Determinants of Cotton Prices in Turkey: A VAR Approach

The study estimates a dynamic vector autoregressive (VAR) model for cotton market prices in Turkey, considering the changes in policies and the market factors. VAR model consists of the annual data for the period between 1960 and 2010. In the cotton pricing model, the domestic stock-to-use ratio and stock-to-use ratio of the two competitive countries in Turkey’s cotton market (USA and Greece) are employed so as to obtain the effects of supply and demand factors. In the model, two dummy variables are used in an attempt to determine the effect of government support programs and 1973 oil crisis. The model led us to the result that government support programs do not have an effect on the determination of cotton market prices, and that the oil crisis of 1973 caused a structural change in cotton prices. Cotton price has a causal effect on the stock-to-use ratio of the two competitive countries (USA and Greece) and the domestic stock-to-use ratio. Additionally, there exists a unidirectional causality from the stock-to-use ratio of the two competitive countries to domestic stock-to-use ratio. Cotton price has an indirect causal effect on the domestic stock-to-use ratio.