Terms of Trade and Structural Sustainability of the Agricultural Sector in Peru: A Cointegration Approach

In recent years, Peru’s agricultural sector has expanded steadily despite recurrent external shocks and persistent volatility in global commodity markets. This sustained performance reflects the sector’s exposure to international price dynamics, a connection with direct implications for structural sustainability in a small, open and commodity-dependent economy. In this context, the study examines whether the terms of trade (TOT) sustain a stable long-run relationship with Peru’s agricultural GDP and assesses how this linkage shapes structural sustainability. The analysis applies Johansen’s cointegration method combined with a bivariate Vector Error Correction Model (VECM), enabling the identification of common long-run trends and the estimation of adjustment speeds following external shocks. The results reveal a single cointegrating vector and a negative, highly significant error-correction term in the agricultural equation, indicating that the sector gradually corrects deviations from its long-run equilibrium. In contrast, the TOT display no meaningful adjustment mechanism, behaving as a weakly exogenous driver. Short-run effects of external shocks are small and statistically fragile, suggesting that quarterly disturbances are overshadowed by the longer-run correction process. Beyond quantifying these dynamics, the study offers a structural reading of how volatile imported inputs—fertilisers, fuels and agricultural machinery—influence agricultural performance, even when export prices are favourable. Overall, the findings underscore that long-term sustainability depends not only on global price trajectories but also on domestic productive capacities and gradual technological improvement, highlighting the need for adaptive strategies in an environment of persistent global volatility.