Managing Agricultural Price Volatility in Zimbabwe Using Derivative Instruments for Sustainable Agricultural Development

Abstract

Agricultural commodity price volatility poses a significant challenge to income stability, investment, and financial sector participation in Zimbabwe. This study examines the nature, drivers, and persistence of price volatility in five major commodities maize, tobacco, cotton, soybeans, and wheat over the period 2010–2025, with a focus on assessing the potential role of agricultural derivatives as risk management instruments. Using monthly price data and employing GARCH(1,1) and extended GARCH-X models, the analysis identifies high and persistent volatility across all commodities. Exchange rate fluctuations, rainfall variability, and policy interventions are found to be the most significant drivers of price instability. Diagnostic tests confirm the robustness and reliability of the models. The findings underscore the limitations of informal risk-coping mechanisms and highlight the potential of agricultural derivatives, including futures and options, to stabilise farm incomes, reduce financial risk, and support investment planning. The study provides empirical evidence supporting the development of a structured derivatives market to enhance resilience and sustainability in Zimbabwe’s agricultural sector.