The effects of the exchange rate on four traded agricultural inputs (fertilizer, chemicals, farm machinery, and feed) in the naira are examined. Unit root tests in a trend model suggest that the exchange rate and the four input price ratios support the presence of unit roots, but they may be denied in a first difference model. The results reveal that domestic consumption affects real exchange rate regime shifts, implying a nonlinear relationship between real exchange rate and agricultural inputs with clearly distinguishable regimes. The past exchange rate has a large linear influence on the current exchange rate. Current foreign consumption, on the other hand, is positive but has no effect on the exchange rate in the linear component of the model. This result is consistent with a fixed-price/flex-price conceptual framework, with industrial pricing being more resistant to exchange rate swings than agricultural commodity prices.
The goal of the study was to look at the link between Nigerian exchange rate changes and agricultural inputs.
In the short term, the study found a correlation between exchange rate volatility and agricultural inputs, as well as a positive relationship between exchange rate and agricultural inputs.
As a result, it is advised that legal variables, including bureaucracy and regulation, be flexible and consistent with important exchange rate players in order to effect change for the efficient and effective supply of agricultural inputs/services. Similarly, among independent variables, financial issues are the most important predictor of exchange rate.
1.1 Background of study
Issues pertaining to currency rates and macroeconomic fundamentals have generated a variety of difficulties and challenges throughout the world in recent decades. The exchange rate, as a mechanism for pricing commodities and services globally, facilitates trade between economies. Exchange rate volatility is a prevalent problem across the world, and it has ramifications for domestic consumption through the cost of consumer products and services. As a result, fluctuations in the currency rate may obstruct or distort global trade of products and services. Furthermore, one of the most pressing problems in international macroeconomics is the impact of significant real exchange rate volatility on macroeconomic fundamentals. As a result, the research on the factors that determine exchange rate instability in international business cycle models has grown (Tretvoll, 2018).
In many developing nations, including Nigeria, exchange rate volatility has been seen to have an impact on domestic economic performance. It has ramifications for almost all economic activity in the United States and overseas. Most established and emerging countries throughout the globe have seen various periods of exchange rate volatility, which has resulted in a high level of uncertainty, which has hampered the achievement of macroeconomic goals. Large swings in exchange rates have prompted a need for a deeper understanding of how they affect import and domestic pricing, as well as consumption (Aliyu, Yakub, Sanni & Duke, 2009). The exchange rate is one of the economic variables that influences consumption both directly and indirectly through the pricing of consumer products and intermediary goods.
The concept of foreign exchange is born from the flow of goods and services across national borders. The movement of goods and services across national boundaries needs the flow of foreign currency in the opposite direction. In order to settle trade-related debt, a rate of exchange between the currencies of the two trading partners must be established. The exchange rate has an impact on the movement of numerous macroeconomic aggregates. It’s an exogenous variable that regulates the movement of most other variables, as well as macroeconomic stability and resource flows into and out of the country (Odili, 2014).
Maskus (1988) demonstrated that aggregate bilateral trade (the United States and its primary Western trading partners) is very sensitive to exchange rate variations by studying the effects of currency rates across many sectors of the economy (agriculture, industry, etc.). Agricultural inputs are usually open when measured by the ratio of exports and imports to domestic agricultural production, and have a low level of industrial concentration, making them more exposed to exchange rate swings than manufactured commodities.