Asymmetry in Price Transmission in Agricultural Markets

• Published date: 01 May 2015
• Author: Alain McLaren
• DOI: http://doi.org/10.1111/rode.12151
• Date: 01 May 2015

Asymmetry in Price Transmission in

Agricultural Markets

Alain McLaren*

Abstract

This paper explores the asymmetries in price transmission from international to local markets. We expect

the presence of large intermediaries in agricultural markets to lead to a stronger price transmission when

international prices decline than when they rise. The empirical evidence confirms the presence of asymmet-

ric price transmission consistent with the presence of large intermediaries with monopsony power.

1. Introduction

While grocery store shelves appear to provide abundant choices, most of

these products are marketed by a small and decreasing number of firms.

Gigantic multinational corporations are consolidating their control over

our food system. . . . The trend raises concerns about how this power is

exercised, as most of these corporations are accountable to their share-

holders, not to communities in which they operate. (Phil Howard, 2006)

Many poor countries have a large proportion of their active population working in

agriculture. In many cases, the amount of revenue they receive will be crucial for their

survival. Using data from the World Development Indicators (World Bank, 2010) one

sees that in the year 2000, the world’s 25% poorest countries had at least a quarter of

their population working in agriculture, and half of these 25% poorest had over 70%

of their population active in agriculture. An illustration of this is given in Figure 1.

Thus poorer countries will be more exposed to large falls in agricultural prices.

Understanding the determinants of changes in agricultural prices is therefore crucial

for the poorest countries.

In this paper the focus is on the extent of asymmetry in the price transmission from

international to local markets. Whether a farmer is selling locally or exporting, the

price he will receive for his production will be directly or indirectly affected by prices

determined in world markets. Indeed, Mundlak and Larson (1992) show that vari-

ations in local agricultural prices are mainly explained by variations in world prices,

but the transmission from international to local markets may not necessarily be sym-

metric. Depending on market conditions falls in international prices may be better

transmitted to local markets than increases in international prices. The consequences

of this asymmetric price transmission could be particularly harmful in poor countries

* McLaren: University of Geneva, Unimail, Bd. du Pont d’Arve 40, 1211 Geneva, Switzerland. Tel: +41-

788431321. E-mail: alain_mclaren@hotmail.com. The author is grateful to Jean-Louis Arcand, Richard

Baldwin, Marcelo Olarreaga, Frederic Robert-Nicoud, Takamune Fujii and Henry Kinnucan for their

helpful comments and discussions. He also thanks all participants at the “ProDoc Trade PhD Workshop,”

the “University of Geneva Young Reseachers Seminar” as well as the “Bari Third International Workshop

on Economics of Global Interactions: New Perspectives on Trade, Factor Mobility and Development” for

their useful comments and suggestions.

Review of Development Economics, 19(2), 415–433, 2015

DOI:10.1111/rode.12151

© 2015 John Wiley & Sons Ltd

where farmers often live close to the poverty line. In fact, Mosley and Suleiman

(2007) suggest that a portion of the small farmers are below the poverty line in some

of the poorer countries. They also put forward that the one sector that has had a

strong ability to stimulate pro-poor growth processes, especially in East and South

Asia, is smallholder agriculture.

Why would one expect a better price transmission when agricultural prices fall?

Agricultural markets are characterized by the presence of large international inter-

mediaries, with strong monopsony power over often small and numerous producers.

Murphy (2006) shows that in the USA two companies (Cargill and Archer Daniels

Midland) export 40% of all US grains. Rogers and Sexton (1994) show that in the

USA more than 60% of all food and tobacco markets can be considered as noncom-

petitive when measured by their top four-firm concentration ratio (with a threshold at

50%). Figures for other countries are similar. For example in Vink and Kirsten

(2002), concentration ratios for the four largest firms for South Africa are also large:

47% in slaughtering, dressing and packaging livestock, 65% for vegetables and animal

oils and fats, 43% for flour, 37% for animal feeds, 99% for sugar, golden syrup and

castor sugar, 80% for coffee, coffee substitutes and tea.

In this paper it is shown that in the presence of strong monopsony power of agricul-

tural intermediaires with sufficiently convex marginal cost functions one should

expect an asymmetric price transmission that is consistent with the use of this monop-

sony power by intermediaires. Indeed as international price falls, local prices will fall

proportionally more than when international prices increase. This prediction is con-

firmed when confronted to a sample of 161 agricultural products produced in 117

countries over a period of 35 years. Moreover, the asymmetry seems to be driven by

the results for markets where large international intermediaries are present or when

exports represent a large share of total production, which increases the monopsony

power of international intermediaries.

Questions of asymmetric price transmission have been widely studied for oil

markets, known as the literature on “Rockets and Feathers,” where prices rise like

rockets but fall like feathers. Many researchers have been analyzing the evolution of

oil output prices. Tappata (2009) analyzed the theoretical aspect of potential asym-

metric responses of oil retail prices. Many empirical studies come to the conclusion

0.2

–10000 10000

GNI

20000 30000 400000

.4 .6

Percent of population in agriculture

Proportion of population in agriculture

.8

Fitted valuesgni

1

Figure 1. Proportion of Population in Agriculture and Wealth

416 Alain McLaren

© 2015 John Wiley & Sons Ltd