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Food Scares, Market Power and Relative Price Adjustment in the UK Tim Lloyd, Steve McCorriston, Wyn Morgan & Tony Rayner 88th Seminar of the European Association of Agricultural Economics Slide 2 Outline of Presentation 1. Motivation and Aims 2. BSE in the UK 3. Food Scares and Price Spreads 4. Empirical Analysis 5. Results 6. Conclusions Slide 3 1. Motivation and Aims Increasing concern over food health scares - Salmonella, BSE, e-coli, foot & mouth Differential effect on farmers and retailers - Competition Commission (2000) Few studies of market power effects Slide 4 Aims: Link market power and price transmission with supply and demand shocks - Power affects co-integrating relationship - Testable hypothesis Highlight the supply side effects of the scare - Cull and export ban cancel out Slide 5 2. BSE in the UK Mid 1980s in cows 1990 crossed species 1996 CJD (139 deaths by 2003) 2000 Parliamentary (Phillips) Report Major scare but how did it affect spreads? Slide 6 UK Beef Prices (Jan 1990 Dec 2000) Slide 7 Retail Producer Price Spread of Beef (p/kg) Slide 8 3. Food Scares and Price Spreads Farmers more affected by BSE than retailers Competition Commission explored market power but how would we expect this a priori to affect price spreads and what determines the spread? Slide 9 Gardner (1975) assumed perfect competition McCorriston et al (1998) oligopoly with supply side shock McCorriston et al (2001) returns to scale Lloyd et al (2002) oligopsony Plus: source of shock, shift/rotation of supply and demand Slide 10 Use theory to determine econometric strategy If market power exists, shifters will be significant thus power not directly measured Spread determined by: demand shifter supply shifter marketing costs Horizontal (retail level) and vertical (spread) relationships exist Slide 11 4. Empirical Analysis Employ a VAR framework and generalised impulse response functions (Pesaran and Shin, 1998) Model beef prices at retail and farm level Include: demand and supply shifters, other retail prices and marketing costs Slide 12 Data Monthly prices (Jan 1990 - Dec 2000) Supply shifter is net withdrawals sum of net exports and cull (000t carcass weight equivalent) Demand shifter press stories index (log form) Slide 13 Net Withdrawals from the UK Beef Sector (1990-2000) Slide 14 The Food Publicity Index (logs) Slide 15 5. Results Two co-integrating relationships: Retail - price of lamb (+) - price of pork (+) - demand shifter (-) Transmission - supply shifter (-) - demand shifter (+) Slide 16 Interpretation: Food scares cause retail prices to fall Significant shifters mean we cant reject hypothesis of no market power Food scares depress producer prices but withdrawals raise them (ceteris paribus) How much do the shocks affect prices? Slide 17 Impulse response analysis - long run responses to a shock - use one standard error shock - look at both demand and supply shocks Slide 18 Simulated Dynamic Effect of a Meat Scares Index Shock Slide 19 Simulated Dynamic Effect of a Shock to Net Withdrawals Slide 20 The Impact of BSE on UK Beef Prices Slide 21 6. Conclusions If market power exists, shocks matter Supply & demand BSE shocks show power exists BSE caused producer prices to fall twice as much as retail Demand shift had greater impact than supply shift Distributional effects of health scares where market power exists