Publication

Price transmission is an increasingly contentious issue in the farming sector due to, among other things, concerns that concentration in upstream and downstream industries may hold back competitive pricing behaviour. A number of empirical studies confirm certain forms of asymmetry in the speed of price transmission. The idea is that prices in upstream and downstream markets converge to their long-run equilibrium at different speed depending on the extent of the market disturbances. In other words, an increase or decrease in the retail price will ultimately lead to a proportional change in the farm price, although the speed at which price changes will materialize will depend on whether the price change is positive or negative. In reality, it is possible that a decrease in the retail price entails a larger movement in the farm price than when the retail price is increasing. Up to now, it has always been difficult for researchers to separate out asymmetric price transmission in magnitude from asymmetric price transmission in speed. Our research investigates whether it is possible to separate out non-linearity in the long-run farm-to-retail price relationship from non-linearity in the adjustment towards equilibrium. We used data for the U.S. hog/pork industry as a case study. We found overwhelming evidence that the farm-to-retail price relationship between the U.S. hog and pork meat prices is non-linear and thus that there is asymmetry in the magnitude of price transmission. This result reverses previous findings that asymmetry in price transmission was mostly related to speeds at which prices converge to their long-run equilibrium.

Finding evidence of downward price stickiness in agricultural supply chains is certainly not unique as others documented slower responses of retail prices following negative shocks to farm prices. In standard models however, decreases in the farm prices are eventually passed along to consumers through lower prices. Our research suggests that lower costs may not be passed onto consumers, questioning the efficiency of price transmission in the U.S. hog/pork supply chain. While our findings cannot be interpreted as evidence of imperfect competition in the U.S. hog/pork supply chain, they offer a promising methodology to investigate the potential determinants of asymmetry in price transmission.