The transmission and management of price volatility in food supply chains

Abstract

The 2006-2011 period has been marked by increased volatility in food an agricultural commodity prices at a global level. In the EU, the continuous liberalization of agricultural markets under the Common Agricultural Policy has led to the exposure of EU agricultural to increasing market price volatility. This thesis has investigated the transmission and management of price volatility in EU food supply chains. The transmission of price volatility in various food supply chains is first investigated through a literature review followed by an empirical analysis of price volatility transmission in the case of the German fresh pork supply chain. The effect of market power was also taken into account in the latter empirical analysis. Next, the management of price volatility was investigated through interviews conducted with actors of selected EU food supply chains. This was followed by the analysis of the effectiveness of selected price volatility management strategies. Lastly, in light of the policy support for agricultural insurance within the Common agricultural policy, premium rates of an agricultural revenue insurance contract were calculated for the Dutch ware potato sector. One of the gaps identified in the reviewed literature is the lack of attention given to the effects of contextual factors on price volatility transmissions in food supply chains. Contextual factors include market power in the chain and pricing strategies (e.g. contracts) by chain actors. Results of the price volatility transmission analysis conducted in this thesis in the case of the German pork chain show that retail market power limited both the transmission of price levels and price volatility. This thesis shows that price volatility is perceived as risky by all actors in the food supply chain. Deviations of prices by more than 10 to 15 % from expected levels were perceived as price volatility by a majority of the chain actors. Results further show that price volatility management strategies in EU food chains are diverse and well beyond traditional instruments such as futures and forward contracts. Contrary to expectations, price fixing contracts were not found to be desirable by interviewed chain actors. This thesis also found that the effectiveness of contracts in reducing price volatility depended on how the contract price was set. Results of this thesis further show that premium rates of a revenue insurance contract for the Dutch ware potato sector across categories of farms. The average premium rates calculated were 32.1%, 22.2%, 33.1% and 24.0% on guaranteed revenue per hectare for the high expected yield, low expected yield, high yield variance to expected yield ratio and low yield variance to expected yield ratio categories of farm, respectively. The difference in premium rates across categories of farms implies that charging the same average premium rate to all Dutch ware potato farms can lead to adverse selection.