The role of retail market power and state regulations in the heterogeneity of farm‐retail price transmission of private label and branded products

Given the leading role of private label brands in the fluid milk market, it is of special interest to focus on possible differences in farm‐retail price transmission between private label and branded milk as well as the causes of heterogeneity. This article examines the heterogeneous effects of private label and branded products on price transmission in the fluid milk market using a panel threshold asymmetric error correction model. Results indicate that upward retail‐price adjustment is faster than the downward price adjustment for both private label and branded milk. The speed of adjustment of private label products is significantly faster than branded products in three different price regimes. We further investigate the reasons of heterogeneity in farm‐retail price transmission of private label milk. We find that both retailer market power and state pricing regulations contribute to the heterogeneity in asymmetric price transmission. Higher retailer market power causes retail prices of private label milk to rise faster and to fall slower. The existence of a state pricing regulation slows down the adjustment speed of retail prices of private labels back to the long‐run equilibrium, regardless of whether the retail price is low or high.     

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.     

Price and Volatility Transmission and Market Power in the German Fresh Pork Supply Chain

We investigate the relationship between the transmission of price volatility and market power in the German fresh pork supply chain. We use a theoretical model underpinning this relationship followed by an empirical application that uses monthly farm, slaughterhouse and retail pork price data for the period 2000–2011. We examine both the relationships of market power with price level transmission and price volatility transmission in the chain. We use a vector error correction model and least squares regressions to analyse price transmission and price volatility transmissions, respectively. Results show that retail market power limited both types of transmissions. Competition inducing policy measures coupled with measures that support price risk management initiatives of chain actors are suggested.     

Marketing,cooperatives and price heterogeneity: evidence from the CIS dairy sector

Drawing on survey data, this article identifies the determinants of variations in farm gate milk prices for three CIS countries (Armenia, Moldova, and Ukraine). We apply a multi‐level modeling approach, specifically a bootstrapped mixed‐effects linear regression model. The analysis suggests three main strategies to improve the price received by farmers for their output: consolidation, competition for output, and stable supply chain relationships. In Armenia and Ukraine selling through a marketing cooperative has a significant, positive, albeit modest, effect on farm gate milk prices. In all three countries studied, the size of dairy operations, trust, and contracting also affect positively the prices received by farmers.     

Does Market Structure Influence Price Transmission in the Agro‐food Sector? A Meta‐analysis Perspective

There exists a large literature on price transmission in agro‐food sectors. However, a great majority of empirical studies focus on the existence of asymmetry and, by and large, do not investigate the reason for its presence or absence. This is in sharp contrast to the theoretical literature that provides a number of explanations of why we should expect (a)symmetry. In response, this paper investigates the reasons for asymmetric price transmission in the agro‐food chain, using meta‐analysis of existing studies. Our focus is on the organizational and institutional characteristics of the agro‐food supply chain. Our findings suggest that asymmetric price transmission in farm–retail relationships is more likely to occur in sectors/countries with more fragmented farm structure, higher governmental support and more restrictive regulations on price controls in the retail sector. On the other hand, more restrictive regulations on entry barriers in the retail sector and the relative importance of the sector tend to promote symmetric farm–retail price transmission. The latter is also more likely in the presence of a strong processing industry.     

Food scares, market power and price transmission: the UK BSE crisis

This paper is concerned with the impact of food scares, principallythe BSE crisis in the UK, and focuses on price transmissionin vertically related markets. We show that if market powerhas an effect on the farm–retail margin, this determinesthe specification of the cointegrating relationship and thusprovides a test of market power. The results for the UK beefchain suggest that we cannot reject the importance of marketpower. The impact of the BSE crisis on farm prices is foundto be more than double that on retail prices, thus corroboratingpublic concerns regarding a differential impact of food scareson retailers and producers.     

Analysis of a supply-control program under uncertainty and imperfect competition: Chinese cabbage in Taiwan

Researchers have often attributed the farm–wholesale price spread, after adjusting for marketing costs, as compensation for marketing firms' risk bearing. However, price spreads in excess of marketing costs can also be due to marketing firms' exercise of market power. In settings where both imperfect competition and marketer risk aversion are plausible, a modeling framework must be sufficiently general to accommodate both types of behavior. This article develops and estimates such a model in the context of fresh produce marketing and develops the implications for analysis of supply‐control programs. The model is applied to the production and marketing of Chinese cabbage in Taiwan and specifically to the analysis of supply‐control programs implemented in this industry by the Taiwanese government. The empirical results provide little support for the hypothesis that marketing firms exhibit risk averse behavior, but they do show that marketing firms exercise oligopsony power in procurement of the product from farmers, and that this power is positively related to the quantity supplied in each market period. This provides a heretofore unexplored impetus for supply controls intended to raise producer incomes. However, such controls are also rendered less effective by imperfect competition because marketing firms capture part of the benefits from supply reduction.     

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.     

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.     

The impact of marketing systems on soil sustainability of agriculture in developing countries: a method and an application

This article is concerned with soil‐sustainability problems of agriculture in developing countries, in particular with soil erosion. The aim of our study is to develop a comprehensive model that explains the adoption of sustainable agricultural practices with respect to soil conservation. Our approach includes the following special features: (a) the model is comprehensive in that it includes a large number of institutional, personal–social, economic, and physical explanatory variables; (b) particular attention is paid to the influence of marketing systems on the adoption of sustainable agricultural practices, which to our knowledge has been neglected in past research; (c) the concept of adopting sustainable agricultural practices (ASAP) is differentiated into a limited number of basic components of soil conservation; and (d) the model is estimated by Principal Component Regression, which enhances efficient estimation of the impact of many explanatory variables on ASAP. Our model is applied to Cabuyal hillside farming in Colombia. The application demonstrates the usefulness of the proposed model. ASAP is differentiated into three basic components: soil‐disturbance control, soil‐protection practices, and run‐off control. It appears that soil‐disturbance control is particularly influenced by farmers' characteristics, such as education and managerial variables. The second component, soil‐protection practices, appears to be strongly influenced not only by farmers' managerial variables but also by their relationship with their environment, in particular marketing institutions. The third soil‐conservation component, run‐off control, is influenced by the physical characteristics of the plot and by the available farm labor. Our empirical results demonstrate the usefulness of the proposed model in designing agricultural policies, because it can determine which variables are more likely to influence the adoption of a specific type of soil conservation.     

Agent‐based modeling for ex ante assessment of tree crop innovations: litchis in northern Thailand

This study uses an agent‐based model for ex ante assessment of agricultural innovations. The model builds on whole farm mathematical programming (MP) and extends the methodology with a spatial representation of the system, the heterogeneity of farm households and landscapes, and the interaction between farm households. We apply the model in a northern Thai watershed to study the potential of four innovations to increase the profitability of litchi orchards. Cost‐benefit analysis shows that each innovation would increase the profitability of litchi growing; however, the results of the agent‐based model show that at current price levels these innovations alone would not be enough to stem the decline in the area under litchis. The model was validated and the sensitivity of the results tested for variations in the irrigated water supply and liquidity. We report on how farmers responded to these results and discuss the implications for other areas in northern Thailand.     

Middlemen behaviour and generic advertising rents in competitive interrelated industries

This article focuses on the role of middlemen in determining the returns to generic advertising in a competitive industry where supply is uncontrolled, the price of marketing inputs is endogenous, and retail markets are interrelated through consumer preferences. Theoretical analysis suggests farm-gate returns (quasi-rents) are overstated when input substitution at middlemen level is ignored, a result confirmed in the empirical application. As for mark-up behaviour, represented by the farm-retail price transmission elasticity, a general result is that farm-gate returns to generic advertising always increase as the transmission elasticity decreases, provided retail demand is more elastic than input substitution. Endogenising the price of marketing inputs has little effect on advertising rents.     

Imperfect Price Transmission: Is Market Power Really to Blame?

Several studies in the literature have argued that price transmission in vertically‐related markets is imperfect, i.e. that farm input price changes are not fully passed‐through to the final product price. Market power, notably oligopoly, is presumed to be the principal source of imperfect price transmission. To date, the impact of oligopsony (buyer) power on the degree of price transmission has not been evaluated using a formal theoretical model. Moreover, neither has the combination of oligopoly and oligopsony despite the fact that its influence has been formally acknowledged in both the UK and some European food markets. This paper makes a contribution to the literature by developing a model of price transmission where both oligopoly and oligopsony power co‐exist and where industry technology is assumed to be characterised by variable input proportions. It shows that taking the degree of price transmission in a perfectly competitive market as a benchmark, oligopoly and oligopsony power do not necessarily lead to imperfect price transmission, although they can. Indeed, they may counteract each other's impact on the degree of price transmission. The key to these outcomes is to be found in the functional forms for retail demand and farm supply.     

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.     

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.     

The economic role of Russia's subsistence agriculture in the transition process

In this article, we analyze the role of subsistence‐oriented agriculture in Russia in the 1990s. We start out by discussing the diverging economic effects of the growth of subsistence agriculture in Russia since the transition process started. The quantitative analysis of this sector's role is carried out by means of an applied computable general equilibrium (CGE) model applying a 1994 social accounting matrix (SAM) as base year data. The novelty of the article is to disaggregate primary agricultural production not by products but by farm types, which enables us to distinguish their institutional and economic characteristics. The model also explicitly differentiates between marketed and subsistence consumption or formal and informal marketing activities of agricultural producers. We simulate two ex post and two ex ante experiments. The results of the first backward‐looking experiment highlight that Russia's subsistence agriculture was an important buffer against further agricultural output declines during transition and, hence, against food insecurity. A simulation, which looks into the effects of a devaluation of the Russian ruble, shows that the financial crisis should have increased the relative competitiveness particularly of large‐scale crop farms versus small‐scale farms. Two forward‐looking experiments indicate that efficiency enhancing institutional change would benefit both large‐scale and small‐scale farms. However, within small‐scale agriculture, a shift from subsistence to commercial agriculture would take place.     

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.     

Sustainability Labels: Are Price Premia Relevant in Online Food Retailing?

Consumers are willing to pay a higher price for products certified as sustainable. By implication, such certification is in the interest of producers, too. A general claim that sustainability characteristics automatically imply a price margin may not, however, be justified. Rather, several price premia might be necessary. This analysis based on 882 product prices of the German online retail, is concerned with the price premia attached to various labels and products. It estimates individual price premia for products, like coffee, tea, sweets, spices, etc., showing that sustainable food labeling is not always an indicator for a price markup. In fact, for some products (e.g. spices, chocolate) and labels (e.g. UTZ) a negative price effect is even estimated. Such markdowns may be due to a differing emphasis on sustainability issues along the supply chain for some products or the label’s certification policies.     

Farm share of the food dollar: an IO approach for the United States and Canada

This article develops a method for using input–output data to calculate a farm share estimate for all food rather than the typical approach of estimating a price spread for an individual product. The farm share of the food dollar is approximately 14% in the United States and 17% in Canada. The farm share increased somewhat during the commodity price boom but has generally fallen steadily by approximately 20% since 1997. While the farm share of expenditures on food for home consumption is approximately 22% across both countries, it is 4% in the United States and 7% in Canada for meals consumed away from home. The empirical framework can be extended to other countries given the extensive use of System of National Account data making international and temporal comparisons possible across farm and food marketing systems.     

Measuring Price Risk on UK Arable Farms

Price risk is estimated for a representative UK arable farm using value‐at‐risk (VaR). To determine the distribution of commodity returns, two multivariate generalised autoregressive conditional heteroscedasticity (GARCH) models, with t‐distributed and normally distributed errors, and a RiskMetrics^TM model are estimated. Returns show excess kurtosis and that the GARCH model with t‐distributed errors fits best. Estimates of VaR differ between models: both GARCH models perform well but the RiskMetrics^TM model underestimates expected losses. UK arable farms face substantial price risk.