Transcript Price Formation, Transmission and Transparency in the Food Chain: Overview of Critical Issues

Price Formation, Transmission and
Transparency in the Food Chain:
Overview of Critical Issues
Professor Steve McCorriston
University of Exeter
OECD Food Chain Network Meeting
13th September, 2011
Transparency of Food Pricing
TRANSFOP
• 3 year FP7 project (2011-2013) funded by the EU
involving 13 partner institutions from 10 EU countries
• Engagement with stakeholders and policymakers
• Overall objective of TRANSFOP:
“to develop a greater understanding of pricing issues in
food supply chains throughout the EU regarding the
mechanisms of price signal transmission and the
determinants of food pricing”.
• Covers many of the areas outlined in the FCN plans
• www.transfop.eu
Characterising Competition
and Regulation in
EU Food Markets
(WPs 2, 5,6)
Food Supply Chains:
Imperfect Factor Markets
And Contract Enforcement
(WPs 2,5,7)
Food Supply Chains:
The Role of SMEs
(WPs 2,5,6,7)
Consolidation and
Restructuring in the EU
Food Sector
(WP 2,7)
Competition and Regulation in EU Food Markets
Drawing Evidence
Together: The Case of the
EU Dairy
Supply Chain
(WP2,3,4,5,6, 7)
Food Pricing Transparency
Action
Plan
(WP 8)
Analysing Pricing in EU Food Markets
Experience of
Price Adjustment
in EU Member States
(WP 2)
Econometric Models
of Price Transmission
in EU Food Chains
(WP 3)
Price Dynamics
at Retail Level
(WP 4)
Retailer-Manufacturer
Pricing Relations
(WP 4)
Price Transmission
with Imperfect Factor
Markets and
Contract Enforcement
(WP6)
Structure of the Presentation
• Challenges in addressing retail price behaviour
(reference to UK data)
• Price transmission: on-going challenges
• New directions in understanding retail prices
• Consolidation in the food sector
• Leave aside more “standard” though important
issues
Mention these in passing
• Price formation at different stages, in different
chains and across countries
• Price transmission through the vertical chain at
different stages
• Characterising differences in food supply chains
• Food price monitoring
Something we will come back to
Domestic
ag. inputs
Processing
Sector
World
Markets
Retailing
Sector
Consumers
Food Price Inflation (CPI) of Selected OECD Countries 1960-2009
Annual Inflation for All Goods, Food and Non-food CPI 1989(1)-2010(1) (%)
Price transmission and retail price dynamics
Various aspects of price transmission
HPT
Domestic
ag. inputs
Processing
Sector
Retailing
Sector
Consumers
World
Markets
VPT
Price Transmission
Price Transmission Issues
• A lot of work on price transmission lacks a theoretical
basis
• What factors give rise to the different experience of price
transmission?
• Competition and Regulation
…how does the structural characteristics of the food chain
impact on price transmission?
…competition at each stage and the nature of contracts
between stages
• It is not a question of just characterising market structure
but understanding how competition within and between
between stages affects outcomes
Competition and Regulation throughout Food Chain
Domestic
ag. inputs
Processing
Sector
Retailing
Sector
World
Markets
Price Transmission
Consumers
Price Transmission Issues
• Competition and regulation
• The nature of responses: asymmetry and
non-linearity
• Other factors: labour costs, exchange
rates, etc...these are seldom accounted for
• Duration of commodity shocks-important if
the aim is to explain food price inflation
Impact of a One-period 10% Shock to different factors
on Annualised UK Food Price Inflation.
Percent
The Predicted Percentage Effect on UK Food CPI of a
10% Shock to World Food Commodity Prices by Duration of the Shock
2.5
2
1.5
1
0.5
0
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
Months following the shock
D=1
D=3
D=6
D=9
D=12
D=18
D=∞
20
21
Price transmission and retail price dynamics
A Different View of Retail Price Dynamics
Breakfast Cereal: Weetabix Original 24s
Yoghurt: Muller Light Pot Cheery Single 200g
150
225
130
200
175
110
150
90
125
70
100
50
101
91
81
71
SAFEWAY
ASDA
SAINSBURY
TESCO
61
51
41
31
21
11
1
121
111
131
75
1
WAITROSE
KWIK SAVE
SOMERFIELD
11
21
TESCO
31
41
51
SAINSBURY
61
ASDA
Sliced Bread: Kingsmill Medium Sliced White 800g
71
81
SAFEWAY
91
SOMERFIELD
101
111
KWIK SAVE
121
131
WAITROSE
Jam: Streamline Strawberry 400g Jar
80
160
70
140
60
120
50
100
80
40
1
11
21
TESCO
31
41
SAINSBURY
51
ASDA
61
71
SAFEWAY
81
SOMERFIELD
91
101
KWIK SAVE
111
121
WAITROSE
131
1
11
21
31
TESCO
41
51
ASDA
61
SAFEWAY
71
SOMERFIELD
81
91
KWIK SAVE
101
111
121
Some new questions
• What is the nature of price adjustment using
high-frequency, dis-aggregated and firmspecific data (this is a growing area in the
macroeconomics area where they are
addressing the issue of inflation dynamics)?
• Sales and promotions
• Behaviour of the underlying “Reference Price”?
• Common factors or idiosynchratic behaviour?
Market structure of not necessarily static
Competition and Regulation throughout Food Chain
.......and how the structure of the food chain changes
Domestic
ag. inputs
Processing
Sector
Retailing
Sector
World
Markets
Price Transmission
Consumers
M&As in the Global Food Sector
(number of deals)
1400
1200
1000
800
Total
600
CBAs
Domestic Deals
400
200
0
Questions to address
• What is the nature and characteristics of the
consolidation and change in the food sector?
• What does the restructuring process look like?
• What factors drive it? Macro-factors, or
sectoral/firm-specific aspects?
• Is it efficiency enhancing? Horizontal and vertical
issues.
Summary
• Combination of “standard” analysis and new directions
will help us better understand the functioning of food
supply chains
• How shocks are transmitted throughout the food supply
chain-a more complete picture needed
• What aspects of competition and regulation (and the
cross-country differences) impact on the functioning of
food supply chains and the different experience of food
price inflation?
• What is the process of change and restructuring in the
food sector, by country and globally.
• www.transfop.eu