of commodities they produce are highly likely to attempt to raise product prices
in order to cover production costs. However, higher price inflation could itself trigger
more rapid compensation growth through explicit or implicit contractual arrangements
such as cost-of-living allowances or through the influence of inflation expectations on the
wage setting process. An examination of the relationship between private sector
compensation and prices on an aggregate level reveals that ECI and the core CPI
frequently are usually in tandem, with only a slight tendency for labor cost developments
to precede price movements (Peneva and Rudd, 2015).

However, Gordon (2013) asserts that the effect of labour cost on price fluctuations can
only make sense if there is an economically significant level of influence of the labour
costs on the commodity price fluctuations. He further argues that commodity price
fluctuations can only be evident if the labour costs are closely connected to price setting
dynamics in any market. Tonu (2012) concludes that labour costs may or may not be a
major determinant of price fluctuations depending on whether the duration involved is
short or long term.

Labour costs have a significant impact on the fluctuations of prices of commodities or on

wage related inflation in any economy. When the cost of engaging labour keeps on
increasing from time to time, it forces the firms to pay more in terms of wages and
salaries. This makes the cost of production to increase and producers are left with no
alternative other than passing through the additional cost to the consumers in form of
increased prices of commodities. Labour costs in most firms represent a significant
portion of the firms’ operational expenses and their continued fluctuations have a
negative impact on the financial performance of the firm. In most cases the profitability
of the firm declines due to reduced financial activity when the prices fluctuate to
abnormal levels (Penneva and Rudd, 2015).

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2.2.4 Government subsidy fluctuations
Governments shape the environment in which firms operate. They affect firms in many
ways such as levying taxes, providing subsidies, enforcing laws, regulating competition
and defining environmental policies. In short, governments set the rules that firms must
comply with as they engage in business. At a given point in time, the government decides
whether or not to change its policy. If a policy change occurs, the perception of the firms
also changes: the posterior beliefs about the old policy’s impact are replaced by the prior
beliefs about the new policy’s impact. When making its policy decision, the
government is motivated by both economic and non-economic objectives: it maximizes
the investors’ welfare, as a social planner would, but it also takes into account the
political cost incurred by changing the policy. This cost is unknown to the investors, who
therefore cannot fully anticipate whether the policy change will occur. The investors’
uncertainty about the political cost is labeled political uncertainty (Bloom, 2009).
Barsky and Kilian (2004) reveal that the type of fiscal and monetary policy adopted by a
government largely dictates the level of price fluctuations. They further argue that most
countries around the globe have had a tendency of adopting an easy monetary policy that
encourages low real interest rates. It is argued that the high prices of oil especially in the
1970S were due to an easy monetary policy. On the contrary a high real interest rate
policy in the 1980s saw made the international commodity prices of minerals and
agricultural commodities in some countries such as the United States of America.

It is optimal for the government to replace its policy by a new one if the old policy’s
impact on profitability is perceived as sufficiently unfavorable; i.e., if the posterior mean
of the impact is below a given threshold. This requirement decreases with policy
uncertainty as well as with the political cost that is associated with the policy. If the
government derives an unexpectedly large political benefit from changing its policy, the
policy will be replaced even if it worked well in the past. In expectation, however, the
threshold is below the prior mean of the policy’s impact. To push the posterior mean
below the prior mean, the realized profitability among firms must be lower than expected.
As a result, policy changes are expected to occur after periods of unexpectedly low
profitability in an economy (Gomes, Kotlikoff, Viceira, 2008).

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