Price Dynamics of Agricultural Commodities: Evidence from Turkey

Bor, Ozgur and Tuncay, Berna Price Dynamics of Agricultural Commodities: Evidence from Turkey. Working Paper (Submitted)

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Abstract

Farmers at the beginning and consumers at the end of the marketing chain often suspect that imperfect competition in processing and retailing allows middlemen to abuse market power. Therefore, the existences of price asymmetries indicate an unbalanced relationship between increases and decreases for a product through the farm gate and retail stages. Price transmission can be defined as the relationship between prices in two related markets. Price transmission is used to demonstrate the effects of a price change in one market over another and provides information on the extent of markets. The special interest is whether the transmission is symmetric or asymmetric. A symmetric price transmission integrates markets vertically and horizontally and a change in prices in one market quickly reflected to another. But, if the price transmission between the specific stages of the supply chain is asymmetric, then the price changes at the production level are not passed to price changes at the processing and/or retail level quickly or fully as in the case of a symmetric transmission. Most publications on asymmetric price transmission refer to non-competitive market structures as an explanation for asymmetry. Market power and oligopolistic behavior can cause imperfect price transmission (Vavra and Goodvin 2005). Brown & Yücel (2000) consider oligopolistic firms that engage in unspoken collusion to maintain higher profits. Ward (1982) suggests that market power can lead to negative APT if oligopolists are reluctant to risk losing market share by increasing output prices. Market power would appear to be capable of leading to long lasting asymmetries in the magnitude of adjustment (Meyer Craubadel 2004:590). Therefore, the aim of the study is to test for raw milk and retail fluid milk price transmission in Turkey by employing the method of cointegration in the presence of asymmetric error correction. In analyzing the historical data, evidence on price transmission for liquid milk have been considered. Monthly data between 2005-2014 for retail and raw milk prices are used. M-Tar and Tar and standard EG model of cointegration techniques are applied in order to capture the possible asymmetric relations.

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