Between August 2014 and May 2015, international wheat prices declined by 18%, rice prices dropped by 14% and maize prices declined by 6% (World Bank, 2015). These decreased prices are expected to be transmitted from international to domestic consumer prices of food items (e.g., wheat flour, bread). However, there are many factors that hinder this transmission process. Several studies analyzed price transmission from international to domestic markets (e.g., Acharya et al. 2012; Götz 2008). In particular, after the so-called food crises of 2007–2008 and 2010–2011 many studies were focusing on the role of integration of domestic markets to international markets, the price transmission of food prices between large markets and small ones. These crises made it interesting to understand and investigate the price relationships in main food products more thoroughly. Also, to study the implications for food security and livelihoods in food-insecure countries (IFPRI, 2016).

Georgia highly depends on food imports. In particular, the share of wheat import in total wheat consumption of the country has been around 90% in recent years (GeoStat, 2016). Wheat products are the main staple foods both in rural and urban areas in Georgia. Wheat accounted for 41% of the total dietary energy supply in 2005-07. On average in 2005-09 per capita consumption of wheat and wheat products (as foods) was 150 kg/yr. Therefore, an improved understanding of the market integration of the Georgian wheat sector is important for the country’s food security.

This policy paper investigates how prices are transmitted from the international wheat market to Georgia’s flour market. In particular, this research will address two research questions. First, we measure how international wheat market prices are integrated with domestic prices in Georgia. Furthermore, we conducted the Engle-Granger ECM test to understand asymmetric price transmission (APT), whether the positive or negative shocks are transmitted within the same time period.

Since September 2014, the ISET Policy Institute has been working with the German Economic Team (GET). In May 2015 ISET-PI and GET extended their partnership and began working on a variety of policy briefs for Georgia's industrial development. These briefs will simultaneously advance research in the sector and provide the Georgian government a set of guidelines for the development of its own policy, exploring where Georgia's comparative advantages lie. The German Economic Team is a consulting group that provides advisory services to the Georgian government on economic policy and is supported by the German Federal Ministry for Economic Affairs and Energy.