An Asymmetric Price Transmission Analysis in the U.S. Pork Market Using Threshold Co-integration Analysis

Abstract

The objective of this study is to examine asymmetric price transmission in the U.S. pork market. The motivation of this study needs to be found in the structural changes in the U.S. pork market characterized by more extensive and intensive operation of pork production, consolidation of the small and medium scale producers, many mergers and acquisitions of meat packers and retailers. For this purpose, threshold co-integration analysis is applied to allow for an asymmetric pattern of price adjustment towards a long-run equilibrium in the price relationship among farm, wholesale, and retail levels. The empirical findings suggest that there is asymmetric price adjustment in the U.S. pork market while its pattern appears to be different across marketing channels. That is, wholesalers tend to respond more quickly to an increase in producer price (i.e., margin squeezing) than to a decrease in producer price (i.e., margin stretching), while wholesale price responds more quickly to a decrease in retail price. These may be generally understood in the presence of non-competitive pricing behavior of agents at a certain chain beyond farm gate. Such findings imply that the recent structural changes in the U.S. pork market may hinder an efficient price transmission mechanism across the marketing channels.

The objective of this study is to examine asymmetric price transmission in the U.S. pork market. The motivation of this study needs to be found in the structural changes in the U.S. pork market characterized by more extensive and intensive operation of pork production, consolidation of the small and medium scale producers, many mergers and acquisitions of meat packers and retailers. For this purpose, threshold co-integration analysis is applied to allow for an asymmetric pattern of price adjustment towards a long-run equilibrium in the price relationship among farm, wholesale, and retail levels. The empirical findings suggest that there is asymmetric price adjustment in the U.S. pork market while its pattern appears to be different across marketing channels. That is, wholesalers tend to respond more quickly to an increase in producer price (i.e., margin squeezing) than to a decrease in producer price (i.e., margin stretching), while wholesale price responds more quickly to a decrease in retail price. These may be generally understood in the presence of non-competitive pricing behavior of agents at a certain chain beyond farm gate. Such findings imply that the recent structural changes in the U.S. pork market may hinder an efficient price transmission mechanism across the marketing channels.