Abstract
Empirical studies show that market concentration and pricing policies regulation have an important impact on price transmission. These factors lead to an asymmetric price transmission, particularly in agricultural commodities markets. This paper investigates farm-retail price transmission along the Canadian dairy and pork values chains using Threshold Autoregressive, Momentum Threshold Autoregressive, Error Correction Models and Granger causality test. Using monthly price data, we found that farm-retail price transmission is asymmetric in short and long-term between raw milk and butter price while it is symmetric in the cheese case. In the pork sector, price transmission is asymmetric in long-term and symmetric in short-term between farm price and respectively pork chops and bacon prices. Because of processor and retailer concentration, consumer prices respond more quickly to upward than downward of farm prices. The processors, retailers and distributors concentration along the value chain in Canadian dairy and pork sectors and the supply management regulation policies as well as income stabilization insurance program are the main factors generating this market structure. Consideration of the characteristics of farmers, processors, and retailers in the value chain and the actors’ potential reactions to the agricultural policy could better protect consumers and producers from market distortion.
Highlights
Agri-food industries in most countries are marked by a high concentration of processors and retailers (Sexton, 1990)
This paper investigates farm-retail price transmission along the Canadian dairy and pork values chains using Threshold Autoregressive, Momentum Threshold Autoregressive, Error Correction Models and Granger causality test
The test shows a long-term relationship between the price of partially skimmed milk and the milk price at production at the threshold of 10%. These results show that all the conditions are satisfied for the estimation of the Error Correction Model (ECM)
Summary
Agri-food industries in most countries are marked by a high concentration of processors and retailers (Sexton, 1990) This concentration is often perceived as a source of market power for these intermediaries, who are able to capture a large part of the margin resulting from a possible prices variation. The exercise of this market power is manifested by the ability of intermediaries to transmit the input price increases quickly and totally to the consumer. Declines in input prices are partially transmitted and at a slower rate than price increases (von Cramon-Taubadel, 1998) This phenomenon called "asymmetric price transmission" has some implications for economic policies outcomes. According to Vavra and Goodwin (2005), when price transmission is not total and symmetric, trade liberalization effects on consumer welfare are overestimated
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