Why Does Food Price
Transparency Matter?
Steve McCorriston
University of Exeter, UK
OECD, Food Chain Analysis Network
October, 2015
Background
• Increased attention to food chain issues following the commodity price
spikes of 2007-08 & 2011
• Concerns from a wide range of stakeholders with implications for policy
that related to the functioning of the food chain (for example, competition
policy)
• These concerns related not only to price transmission effects and how
prices at the consumer level evolve but tied to this issues of “fairness” in
the supply chain, the potential exercise of market power and how and why
food chains differ in structure and functioning across sectors and across
countries (as reflected in the different experience of food price inflation
across countries)
• These concerns are on-going with subsequent declines in raw agricultural
prices
On the research side…
• Long standing interest in price transmission issues with the conjecture
that the price transmission process had something to do with
concentration in the food chain
• These studies typically hindered by using data at either end of the food
chain (farm-retail) and had no structure…so it was difficult to apportion
‘blame’
• Complementing these econometric studies was research on the industrial
organisation of the food chain that, in part, focused on ascertaining the
extent of market power and, in some cases, explicitly modelling the price
transmission process when characteristics of the food chain ‘matter’
Focus here
•
Is on some recent research insights covering three issues
(i)
How do (can we) relate increasing aspects of price adjustment/transmission to the
functioning of the food chain
(i)
Given the complexity of the food chain, what aspects are likely to matter in
determining the price transmission process
(ii) Data issues and the trade-off between monthly aggregate data and scanner data
sources
Most of the reference to research will relate to the EU and tied to TRANSFOP
To motivate the discussion…
• Recent OECD document on “Food Price Formation” (2015)
(TAD/CA/APM/WP(2014)36/REV1)
• “..transparency along the food chain was identified as a top priority”
• Reported on efforts to improve price transparency along the food chain:
Table 2 reports 35 countries monitoring food prices throughout the food
chain including in many cases, prices at the processing as well as farm and
retail stages
• What did respondents to the OECD questionnaire see as the main issues?
Benefits of Price Transparency
•
Data available for specific commodities/food sectors at different levels across a
large number of countries
•
Evolution of prices at different stages can promote transparency on how prices
at different levels evolve
•
This can focus discussion among different groups
•
Perhaps complemented by additional information such as share of agricultural
product in “Food Euro/Dollar” and additional information
•
But the challenge is, on the basis of price information alone-reported as a
monthly average for a country-how far can you go in interpreting how food
chains function and how the characteristics of those chains relate to price
transmission (and other features of prices)?
What is and what is not transparent about the food
chain?
• Present a simple framework
( R  FP )  f (CF , C NF , MU FC )
or
( R  FM )  ( FM  FP )  f (CF , C NF , MU R , MU FM )
Double
Marginalisation
We can observe these prices; the challenge is the right hand side
Price transmission
( R  FM )  ( FM  FP )  f ( sF , s NF , MPUR , MPUM )
These represent the elasticities
of the mark-ups at the retail and food
manufacturing stages
What determines the elasticities of these mark-ups?
• The nature of the demand function including behaviour of
consumers
• Market structure and firm behaviour in the two stages: selling
and buyer power throughout the food chain
• Contracts/vertical coordination between the two stages
• Private label penetration
• Retailer-specific price adjustment strategies
• Regulatory infrastructure
Research insights: (1)
• Large number of price transmission studies may tell us
something about the LHS and construe from the results
something about the RHS
• Few studies have measured the RHS directly: when they have,
the elasticity of the mark-up plays a significant role in
determining the price transmission effect (Nakamura and
Zerom, 2011)
• Can you say something indirectly? Some insights from the
TRANSFOP group
Hassouneh et al: Overview of Price Transmission and Reasons of Different
Adjustments in Different EU Member States
• This study characterizes price transmission processes along a wide range
of different food marketing chains within the European Union (EU) and
explains the differences and/or similarities that exist between them.
• Results provide evidence of symmetric price adjustment in two-thirds of
the markets considered…asymmetry not a general feature
• Producer prices are found to adjust faster to long-run disequilibrium than
consumer prices.
• What factors affect price transmission? (i) The production share within the
EU, (ii) the export and production specialization ratios of each country, (iii)
the relevance of vertical contracts within the chain and (iv) the
perishability of the food product are found to affect price adjustments
along the food marketing chain.
Lloyd et al: Experience of Food Inflation in EU
• Relate the extent to which world commodity price changes
has driven food inflation across the EU and how this relates to
differences in ‘observable’ characteristics relating to
differences in food chains
• Factors include: barriers to competition at retail (but role of
discounters play only limited role); private labels (they
diminish the double marginalisation issue); rationale
inattention by consumers
Correlation between Barriers to Competition at Retail Index and Contribution of
World Wheat Prices to Retail Bread Prices
Bonnet, Corre and Réquillart
• Use a structural model applied to the dairy sector in France
using scanner data (see also below)
• This allows them to estimate product specific own and cross
price elasticities
• They also allow for different forms of contracts between
retailers and food manufacturers
• Depending on the nature of this vertical contract, price
transmission can be greater than 1 for some products!
Research Issues: (2)
• Price data is available at an aggregate level: single observation
at monthly frequency with no spatial dimension and implies
homogeneity across retailers/manufacturers and across
outlets
• Use of scanner data gives some insights that question this
homogeneous presumption about the food sector
Kingsmill Everyday White Bread
TESCO
SAINSBURY
ASDA
SOMERFIELD
KWIK SAVE
WAITROSE
SAFEWAY
80
70
Price in pence
60
50
80
70
60
50
Graphs by retail chain. Sample period 08 September 2001 to 17 April 2004.
…German beer prices
Brand level average weekly prices (euro/kg) for butter in chain A (left panel) and chain B (right panel). (20092011)
…food inflation more volatile
110
108
106
104
102
100
98
96
94
92
90
1
2
3
4
5
Laspeyres weekly (Scan)
5
6
7
Laspeyres monthly (Scan)
8
9
10
Laspeyres monthly (ISTAT)
11
12
…there is no ‘one’ price transmission number!
• Scanner data has the potential to offer more transparency in
the food sector highlighting differences across retailers,
frequency of price adjustment (weekly rather than monthly),
by outlet, and across space.
• Heterogeneity is the key point here and also raises the
question of what the reference price is and how firms adjust
prices
• Some scanner sources can provide quantity data so product
specific price transmission elasticities can be derived
• But obtaining more transparency is not costless
Summary
• Considerable effort in recent years to promote transparency
in the food chain
• This in itself is a ‘good thing’ and provides a platform for
discussing pricing issues throughout the food chain
• Challenge though is construing what the LHS (price
transmission) tells us about the RHS (the functioning of the
food chain)
• Data aggregation issues are also important in this regard
• This will be an important and on-going aspect of the policy
and research agendas in future years