Why Does Food Price Transparency Matter?

Steve McCorriston University of Exeter, UK

OECD, Food Chain Analysis Network October, 2015

Background

• Increased attention to food chain issues following the commodity price spikes of 2007-08 & 2011

• Concerns from a wide range of stakeholders with implications for policy

that related to the functioning of the food chain (for example, competition policy)

• These concerns related not only to price transmission effects and how

prices at the consumer level evolve but tied to this issues of “fairness” in the supply chain, the potential exercise of market power and how and why food chains differ in structure and functioning across sectors and across countries (as reflected in the different experience of food price inflation across countries)

• These concerns are on-going with subsequent declines in raw agricultural prices

On the research side…

• Long standing interest in price transmission issues with the conjecture that the price transmission process had something to do with concentration in the food chain

• These studies typically hindered by using data at either end of the food chain (farm-retail) and had no structure…so it was difficult to apportion ‘blame’

• Complementing these econometric studies was research on the industrial organisation of the food chain that, in part, focused on ascertaining the extent of market power and, in some cases, explicitly modelling the price transmission process when characteristics of the food chain ‘matter’

Focus here

• Is on some recent research insights covering three issues

(i) How do (can we) relate increasing aspects of price adjustment/transmission to the functioning of the food chain

(i) Given the complexity of the food chain, what aspects are likely to matter in determining the price transmission process

(ii) Data issues and the trade-off between monthly aggregate data and scanner data sources

Most of the reference to research will relate to the EU and tied to TRANSFOP

To motivate the discussion…

• Recent OECD document on “Food Price Formation” (2015) (TAD/CA/APM/WP(2014)36/REV1)

• “..transparency along the food chain was identified as a top priority”

• Reported on efforts to improve price transparency along the food chain: Table 2 reports 35 countries monitoring food prices throughout the food chain including in many cases, prices at the processing as well as farm and retail stages

• What did respondents to the OECD questionnaire see as the main issues?

Benefits of Price Transparency

• Data available for specific commodities/food sectors at different levels across a large number of countries

• Evolution of prices at different stages can promote transparency on how prices at different levels evolve

• This can focus discussion among different groups

• Perhaps complemented by additional information such as share of agricultural product in “Food Euro/Dollar” and additional information

• But the challenge is, on the basis of price information alone-reported as a monthly average for a country-how far can you go in interpreting how food chains function and how the characteristics of those chains relate to price transmission (and other features of prices)?

What is and what is not transparent about the food chain?

• Present a simple framework

),,,()()(

),,()(

FMRNFF

FCNFF

MUMUCCfFPFMFMR

or

MUCCfFPR

We can observe these prices; the challenge is the right hand side

Double

Marginalisation

Price transmission

),,,()()(UMUR MPMPNFF ssfFPFMFMR

These represent the elasticities

of the mark-ups at the retail and food

manufacturing stages

What determines the elasticities of these mark-ups?

• The nature of the demand function including behaviour of consumers

• Market structure and firm behaviour in the two stages: selling and buyer power throughout the food chain

• Contracts/vertical coordination between the two stages

• Private label penetration

• Retailer-specific price adjustment strategies

• Regulatory infrastructure

Research insights: (1)

• Large number of price transmission studies may tell us something about the LHS and construe from the results something about the RHS

• Few studies have measured the RHS directly: when they have, the elasticity of the mark-up plays a significant role in determining the price transmission effect (Nakamura and Zerom, 2011)

• Can you say something indirectly? Some insights from the TRANSFOP group

Hassouneh et al: Overview of Price Transmission and Reasons of Different Adjustments in Different EU Member States

• This study characterizes price transmission processes along a wide range of different food marketing chains within the European Union (EU) and explains the differences and/or similarities that exist between them.

• Results provide evidence of symmetric price adjustment in two-thirds of

the markets considered…asymmetry not a general feature • Producer prices are found to adjust faster to long-run disequilibrium than

consumer prices. • What factors affect price transmission? (i) The production share within the

EU, (ii) the export and production specialization ratios of each country, (iii) the relevance of vertical contracts within the chain and (iv) the perishability of the food product are found to affect price adjustments along the food marketing chain.

Lloyd et al: Experience of Food Inflation in EU

• Relate the extent to which world commodity price changes has driven food inflation across the EU and how this relates to differences in ‘observable’ characteristics relating to differences in food chains

• Factors include: barriers to competition at retail (but role of discounters play only limited role); private labels (they diminish the double marginalisation issue); rationale inattention by consumers

Correlation between Barriers to Competition at Retail Index and Contribution of World Wheat Prices to Retail Bread Prices

Bonnet, Corre and Réquillart

• Use a structural model applied to the dairy sector in France using scanner data (see also below)

• This allows them to estimate product specific own and cross price elasticities

• They also allow for different forms of contracts between retailers and food manufacturers

• Depending on the nature of this vertical contract, price transmission can be greater than 1 for some products!

Research Issues: (2)

• Price data is available at an aggregate level: single observation at monthly frequency with no spatial dimension and implies homogeneity across retailers/manufacturers and across outlets

• Use of scanner data gives some insights that question this homogeneous presumption about the food sector

50

60

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80

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80

TESCO SAINSBURY ASDA SAFEWAY

SOMERFIELD KWIK SAVE WAITROSE

Price

in p

en

ce

Graphs by retail chain. Sample period 08 September 2001 to 17 April 2004.

Kingsmill Everyday White Bread

…German beer prices

Brand level average weekly prices (euro/kg) for butter in chain A (left panel) and chain B (right panel). (2009-2011)

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1 2 3 4 5 5 6 7 8 9 10 11 12

Laspeyres weekly (Scan) Laspeyres monthly (Scan) Laspeyres monthly (ISTAT)

…food inflation more volatile

…there is no ‘one’ price transmission number!

• Scanner data has the potential to offer more transparency in the food sector highlighting differences across retailers, frequency of price adjustment (weekly rather than monthly), by outlet, and across space.

• Heterogeneity is the key point here and also raises the question of what the reference price is and how firms adjust prices

• Some scanner sources can provide quantity data so product specific price transmission elasticities can be derived

• But obtaining more transparency is not costless

Summary

• Considerable effort in recent years to promote transparency in the food chain

• This in itself is a ‘good thing’ and provides a platform for discussing pricing issues throughout the food chain

• Challenge though is construing what the LHS (price transmission) tells us about the RHS (the functioning of the food chain)

• Data aggregation issues are also important in this regard

• This will be an important and on-going aspect of the policy

and research agendas in future years