Import Demand for Milk in China: Dynamics and Market Integration

Abstract

The consumption of milk in China has been increasing over past two decades. Currently, China does not produce enough milk to meet this increase in demand. Consequently a large volume of milk is imported. In this study, import demand for milk in China is explored using demand systems approach formulated through a vector error correction model (VECM). Additionally, import market integration is explored using contemporaneous causality structures developed through artificial intelligence and Direct Acyclic Graphs (DAGs) applied to innovations of VECM. Objectives of this study are to (1) Develop a VECM and test price homogeneity in the cointegration space; (2) Estimate almost ideal demand system model where prices are expressed in relative prices; (3) Calculate Chinese import demand elasticities for milk; and (4) Model import market integration using DAGs. Annual import volume (lbs) and total value ($US) of milk imported to China from Australia, New Zealand, United States and rest of the world, from 1992–2013 are collected from UN COMTRADE database. Calculated milk import demand elasticities shed light on the sensitivity of milk imports to changes in milk price of exporting country. Causality structure based off of innovations of VECM will allow us identify import market integration patterns. Preliminary results from causality structures reveal that the import share from the rest of the world is endogenous, while that of the United States, Australia and New Zealand was found to be weakly exogenous.