Price Transmission along the European Food Supply Chain in Selected Northern-Southern Countries

Price Transmission along the European Food Supply Chain in Selected Northern-Southern Countries

Wael Chouayet (Business Economics and Management Department, Mediterranean Agronomic Institute of Chania (CIHEAM-MAICh), Chania, Greece) and Anthony Rezitis (Department of Economics and Management, University of Helsinki, Helsinkni, Finland)
DOI: 10.4018/IJFBMBM.2016070103
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This study intends to estimate the different characteristics of price transmission and aims to test the hypothesis of price transmission asymmetry based on agricultural, processor and consumer monthly series of price indexes from 2005 to 2012 in 8 European countries from both Southern and Northern Europe and via the use of time series as well as econometric approaches such as co-intergation and error correction models. The results obtained reveal that price transmission has very small magnitude. Indeed, just 10 to 12% of price shocks at one level are corrected in the long-run by prices at another level both downstream and upstream of the food supply chain. The results also show that prices are transmitted mutually in both directions downstream and upstream the food supply chain in the two European groups. Furthermore, they indicate that in the long-run prices are transmitted symmetrically both downstream and upstream of the food supply chains in Northern as well as in Southern Europe. Finally, in the short-run different conclusions are found depending on the region.
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During the last decade, agriculture commodity prices have shown severe fluctuations, especially between 2007 and 2008. Starting from the second half of 2007, agriculture commodity prices have increased dramatically. By the end of 2008, they reached an exceptional level. Later, during the wake of the economic crisis, commodity prices (bulk prices) decreased sharply and came down to even lower comparable levels than those before the price surge. However, consumer food prices followed their rise until mid-2009 when they started triggering a slight decline before following a new upward trend (EC, 2014). Currently, the economic environment is still facing different critical scenarios such as global insecurity (war), food crisis, weather instability and natural disasters. Those factors have gravely affected not only the supply-demand equilibrium, global trade and domestic transactions but particularly food price levels.

In the same context, after the positive anticipation for EU economic recovery in the latest years, numerous prospects regarding income and different agriculture markets in the EU (such as the prospects for 2011-2020, 2012-2022 and 2013-2023 – EC: 2010, 2011, 2012, 2013 and 2014) have shown an expected increase in EU food production and consumption tendencies. However, according to the same sources, food commodity prices are expected to stay high. The importance of this topic takes its reasons chiefly from the serious weight and pressure created on citizens’ income and people’s expenditures at the same time when an increase in consumption is imperative. Another key point refers to producers who are suffering and complaining from a non-sustainable and inequitable distribution of value added, simultaneously at a time characterized by significant increases in input prices. Given this situation, the projected situation has received considerable attention from many agro-economists and policy makers especially as regards to the well-functioning of the food supply chain.

In fact, the food supply chain is composed of a variety of goods and enterprises which function in various markets and sell a wide variety of agricultural and food products (Bukeviciute et al, 2009). It combines 3 important sub-sectors which are: agriculture farms, the food industry and the distribution (consumption) sector. Moreover, the importance of the food supply chain can refer to many economic and social aspects. Thus, it participates by 5% in European value added and 7% in employment while food consumption takes up 16% in the European household expenditure (EC, 2009). The food industry contributes by around 86 billion euro to the total European economy (EC, 2011). Given that, the maintenance of the efficiency and good performance of the EU food supply chain becomes a current and extremely important topic while it takes a crucial role in the European process towards recovery from the economic crisis. One of the best theories that can investigate and make clear the shock on prices, in such a situation, is the study of price transmission.

Indeed, as markets become more concentrated in many countries, price transmission becomes an important part of the empirical application referring to the food supply chain analysis (Özgür et al 2014). The assessment of this framework reflects the chain’s performance and can identify the eventual market failures via the dispersion of price shocks between the various levels of the chain (Bunte, 2006).In fact, any price shock at one level should be perfectly transmitted to another related one. In this case, price trends would reveal similar patterns and substantial symmetries. In other words, if prices are fully and instantaneously transmitted along the chain, one would expect a near to unity correlation between prices at different market levels (Serra, 2011). On the contrary, the presence of asymmetries would reveal some kind of market imperfection.

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