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Methods on MeasuringPrices Links in the Fish Supply Chain
Daniel V. GordonDepartment of Economics
University of Calgary
FAO Workshop Value ChainTokyo, Japan
December 2010
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• Introduction• The demand for fish is derived by end-use
demand for the commodity. • The retail price will reflect the fish price plus the
cost of marketing the commodity from the vessel to the retail level.
• Let the retail/vessel price margin be the difference between the retail and vessel price.
• The impact of a shock somewhere in the supply chain on price will depend on the structure of the relationship between the two sectors
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• Consider a fixed proportions relationship between fish supply and marketing inputs
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• Add in market Demand
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• Assume that proportionally larger amounts of marketing inputs are required to process increased supply of fish.
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• Supply of marketing inputs is perfectly elastic but substitution possibilities exist between the fish commodity and marketing inputs, the derived fish demand curve is more elastic
• Wohlgenant and Haidacher (1989) argue that processors can choose alternative production processes, including different modes of transporting, interproduct substitutability and the substitution of quality for quantity.
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• Substitution
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• An interesting model by Wohlgenant (1989) and Holloway (1991). Provides summary measures of the price and margin flexibilities
1 imqimrdimmcmi LRDMCM
2 iprqiprrdiprmcpri LRDMCpr
1 ipfqipfrdipfpfi LRDMCpf
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• Retail Demand Shift Variable and Marketing Cost Index
• Consider the following price transmission equation describing the stochastic behaviour of fish prices.
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• The Rd shift variable is defined as the linear combination:
• Why is it that we require premeasured elasticities?
• The problem is statistically consistency.
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• The Rd index is deterministic and it might be an advantage to introduce a stochastic error term to account for unobserved randomness
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Estimated Elasticities
Price of Sirloin/kg
Price of chicken/kg
Price of Non-Food
Income Population
Estimated Elasticity
0.25 0.15 0.09 0.81 1.0
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• Marketing Cost Index• The Mc index is a weighted price index of the
cost of inputs used in moving fish product through the supply chain. We have identified four major inputs in fish processing; labour, electricity, transportation and packaging. The weights in the index reflect the cost share of the input in the total cost of processing.
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Cost Share Major Inputs Fish Processing
Price of Labour
Price of Electricity
Price of Transportation
Price of Packaging
Cost Share 0.51 0.18 0.16 0.15
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• Mc index is written
• Combining the real price indices with the cost shares we are able to predict the marketing cost index for seafood processing
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• Reduced Form Models • This price approach is based on the theory of
derived demand where the processed price of fish is used as a proxy for market factors setting the ex-vessel price.
• Univariate analysis is carried out on the ex-vessel price of fish.
• The ARMAX model is well identified and will allow for dynamic forecasts of ex-vessel prices.
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• Selecting the correct lag specification critical for generating an estimated equation with good forecasting potential.
• Review the autocorrelation and partial autocorrelation functions
• Candidate specifications defined on testing iid • Box-Lung Q-statistic RMSE and AIC statistics.
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• ARMAX Model
• Model with stationary variables
tjt
q
jjit
p
iVi
ssstpot ExvesselDExExvessel
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1
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• Error-Correction Modelling • Recognizing the structural links between the
first-hand and processing, we postulate a long-run price relationship.
• An error-correction (EC) model can be used to econometrically identify both the short- and long- run parameters for the first-hand market and predict the length of time for price adjustment to regain the long-run equilibrium
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• In a pairwise comparison of prices it is not unreasonable to think of an economic equilibrium describing the long-run relationship and written in basic form as
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• in a short run distributed lag representation the error-correction model can be written
• All arguments stationary • The speed of adjustment to a short-run price
shock can be approximated •
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• Testing weak exogeneity
• Long-run exogeneity tested by including the error-correction term as an additional regressor.
• Short-run exogeneity tested by using fitted residuals from this equation and adding this as an additional variable error correction