Notes on farm‐retail price transmission and marketing margin behavior

Perfect farm‐retail price transmission sometimes is taken to mean an elasticity of price transmission (EPT) equal to 1. We show that this definition is inconsistent with Gardner's (1975) model. We also show that the absolute marketing margin (defined as the difference between the retail price and farm price) responds differently to shifts in retail demand, input supply, and technical change in the marketers’ production function than does the relative marketing margin (defined as the ratio of the retail price to the farm price). The empirical implications of these results are discussed in some detail.     

Optimal generic advertising in an imperfectly competitive food industry with variable proportions⋆

This paper determines the impact of food industry market power on farmers' incentives to promote in a situation where funds for promotion are raised through a per‐unit assessment on farm output and food industry technology is characterized by variable proportions. Specifically, building on earlier studies by Azzam [Am. J. Agric. Econ. 80 (1998) 76] and Holloway [Am. J. Agric. Econ. 73 (1991) 979], Muth's [Oxford Econ. Papers 16 (1965) 221] model is extended to consider the farm‐level impacts of generic advertising when downstream firms possess oligopoly and/or oligopsony power and advertising expenditure is endogenous at the market level. Applying the model to the US beef industry, we find that for plausible parameter values market power reduces farmers' incentives to promote. However, the disincentive is moderated by factor substitution, and effectively vanishes as the factor substitution elasticity approaches the retail demand elasticity. This suggests that the Dorfman–Steiner theorem, suitably modified to account for factor substitution, suffices to indicate optimal advertising intensity in the US beef sector.     

Rivalry in Price and Variety among Supermarket Retailers

Recent theoretical models of retail competition suggest that product heterogeneity is critical to retail price and variety strategies. This article provides empirical evidence on supermarket retailers' price and variety strategies using a nested constant elasticity of substitution (NCES) modeling framework. The model is estimated using chain-level scanner data for four major grocery chains in a large, urban West Coast market. The results show that retailers compete for market share using both price and variety. While they all tend to follow moderately cooperative pricing strategies, the extent to which they follow cooperative strategies in variety is less homogeneous.     

Measurement errors in agricultural data and their implications on marginal returns to modern agricultural inputs

The low uptake of modern agricultural technologies in sub-Saharan African countries has encouraged researchers to revisit the returns to (or profitability of) these agricultural inputs. A related strand of literature is exploring the allocative efficiency of these factors of production in African agriculture. However, all these studies rely on self-reported agricultural data, which are prone to nonclassical measurement errors, the errors in these data are correlated with the true values of variables of interest. In this article we investigate the implication of measurement errors in self-reported agricultural input and production data on marginal returns to these modern agricultural inputs. We consider a generic two-sided measurement error problem where both production and inputs can be measured with error, and these errors can be correlated. We employ both self-reported and objective measures of production and plot size to compute output elasticities under these alternative measurement scenarios. We find that using self-reported production and plot size overestimates output elasticities and hence marginal returns to modern agricultural inputs (including chemical fertilizer and improved seed). These results are noteworthy in terms of informing conventional technology diffusion strategies as well as in view of revisiting existing presumptions about the profitability of modern agricultural inputs.     

IMPERFECT COMPETITION AND THE COBWEB THEOREM: A VEGETABLE CASE

Producer price changes are dependent on final demand, marketed volume and marketing cost, but the less than perfect competition which may determine this last is ignored in formulating the cobweb theorem. Attention to monopsonistic buying of farm products has importance in the choice between stabilisation measures directed at producers and marketing firms, and also as regards the need for integration of the theory of imperfect competition and the analysis of agricultural price cycles. Cyclical instability is a serious problem in the New Zealand vegetable industry. The size and inflexibility of retail margins significantly accentuate producer price fluctuations. Auctions are the main mechanism for price formation, and high retail margins appear to be permitted by the non-competitive elements in this marketing system. The most promising avenues for improvement would be in reform of auction procedures and exploration of alternative marketing channels for vegetables.     

Maize acreage response under differential prices in the Republic of Benin,West Africa

Price response of maize acreage in Benin was estimated with a particular emphasis on whether the prices were producer prices in rural markets or retail prices in urban markets. A second difference between prices was examined through a price adjustment model which takes into account the distortions caused by local units on maize price when one is concerned with the pricing system in the private marketing network relating rural and urban areas. Urban market price specification appeared to be the most relevant statistically in explaining acreage decisions in Mono province. Price elasticity of acreage was 0.445 in this area while its value, around 0.10, was not significant for Benin as a whole. The use of adjusted urban prices enabled an increase of 5.6% of the elasticity in Mono province. The urban vs. rural difference was apparent, but the coefficients of the price variable were not significant in equations with rural prices. The latter were not as reliable as those of the urban market of Dantokpa (in Cotonou city) collected by the Institute of Statistics (INSAE) and the GTZ project.     

Processing Technology,Market Power and Price Transmission

This paper focuses on the extent to which price changes occurring at the farm-level are transmitted to the retail sector. A price transmission elasticity is derived which is shown to depend on the degree of market power in the food industry and the nature of the food industry's processing technology. The offsetting role of the processing technology and market power in determining the extent of price transmission are highlighted. A case-study reports values for the price transmission elasticity for the US beef and pork sectors.     

Strategies for sustainable intensification in East African highlands: labor use and input efficiency

Strategies for poverty alleviation and sustainable natural resource management usually focus on land use options for improving yields. Increasing the returns to critical factors requires possibilities for input substitution. Inadequate timing of input applications or nonavailability of complementary factors can seriously hinder this substitution. Such constraints particularly apply in less‐favored areas where soil organic matter content is too low for enabling efficient nutrient uptake and soil structure limits water infiltration and moisture retention. This article focuses attention on the importance of labor for crop management activities and input applications that enhance input efficiency in highland area cropping systems of Northern Ethiopia. Given the inherent complementarities between labor and nutrient supply during critical phases of the plant growth process, input efficiency strongly depends on labor use. We present a semiparametric bioeconomic modeling approach to analyze the available options for improving input efficiency in agricultural production. Input response equations are used that consider the returns per unit of land and labor as a function of specific combinations of material inputs and management practices. Critical trade‐offs may arise when opportunity costs for labor are considered or when complementary factors appear as binding constraints. The model enables assessment of feasible pathways for enhancing sustainable intensification and poverty alleviation in typical settings of the East African highland region.     

Estimating Crop-Specific Production Technologies in Chinese Agriculture: A Generalized Maximum Entropy Approach

A generalized maximum entropy approach is adapted to empirically estimate crop-specific production technologies in Chinese agriculture. Despite a modest behavioral assumption about equal marginal returns of nonland inputs among crops, this method does not require price information, which is usually distorted in a centrally planned economy such as China. A multi-output technology for Chinese agriculture is estimated and input allocations for each province are recovered simultaneously. The estimated multi-output production technology and input allocations imply that China may have greater grain production potentials than previously thought.     

Examining long-run relationships between Australian beef prices

Cointegration and impulse response analyses are used to investigate the short-run and long-run dynamics of the Australian beef market. The aim of this study is to determine whether long-run relationships existed between Australian beef prices at the farm, wholesale and retail levels. Based on monthly data from 1971 to 1994, the results show that all three prices considered are cointegrated. Furthermore, the wholesale price is found to be weakly exogenous. The latter result might be an indication of market inefficiency due in part to price levelling often practised in the beef marketing system.     

The Impact of Generic Advertising on U.S. Household Cheese Purchases: A Censored Autocorrelated Regression Approach

The impacts of generic cheese advertising on U.S. household cheese purchases are examined via the use of a unique household panel. Modest gains in overall at-home cheese purchases from generic cheese advertising appear to be largely the result of strong gains in purchases of natural cheese rather than processed cheese. Results indicate that relatively larger gains in household cheese purchases from generic advertising may be realized by targeting infrequent purchasers to increase purchase frequencies, rather than by targeting households in general to increase their conditional purchase levels.     

Differences in agricultural returns: an empirical test of efficiency in factor input allocation using Vietnamese data

We study whether rural households in Vietnam allocate their factor inputs efficiently. Factor returns and technical rates of substitution (TRS) between production activities are compared. We estimate two translog production functions and conduct three tests: First we test the equality of bootstrapped returns. Second, we use a bootstrapped t -test comparing the equality of TRS. Finally, we derive a set of nonlinear restrictions on our estimated parameters, which, if held, would imply that we cannot reject efficiency. The article concentrates on the allocation of factors between the cultivation of the two most important agricultural crops—sugar cane and rice. We cannot reject the possibility that households are efficient in their input allocation. These results are consistent and stable over different estimation techniques and support the assumption of profit maximization.     

Balancing economic revenue and grazing pressure of livestock grazing on the Qinghai–Tibetan–Plateau

Treating grazing pressure as an undesirable output of livestock grazing in a directional distance function improves understanding of how economic behaviour affects the environment. Field survey data from 193 livestock grazing households combined with remotely sensed net primary productivity (NPP) data on the Qinghai–Tibetan–Plateau was used to develop a directional output‐orientation distance function. The average efficiency of livestock grazing households is 0.817 when incorporating grazing pressure as an undesirable output, which means that households can achieve 18.3% more output and decrease proportional grazing pressure holding all inputs fixed. The relative shadow price of undesirable grazing pressure to good output grazing revenue is estimated to be between 1.795 and 3.986. According to the Morishima elasticity of substitution between inputs, there is a significant complementary relationship between grassland, labour and capital.     

Input Controls,Input Substitution and Profit Maximisation in the English Channel Beam Trawl Fishery

Studies of input substitution in fisheries have tended to focus on substitution between physical inputs and/or time fished. However, input controls may create incentives for substitution of other inputs into the production process. For example, fishers faced with constraints on access to particular areas of the fishery may substitute physical inputs for fishing location. This was the case with the UK beam trawl fishery in the English Channel. Constraints were imposed on access to particular areas of the fishery through restrictions on engine power. This created incentives for a number of fishers to reduce their engine power to meet the conditions of the input control. The relative contribution of the boat inputs and location in the production process and the potential for substitution were examined using a translog production function. The results suggested that the apparent input substitution was consistent with profit maximising behaviour.     

THE DEMAND FOR DOMESTICALLY PRODUCED SAWN TIMBER: AN APPLICATION OF THE DIEWERT COST FUNCTION

The Australian demand for domestically-produced sawn timber is investigated by considering its major use — as an input into residential construction. Using a cost function approach, a system of equations is derived expressing quantities demanded in terms of relative prices. Cross-price elasticities are estimated and the falling input-output ratio of timber in residential construction is analysed by decomposing the change in this ratio into price, outputs and taste/technology effects. A major finding is that, while substitution of timber for other inputs has been encouraged through relative price movements, this effect has been more than offset by taste and technology trends away from timber usage.     

Generic Advertising of U.S. Lamb

ABSTRACT

Generic advertising of U.S. lamb by the U.S. sheep and lamb industry is an effort to reverse an almost continual decline in the industry since World War II. This analysis explores the answers to three related questions: (1) What have been the effects of the generic lamb advertising on U.S. and foreign sheep, lamb, and wool markets? (2) Has the generic lamb advertising program effectively increased the consumption of domestically produced lamb as intended rather than imported lamb? (3) What have been the returns to U.S. sheep producers, feeders, and packers who pay for the advertising? Using a 70-equation, non-spatial, price equilibrium, simultaneous econometric simulation model of the world sheep, lamb, and wool markets, the analysis concludes that the U.S. lamb industry’s generic lamb advertising program has positively impacted their markets, enhanced profitability of the industry, and increased the industry’s share of domestic lamb consumption.     

Demand,challenges, and marketing strategies in the retail promotion of local brand milk

This article addresses the demand and challenges for local brand milk and focuses on the marketing strategies for retail promotion. While federal and state government make efforts to promote local food purchases and consumption at the farm level, local foods face significant distribution challenges in grocers, especially in larger retail stores. Limited shelf space and high pricing by retailers impedes consumers’ purchases and results in weak competitiveness for local brands. Therefore, it is essential for local producers and “buy local” programs to understand what types of promotion and marketing strategies might be more effective in stimulating demand in retail outlets. Using 2010-2011 Nielsen Retail Scanner data in the Northeast region, we estimate a random-coefficient discrete choice model of demand to determine the effects of nutritional characteristics, price, packaging, and distribution strategies on the consumers’ choice to purchase locally branded milk. Results show that local brand milk faces significant demand challenges in addition to high prices and limited outlets in competing with lower-priced products. Marketing strategies, such as price cut, one-gallon package offering, and expanded presence in retail stores, can significantly stimulate the demand for locally branded milk, with one-gallon package offering being the most effective strategy.     

Simultaneous Estimation of Cost and Distance Function Share Equations

The study considers the simultaneous estimation of share equations using cost and distance functions. Simultaneous rather than single system estimation utilizes full as opposed to limited information. Econometric results exploit the nonstationary nature of the data and that variables are cointegrated. Under cointegration all variables are endogenous and so it is not necessary to undertake the somewhat ad hoc exercise of choosing instruments to achieve parameter consistency. Johansen's maximum likelihood estimator is applied to data from Central Canada and Western Canada (1935–2006). Symmetry and homogeneity restrictions are not rejected for either region. Monotonicity held for all data points and concavity held at 92% of the data points. Long‐run constant returns and Hicks neutral technological change are rejected for both regions. Morishima elasticity estimates coming from the cost function in Western Canada indicate highly elastic long‐run substitution between the land/fertilizer input pair and mildly elastic long‐run substitution between land and both machinery and labor. In contrast, substitution for land and other inputs is inelastic for the land/machinery pair and the land/labor pair, with only the land/fertilizer pair being mildly elastic. The results indicate the limiting nature of land as a fundamental constraint on long‐term agricultural production is a real possibility in Central Canada because other inputs are inelastic, or at best only mildly elastic, substitutes for land. In Western Canada, fertilizer is the only factor that is highly substitutable for land and, therefore, could mitigate the limiting nature of land in that region. However, given that fertilizer applications are often considered to be environmentally unfriendly, the long‐run substitution of fertilizer for land as a fundamental mitigating factor to land scarcity in Western Canada is at a cost to the environment.     

Generic advertising without supply control: implications of funding mechanisms for advertising intensities in competitive industries

Producer profit-maximising rules for generic commodity advertising programs and associated funding levies are derived. Lump-sum, per unit and ad valorem levies, and government subsidy funding arrangements are compared and contrasted. The initial single-product competitive market model is extended to incorporate international trade, government price policies, and multiple commodity interactions.     

Input Substitution,Productivity Performance and Farm Size

This paper develops a theoretical model to examine the relationship between the input elasticity of (technical) substitution and both farm total factor productivity and size. In the presence of ongoing technical change and its factor bias, the ‘income effect’ arising from farms' cost minimising behaviour enables them to increase productivity by saving inputs or, through the dual equivalent, enlarging farm size. As such, farms with higher elasticities of substitution tend to grow larger and become more productive, which provides a new mechanism through which farm heterogeneity in productivity growth can be examined. Empirical evidence from Australian broadacre agriculture supports this theory and points to important policy implications.