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Article Excerpt
Abstract
This paper investigates the behavior of input, output, and consumer food prices under two different policy regime periods, before and after the reformulation of the Common Agricultural Policy (CAP) occurred in May 1992. The findings, through Granger causality tests, support a different behavior in terms of the transmission from the input level to the consumer level and vice versa. This transmission occurs through the output level only for the post-CAP reformulation period, while it occurs in a direct manner over the first period. The results imply that the decrease of agricultural output prices, due to lower minimum support prices following the reformulation of the CAP, is transmitted through the output price mechanism in both input and consumer food markets. (JEL Q11, Q13)
Introduction
The linkages among agricultural input prices, agricultural output prices, and consumer food prices are of substantial economic interest. As agricultural inputs are transformed into raw food products and as raw food products are processed through packaging and other services into final food products, the knowledge of the relationship among input, output, and consumer food prices is important for many contemporary policy and commodity market analyses. Most of the recent studies on price linkages in international agricultural commodity markets have emphasized the dynamic transmission of farm gate prices to final consumer prices [Larue, 1991; Palaskas, 1995; von Cramon-Taubadel, 1998; Goodwin and Holt, 1999; Bettendort and Verboven, 2000]. These studies have generally used a time-series framework to examine the extent of price transmission through the production, processing and marketing system.
Another issue, which is an important topic in the literature of agricultural price transmission, is the causal direction between prices. One perspective of the pricing process is based on the cost-push theory, which indicates that increases in input prices will eventually passthrough to consumers in the form of higher prices of final goods. The studies by Engle [1978], Silver and Wallace [1980], and Guthrie [1981] are examples of empirical studies based on the cost-push theory. On the other hand, the demand-pull theory suggests that the demand for final goods could be affected by macroeconomic factors, which, in turn, affect the demand for inputs and thus causing changes in input prices. The studies by Gordon [1975], Granger et al. [1986], and Devados and Meyers [1987] are examples of empirical works based on the demand-pull approach.
Greek agricultural products are produced and marketed in a protected sector due to the protection provided by the Common Agricultural Policy (CAP). This causes higher producer and consumer prices for most agricultural products than would otherwise have been the case. However, producer prices show significant fluctuations, which are due to (1) the reformulation of the CAP in May 1992, which decreased minimum support price for farmers and increased direct income support, transferring the GAP towards a market-oriented supply policy, (2) limited effectiveness of the CAP's support program; according to Colman [1986], changes in policy prices are not fully matched by changes in producer prices, (3) some agricultural products are not under the CAP, and (4) unexpected changes of weather conditions.
The purpose of this paper is to investigate the behavior of agricultural input prices, agricultural output prices, and consumer food prices under two different policy regime periods, that is, prior to and after the reformulation of the CAP, which occurred in May 1992. It is expected that agricultural output prices would have not been so responsive to changes in agricultural input or consumer food prices for the period before the reformulation of the CAP as much as for the period after the reformulation. If this was the case, then changes in agricultural input or consumer food prices would have caused different changes in relative prices and thus, in farmer's welfare across the two periods, before and after the reformulation of the CAP. For example, the welfare of farmers would have deteriorated in the first period if prices paid by farmers increased due to a shock,...
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