Price Transmission Analysis Research Articles

Price transmission analysis using threshold models: an application to local rice markets in Benin and Mali

In most African countries, spatial dispersion of production and consumption often results in high transaction costs that prevent farmers from accessing markets and causes asymmetry in price transmission. The objective of this study was to provide the baseline information on local rice price transmission between paired producer and consumer markets in Benin and Mali. To achieve this, we used Enders and Siklos’s threshold models on monthly price series from 2000 to 2010 to examine the nature of price transmission between selected markets in the surplus zones and the nearest important consumption markets. The results for Benin indicated that price transmission between markets in the surplus zone and the consumption markets was asymmetric, probably because of the prevalence of high transaction costs. These results showed that increases in price in the surplus-zone market were more quickly transmitted to the consumer market than decreases in price. Conversely, the results for Mali indicated symmetric price transmission between the market in the surplus zone and the consumer market, suggesting the prevalence of lower transaction costs. These results highlight the need for policies aiming to lower transaction costs observed in selected local rice markets in Benin. Specific policies, such as investment in public infrastructure, e.g. roads, could promote the vertical integration of local rice production with marketing. This would be crucial to achieving rice farmers’ food security and hence their wellbeing.

The Estimation of Threshold Models in Price Transmission Analysis

The threshold vector error correction model is a popular tool for the analysis of spatial price transmission. In the literature, the profile likelihood estimator is the preferred choice for estimating this model. Yet, in many settings this estimator performs poorly. In particular, if the true thresholds are such that one or more regimes contain only a small number of observations, if unknown model parameters are numerous, or if parameters differ little between regimes, the profile likelihood estimator displays large bias and variance. Such settings are likely when studying price transmission. We analyze the weaknesses of the profile likelihood approach and propose an alternative regularized Bayesian estimator, which was developed for simpler but related threshold models. Simulation results show that the regularized Bayesian estimator outperforms profile likelihood in the estimation of threshold vector error correction models. Two empirical applications demonstrate the relevance of this new estimator for spatial price transmission analysis.

Price Transmission Analysis of the Effects of TPP Tariff Elimination and Feed Price Increases on the Wagyu Beef Market in Japan

The Trans-Pacific Partnership (TPP) negotiations have become a major topic of debate in Japan. This paper focuses on wagyu beef market and analyzes how tariff elimination affects the market. This issue is particularly important in the light of feed price increases in 2007–08 because it is not clear about how much feed price increases will negatively affect livestock farmers during the process of tariff elimination. This paper estimates the demand function for wagyu beef and derives the upper and lower limits of the cross-price elasticity of demand with respect to imported beef price. The effects of tariff elimination on the market are then examined using a static price transmission model. The model assumes that the current tariff will be reduced in phases until it is completely eliminated after 11 years. During this process, this paper considers the case where feed prices remain the same against another case where feed prices increase every year. The results show that, in the first case with the upper limit, wagyu demand will decline by 4% in 11 years, and the gross profits of wagyu fattening farmers will decline by 7% at worst. However, using the lower limit, wagyu demand will increase by 2% as the price decline stimulates consumption, leaving their gross profits unchanged. Meanwhile, wagyu calf prices including subsidies will fall by 5%. Total sales of calf breeders, including subsidies, will decline by 3%–9% in 11 years. Overall, the negative effect of tariff elimination on wagyu calf production will be limited. However, the Japanese government will have to offer more subsidies to maintain wagyu calf production. As for the second case, increasing feed prices amidst reduction in tariffs will have more negative impact on cattle fattening farmers. In this case, the tariff reduction process should be slowed down to mitigate this negative impact.

Marketing price transmission analysis in the Iranian rice market

The goal of this paper is to test whether changes in the marketing margin between the farm and the retail prices can result in an asymmetric relationship between the on farm and the retail prices in the rice market of Iran. By separating the transaction cost variation into two regimes, this paper utilizes a two-type TVECM with the error correction. The empirical results show that when the marketing margin is lower than the threshold value, the market system operates freely and there is feedback between the farm and retail prices. However, when the marketing margin is higher than the threshold value, the government intervenes in the market and the causality between the farm and retail prices no longer exists. The conclusions are as follows: Changes in the marketing margin can cause the asymmetric price transmission between the farm and retail prices in Iran’s rice markets; therefore, ignoring the effect of the marketing margin could lead to errors in the models. When the marketing margin is higher than the threshold value, the government intervenes in the market and the causality between the two prices is broken.

A Simulation Analysis of Asymmetric Price Transmission in a Farm Product Chain

A Simulation Analysis of Asymmetric Price Transmission in a Farm Product Chain

Spatial price transmission analysis in Ghanaian agricultural markets: Does the data frequency improve our estimation?

Unavailability of high frequency weekly or daily data compels most studies of price transmission in developing countries to use low frequency monthly data for their analyses. Analysing price dynamics, especially in agricultural markets, with monthly data may however yield imprecise price adjustment parameters and lead to wrong inferences on price dynamics. This is because agricultural markets in developing countries usually operate daily or weekly, not monthly, as implied by the market analysts who use low frequency data. This paper investigates the relevance of data frequency in price transmission analysis by using a standard and a threshold vector error correction model to estimate and compare price adjustment parameters for high frequency semi-weekly data and low frequency monthly data obtained from five major fresh tomato markets in Ghana. The results reveal that adjustment parameters estimated from the low frequency data are higher in all cases than those estimated from the high frequency data. There is reason to suspect that using low frequency data, as confirmed in some literature, leads to an overestimation of the price adjustment parameters. More research involving a large number of observations is however needed to enhance our knowledge about the usefulness of high frequency data in price transmission analysis.

Markov‐Switching Estimation of Spatial Maize Price Transmission Processes between Tanzania and Kenya

We discuss the Markov-switching vector au toregressive (MS-VAR) class of nonlinear time series models that can be used to analyze recurring discrete structural changes in time series. Hamilton's (1989) seminal Markov switching (MS) model of the U.S. business cy cle triggered considerable interest in the MS approach in economics. Most empirical appli cations to date have focused on the business cy cle and financial markets, but we see potential for MS-VAR models in agricultural economics, for example, in price transmission analysis. In the following, we first provide an overview of the MS-VAR framework. We then present an illustrative application to maize price trans mission between Tanzania and Kenya. The article closes with a discussion of strengths, weaknesses, and potential uses of the MS-VAR approach in price transmission analysis.

The impact of market and policy instability on price transmission between wheat and flour in Ukraine

Analysis of price transmission in transition countries is often complicated by unstable policy environments. We use a Markov-switching vector error-correction model (MSVECM) to model multiple regime shifts in the relationship between wheat and wheat flour prices in Ukraine from June 2000 to November 2004. Unlike common alternative error correction specifications, the MSVECM does not require an explicit transition variable but rather permits changes between regimes to depend on an unobserved state variable. The analysis reveals four regimes whose timing coincides with political and economic events in Ukraine. Strong coincidence between a 'high-uncertainty' regime and discretionary policy interventions suggests that policy responses to fluctuations in Ukrainian harvests may have amplified instability. Oxford University Press and Foundation for the European Review of Agricultural Economics 2009; all rights reserved. For permissions, please email journals.permissions@oxfordjournals.org, Oxford University Press.

Analysis of economic issues relating to the dairy sector, with emphasis on price transmission

The dramatic decline in consumption after 1990 was an important problem during the analysis of the sector. Even today, consumption is still below the degree that was before the political change, and significantly lags behind the EU level.The importance of this topic is emphasized by the fact that surplus milk could be marketed through the increased domestic consumption; this would create a more stable and calculable situation for farmers. Therefore, I considered it important to reveal what factors and by what shares influence the consumption of milk and dairy products. The relationship, time series and cross-sectional analysis based on national and international databases demonstrate the relationship between the consumption of milk and dairy products and the other determining factors of consumption in Hungary and in the EU-25 through diagrams. I draw the conclusion that there is a medium correlation between the development of the economy, the higher income level and the consumption of milk and dairy products. Just before our EU accession, the dairy sector was one of the most critical industries of Hungarian agriculture, which is why I chose this for my analysis. I regard as a new scientific result the econometric analysis of the asymmetric market conditions in the price transmission approach within our dairy sector between 1995 and 2003. I confirmed and quantified that the market is under an oligopoly and defined the direction of price adjustment. Furthermore, I regard as a new result in the price transmission analysis (also published in the article published with Dr. József Tóth), that the three possible dimensions (elasticity, a symmetry relations,lag) are analysed simultaneously.Therefore,a more sophisticated picture is given on price transmission. The theoretical advantages and disadvantages are verified by an example of a vertical coordination based on the horizontal cooperation in the dairy sector (Alföldi Tej Ltd).

The price transmission in pork meat agri-food chain

The paper deals with the analysis of price transmission in pork meat agri-food chain. The analysis is aimed at the determination of the type of market structure in the chain based on the derived theoretical model and fitted reduced model of price transmission in the form of VECM. Then, impulse-response analysis and decomposition of variance of fitted VECM show the system’s reaction to innovations and the interaction between variables for longer forecast horizons. The results imply that processing stage may exercise oligopsonic power, i.e. the market structure has the type of oligopsony. Impulse-response analysis shows that the system approaches relatively fast the equilibrium and all responses are positive. Moreover, decomposition of variance informs about the increasing role of the wholesale price in the explanation of forecast error variance of agricultural price. Then, it follows from the obtained results (among other) that the pork meat agri-food chain may be characterised as demand-driven. The type of market structure implies that the agricultural support is in this case shared within the vertically related markets and thus is less efficient.

Price transmission analysis between Finnish and selected European broiler markets

The import of poultry meat in Finland has been growing since 2000, mostly in broiler. Because of the avian flu scare, there has been a ban on importing poultry from Asia for the past two years, so Finland imported broiler mostly from European 25 countries, such as Denmark, Germany and France. The market share of broiler from foreign countries is growing, so is the competition on the price. Allowing for price signals to be transmitted spatially in different markets and market integration is the key premises in economics. One of the main goals of the EU’s common agricultural policy is to get spatially integrated agricultural commodity markets within and between all member states. In an integrated market, price information should be efficiently transmitted between the member states. EU commission claims that also domestic policies and regulations applied in the member countries, should support (or at least not to distort) the goal of achieving the informational efficient single European market. Particularly in Finland, with small and remote domestic market, the issue of market efficiency and transmission of market information have significant implications for the first is actions taken in accordance of the antitrust legislation on regulating the domestic food industry structures. The second is permission for domestic agricultural subsidy programs that supplement the CAP. The main purpose of the paper is to estimate the price transmission relationship between the Finnish broiler market and selected its major exporting partners using the wholesale prices, i.e. the prices in front of the slaughterhouses in each countries. The result implies that the price level of Finnish broiler market is rather stable in comparison to the most of other EU countries, and the domestic demand and supply mostly decide the wholesale price in Finland. Finnish broiler price is not cointegrated with the price of the selected countries, indicating that there is no significant long-run relationship between them. The findings show, however, the unidirectional causality between Finnish broiler price and the prices in the other EU countries in the short run. That is, the broiler price shock of Finland appears to be driven partly by the prices of imported countries, but the reverse is not true.

A cointegration analysis of price transmission between ADRs and dually listed South Korean stocks

This paper examines the dynamics of price transmissions between the South Korean shares and its American Depository Receipts (ADRs) for individual firms and a portfolio of all firms using a vector autoregressive (VAR) model in a cointegration framework. The results show a long-run cointegrating relationship among five pricing factors, namely the prices of Korean ADRs and their underlying shares, the Korean and the United States (US) market indices, and the exchange rate. Although the US market index is in the cointegrating vector, it is found to be an exogenous variable in the long-run. The short-term dynamics of the Korean portfolio returns are influenced by the deviation from the long-run equilibrium and the lagged changes of all pricing factors except for the exchange rate. On the other hand, its ADR portfolio returns are influenced by lags of its own returns, the US market return and changes in exchange rate. While innovations in the price of underlying shares explain a large portion of innovations in the ADRs for individual firms, shocks to the Korean and the US markets are more important at the aggregate level.

Marketing margins and price transmission on the Hungarian beef market

Abstract There is a wealth of literature on farm-retail price spread for different commodities and countries. However, research on price transmission and marketing margins in the transition economies is still limited. The paper analyses two specific aspects of transition: the larger probability of asymmetric price transmission and structural changes in the case of Hungarian beef chain. The article identifies the date of structural break applying the Gregory and Hansen procedure with recursively estimated breakpoints and ADF statistics. Exogeneity tests reveal the causality runs from producer to retail prices. Homogeneity is rejected, suggesting a mark-up pricing strategy. Price transmission analysis suggests that, despite the common belief, price transmission on the Hungarian beef meat market is symmetric on both long and short run.

The transmission process of supply and demand shocks in Czech meat commodity chain

Based on the results of price transmission analysis, the paper aims to explain the asymmetry of price transmission in Czech meat commodity chain, in the supply as well as in the demand direction. The transmission asymmetry in supply direction, i.e. e. from farmer to consumer (especially in case of price growth); can imply the existence of market power exercised by individual links of the chain, especially by processors or retailers. The transmission asymmetry in demand direction, i.e. from the final consumer to farmer, is treated as well, although the possible reasons behind the asymmetry are definitely not the same. Demand shock (rapid decline in consumer demand), which is often followed by price fall at the consumer level, can be caused by food safety hazards. They play very important role in the meat commodity chain, where higher risks of threatening the food safety standards are presupposed, especially in connection with the frequent distribution of animal diseases (such as the mad cow disease (BSE), the avian flu, the foot-and-mouth-disease), which is the main reason for demand-oriented price transmission analysis. Price transmission analysis is carried out in three steps. First, the extent of the transmitted price changes is measured by the coefficient of elasticity of price transmission (EPT), the results are presented in the form of matrix, which represents supply as well as demand direction. Second, the analysis of price differences is carried out in both directions. Positive as well as negative price changes are treated separately. As the last step, the impact of time delay on the price transmission process is assessed in both directions. The data used represent monthly prices (resp. their differences) in the period of 1997–2005 with the distinction on poultry, pork and beef branch of the chain. 

A threshold cointegration analysis of asymmetric price transmission from crude oil to gasoline prices

This study provides new supportive evidence for asymmetric adjustment in U.S. retail gasoline prices. The asymmetric transmission is found to occur not just through the spot markets of crude oil and refinery gasoline but also through their future markets. Further evidence also shows that the observed asymmetry in price transmission primarily occurs downstream – not upstream – of the transmission process.

Processing Costs and Price Transmission in the Meat Marketing Chain

The purpose of this paper is to deduce a clear picture of the producer-retail price relationship for a regional market segment of the German meat sector. The price transmission approach of Palaskas (1995) is extended by considering the wholesale level separately and implementing a cost variable that reflects slaughtering costs explicitly. The vertical price transmission analysis is based on weekly prices for the period 1995-1997. The hypothesis of perfect price transmission in both the long and short run has been rejected. While the producer-wholesale relationship is quite competitive, retailers seem to exercise market power.

How does the European seafood industry stand after the revolution of salmon farming: An economic analysis of fish prices

Abstract The introduction of farmed salmon on the European fish markets has coincided with major organisational changes within the value chain. The present paper investigates the extent to which the value spread between the intermediaries has been modified thereafter not only for salmon but also for a few wild-caught species. The background of cointegration theory has been extended to refine the analysis of price transmission along the fish value chain. As a result, one could admit that the introduction of farmed salmon and globalisation of fishery markets has certainly benefited to the European consumers, but probably not to the extent of the most optimistic expectations because of market imperfections.

Price transmission analysis: a flexible methodological approach applied to European pork and lamb markets

Price transmission analysis: a flexible methodological approach applied to European pork and lamb markets

Price transmission analysis: a flexible methodological approach applied to European pork and lamb markets

The study of spatial price relationships helps to explain market performance and their degree of integration. Applying only one method of analysis may not be flexible enough to account for the complex interactions of prices in separated markets. This paper complements usual cointegration tests with a description of dynamic features and patterns of causality among price series. The method proposed is applied to study spatial pork and lamb prices relationships within the EU in the period 1988–1995. The results indicate that European markets for both commodities are integrated, not only in the long run but in the short run as well, although the price transmission process is more efficient in the porkmeat industry.

The Canadian Beef and Pork Sectors: New Found Relevance of Live Market Information

The structure of price transmission both vertically (between links in the market channel) and horizontally (between market areas) for beef and pork in Canada is examined. The analysis of vertical price transmission indicates that farmgate prices lead retail prices. The hypothesized relationship between retail and farmgate prices is that the farmgate demand curve is shifted by wholesaler anticipation of the retail price changes. Such a situation would place greater importance on the live markets since prices determined in these markets would eventually be reflected in the retail market. The results have further implications for the determination of price margins and related policy issues.