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.     

Energy‐milk price transmission at the product brand level

This article estimates the pass‐through rates between diesel fuel and retail milk prices at the product brand level. Using a random coefficient logit demand model and taking the direct and indirect impacts of energy prices, this research identifies changes in pass‐through rates before and after the great recession in 2008. Empirical results show that diesel prices significantly impacted the retail prices of milk products and are an important determinant of food price inflation. Pass‐through rates are estimated to range from 0.16 to approximately 0.60 through 2008 with an average of 0.22 for the whole period. Statistical tests indicate that pass‐through rates before June 2008 were significantly higher than after June 2008 when they dropped significantly to 0.04 to 0.17. Interestingly, private label brands have the lowest pass‐through rates, implying that compared to manufacturer brands, private label prices are more insulated from diesel price shocks.     

Price shock transmission: evidence from the wheat‐bread market value chain in Ethiopia

This study assesses the degree of vertical price transmission along the wheat‐bread value chain in Ethiopia. This is pursued by applying a vector error correction model and an impulse response analysis using monthly price data for the period 2000–2015. Our analysis considers transmission of price shocks across different market levels, including from the international and domestic wheat grain markets at the upstream to the domestic wheat bread market at the downstream of the value chain. The empirical findings indicate that significant cointegration exists across prices of the different market stages. There is a transmission from international prices to domestic prices at downstream markets, in particular to flour and bread prices. Prices at upstream markets are largely influenced by the domestic wholesale market. In general, the speed of adjustment is quite slow with a half‐life of about one year for restoring the equilibrium price relationship. As price margins between the different market stages in the value chain have substantially decreased in the last 15 years, higher transmission, and thus exposure to international market shocks, can be expected in the future. The results also show that causal relationships exist between prices at different market stages—with the wholesale market identified as the key market level where prices and price expectations are formed.     

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.     

Modeling price transmission between farm and retail prices: a soft switches approach

Vector error correction models (VECM) are used to model price transmission when farm and retail prices are cointegrated. To allow for nonlinearity in the cointegration process, researchers may specify thresholds to break the error correction process into regimes according to whether the retail price is above, below, or close to its equilibrium value given farm prices.  However, because the coefficients in a VECM can change when there is movement from one regime to another, the model can be discontinuous.  This implies sudden, “hard” regime changes. In this study, we extend the threshold VECM to include features of smooth transition autoregression (STAR) models. Our approach allows for gradual, soft regime changes.  An empirical application to retail cheese and farm milk prices is presented.     

Impacts of the End of the Coffee Export Quota System on International‐to‐Retail Price Transmission

We examine the impact of the end of the coffee export quota system (EQS) on international‐to‐retail price transmission in France, Germany and the United States. We take account of the existence of long‐run threshold effects and short‐run price transmission asymmetries (PTAs). We find evidence of threshold effects in both periods (EQS and post‐EQS) in all three countries and the presence of short‐run PTAs during the post‐EQS period in all countries, but not during the EQS period. Our results indicate that the threshold values are smaller in the post‐EQS period, suggesting that retail prices became more responsive to changes in international prices. However, the speed of adjustment towards the long‐run equilibrium decreases during the post‐EQS period in the three countries. In the short run, non‐linear impulse response analyses indicate that a shock in international prices was more persistent during the EQS period than in the post‐EQS period. Moreover, we find evidence of short‐run PTAs in the post‐EQS period, with differences across countries. We find support for the ‘rockets and feathers’ principle in the United States; in contrast, retail prices respond faster when international prices are falling in Germany and France. We explain these differences in terms of market structures.     

The Value of Product Attributes,Brands and Private Labels: An Analysis of Frozen Seafood in Germany

It is well known that the price of a food in general and fish in particular is a function of a number of attributes such as species, product form, processing form and size. However, limited attention has been given to the influence of private labels, production method, eco‐labels and promotions. We use a unique dataset which identifies these attributes in the German seafood market. We estimate a hedonic price function, and our results highlight the importance of brand and labels for seafood prices in Germany. Our results also suggest that private label products are discounted by 20%, while branded products achieve substantial price premiums, as do fish products from aquaculture.     

Spatial dispersion of retail margins: evidence from Turkish agricultural prices

The farmer share of retail prices is shown to be about 16%, corresponding to about 84% of a distribution share, on average across agricultural products and regions within Turkey. The share of transportation costs in retail prices is only about 7%, while the share of retail margins is about 77% of retail prices. The dispersion of retail prices across regions is shown to be mostly due to local wages and variable markups, while the contribution of traded‐input prices is relatively small. Accordingly, the high dispersion of farmer prices across locations is not reflected in the dispersion of retail prices due to the high contribution of retail margins. These retail margins are also shown to account for about one third of the consumer welfare dispersion across regions and more than half of the consumer welfare dispersion across products.     

Strategic pricing in a differentiated product oligopoly model: fluid milk in Boston

In an imperfectly competitive industry, differentiated products compete with each other with price rather than quantity as the strategic variable. Several previous studies have employed a generalized Nash–Bertrand model: Liang (1989) , Cotterill (1994) , Cotterill et al. (2000) , and Kinoshita et al. (2002) ; however, only Liang has explored the theoretical foundations of that model. This article generalizes the Liang two‐good model to three goods. A surprising and important result follows. Price‐conjectural variations do not exist in models with three or more goods. Price‐reaction functions, however, exist in multiple‐good models. We estimate them jointly with a brand‐level demand system to evaluate the total impact of a brand manager's price change on own quantity. In a differentiated product market, this is a useful addition to a partial demand elasticity approach, because a change in one brand's price typically engenders a price reaction by other brands that affects own quantity via substantial cross‐price elasticities among substitutes. Strategic pricing in the Boston fluid milk market was also influenced by the existence of a raw milk price support program, the Northeast Dairy Compact. We find that the advent of the Compact was a focal point event that crystallized a shift away from Nash–Bertrand to more cooperative pricing. If the downstream market is not competitive, one needs to consider strategic price reactions when designing and evaluating agricultural price programs.     

The effects of NCPB marketing policies on maize market prices in Kenya

The Government of Kenya pursues maize marketing policy objectives through the National Cereals and Produce Board (NCPB), which procures and sells maize at administratively determined prices, and stores maize as a contingency against future shortages. A private sector marketing channel competes with the NCPB. This article estimates the effects of NCPB activities on the historical path of private sector prices in Kenyan maize markets between 1989 and 2004. The analysis is carried out using a reduced form vector autoregression model (VAR) estimated with sparse data and imposing only minimal identification restrictions. Results show that NCPB activities have stabilized maize market prices in Kenya, reduced price levels in the early 1990s, and raised average price levels by roughly 20% between 1995 and 2004. Over the past decade, the price-raising activities of the NCPB have transferred income from urban consumers and a majority of small-scale farm households that are net buyers of maize to a relatively small number of large- and small-scale farmers who are sellers of maize.     

Tracing the evolution of the aggregate U.S. milk supply elasticity using a herd dynamics model

The U.S. dairy sector is characterized by increasing volatility of milk prices, and consolidation in production as evidenced by declining number of dairy farms with an increasingly larger share of milk supplied from a small number of very large farms. Using aggregate national data, we build a mixed‐frequency herd dynamics econometric model of the U.S. milk supply that updates and substantially amends the model first proposed by Chavas and Klemme. We implement a dynamic residual‐based bootstrap technique that can be used in testing for changes in nonmarginal simulated long‐run supply responsiveness, and trace the evolution of long‐run milk supply elasticity from 1975 through 2010. Several papers in the past have suggested that long‐run supply elasticity increases with dairy farm size, which implies that increased importance of large farms would increase aggregate long‐run supply responsiveness. Contrary to this conclusion, we find a declining trend in long‐run supply elasticity from 1975 through 2005. Persistence of such a decline would be a major cause for worry, as ever larger price swings would be needed to equilibrate the market in face of demand shocks. However, we find that milk supply is becoming more responsive since 2005 both to milk and feed price changes. Increasing responsiveness to feed prices further justifies focusing the next generation of the dairy policy instruments on managing dairy profit margins rather than just revenue streams.     

Threshold cointegration and spatial price transmission when expectations matter

We examine the performance of the threshold cointegration approach, specifically Band‐TVECM, to price transmission analysis in an explicit context where trade decisions are made based on expectation of final prices, because trade takes time. We find that, following a standard inference strategy, a large portion of three‐regime cases are not identified as such. Results show that transfer costs are systematically underestimated, particularly in three‐regime models. The speed of price transmission is also biased in three‐regime models. Furthermore, inferences about occurrence of trade are poor, with estimated models suggesting far lower market integration than is true in the data‐generating process.     

Price relationships between qualitatively differentiated agricultural products: organic and conventional wheat in Germany

Organic agriculture, which produces commodities that can be qualitatively differentiated from conventional food products, has grown into an important market in many countries. The dynamics of commodity prices in both sectors are partly interdependent, but are also shaped by independent determinants and have rarely been studied. We analyze organic food markets and their interdependencies with conventional markets in the context of wheat markets in Germany, which have been subject to a number of fundamental changes during the last two decades. Based on institutional market characteristics, we suggest a flexible Markov‐switching asymmetric time series model. We find a pronounced temporal sequence of market phases that differ in their asymmetric dynamics and the extent to which the organic price is influenced by the conventional price. Organic wheat prices tend to be increasingly connected to prices of conventional wheat.     

Post–Uruguay Round price linkages between developed and developing countries: the case of rice and wheat markets

The Uruguay Round Agreement on agriculture attempted to lower distortions in global agricultural markets. However, the significant fall in commodity prices in the late 1990s may have reduced the incentives for both developed and developing countries to better integrate into world markets. This study analyzes price linkages and adjustment between developed and developing countries during the post–Uruguay Round period. Prices of two key commodities, long‐grain rice and medium‐hard wheat, are assembled for major exporters and producers. Results of multivariate cointegration analysis suggest partial market integration between developed and developing countries in the post–Uruguay Round period. Developed countries are found to be price leaders in these two markets, and in most cases, changes in their prices have relatively large impacts on those of the developing countries. Developing countries (e.g., Vietnam and Argentina) have faced considerable price adjustment due to changes in the developed countries' prices.     

Evolving Dynamic Relationships Between the Money Supply and Food-Based Prices in Canada and the United States

The objective of this paper is to analyze the relationships between the money supply and food-based prices (farm input, farm output, retail food prices) and shed some light on contradictory results in the literature by performing the analysis on two countries, testing and allowing for structural change, and decomposing long-run relationships in terms of speed of adjustment and adjustment amount. Money neutrality is rejected for all of the periods in both countries. However, some of the required conditions for money neutrality held temporarily in the U. S. This could be attributed to differences in policy-induced market signal distortions. In both countries, demand-pull forces have grown stronger, and the cost-push forces have grown weaker. In Canada, this is consistent with a growing and more concentrated retail sector exercising price leadership on farm input and farm output prices.     

Modeling winegrape prices in disequilibrium

This article presents an econometric model of winegrape prices which recognizes the existence of demand and supply imbalances in the Australian market. A “markets in disequilibrium” framework is employed to motivate modeling price changes as responding to variations in excess demand/supply. The disequilibrium price equation provides estimates of regional and varietal price discounts/premiums and a measure of the speed of disequilibrium price adjustment. The equilibrium assumption is rejected for the market and substantial differences between equilibrium and disequilibrium estimates point to the inaccuracies of assuming market clearing. Disequilibrium estimates point to significant differences between warm and cool regions and changing speed of disequilibrium adjustment over time.     

Price transmission,asymmetric adjustment and threshold effects in the cotton supply chain: a case study for Vidarbha,India

This study examines price transmission asymmetries in Vidarbha's (India) cotton supply chain from 2002 to 2012. The analysis takes account of thresholds in price adjustments toward their long‐run equilibrium. The first stage considers the price dynamics between international and Indian domestic cotton prices. The second stage considers price transmission from domestic to farm gate cotton prices in Vidarbha. Results from the first stage indicate that Indian and international cotton markets are well‐integrated. In contrast, the second stage reveals significant threshold‐type nonlinearities as well as asymmetries in price transmission between domestic and farm gate prices. The short‐run dynamics suggest that the pass‐through from domestic to farm gate prices is larger when domestic prices decrease than when they increase. Moreover, back of the envelope calculations suggest that the loss in revenue for a typical farmer from a decrease in domestic price is larger than the gains from an increase in domestic price of the same magnitude. The implication is that traders benefit from price fluctuations at the expense of farmers. Evidence from fieldwork in Vidarbha suggest that asymmetries revealed in this analysis may be linked to trader's market power and inadequate market information among farmers.     

High food commodity prices: will they stay? who will pay?

Much of the public discussion of the food price crisis has focused on the sharply increased use of food commodities for biofuel production, framing debate in simple food versus fuel terms. Reality is more complex. Multiple forces drove food prices to high levels and, according to findings we report in this article, these forces will sustain high prices over the medium term. We also find that the distinction between high world prices for food commodities and the consumer costs of food is an important one to make. Food consumers do not buy raw food commodities at international prices. The degree to which the price of traded food commodities and the price of food are related depends on a long list of factors, most of which operate to dampen price transmission. In the search for appropriate policy response, it is essential to measure consumer effects correctly and to apportion properly the causes of current high prices.     

Product Differentiation with Credence Attributes and Private Labels: The Case of Whitefish in UK Supermarkets

The retail market for seafood is dynamic with substantial competition both amongst retailers and between private labels and national brands. New product attributes are added in attempts to differentiate products and to attract consumers. Credence attributes, in particular those related to eco‐labels and fishing method, have become more common. But little is known about how these and other credence attributes are valued in the retail market. In addition, little is known about price differences between private labels. To estimate the value of these attributes, weekly in‐store observations of selected frozen whitefish products were conducted in seven UK retail chains in the city of Glasgow. An estimated hedonic model shows a substantial price premium for fishing method (line‐caught), a premium for both home (Scottish) and non‐home country of origin (Icelandic) and a premium for the Marine Stewardship Council eco‐label. An uncertified eco‐label owned by a large seafood manufacturer leads to reduced price. The study also reveals substantial price differences between private labels for whitefish. The results contribute new insights regarding opportunities for differentiation by credence attributes which may lead to more sustainable and effective resource use along the value chain for frozen whitefish.     

Impacts of price and productivity changes on banana‐growing households in Uganda

This article compares the effects of changing market prices and farm productivity on the welfare of banana‐growing households in the Ntungamo district of Uganda. A heterogeneous‐agent model is applied via a series of mathematical optimization problems, to simulate production and consumption responses of 70 farm households surveyed in 2006. Results show that a given increase in productivity has a greater impact on poverty alleviation than that same increase in market prices. Despite the effects of productivity gains being comparable across different types of household groups, price improvements primarily benefit the incomes of households who are involved in rural producer organizations, who are located closer to markets, and who sell at the market.