Price and Volatility Spillovers of the Producer Price of Milk between some EU Member States

The aim of this analysis is to compute the return and volatility spillovers of raw milk prices paid to producers in Germany, Hungary, Italy and Poland with the inclusion of world prices, in the time period between January 2003 and June 2017. This study poses the questions: what is the level of spillovers of the producer price of milk among these Member States? Has the level of spillovers increased over time? Based on the relevant literature, we assumed that agricultural price spillovers have increased over time in general and the price returns of Germany and Italy determined the price returns of Hungary and Poland. We calculated the Diebold-Yilmaz Spillover Index for the returns and for the absolute returns in order to measure return and volatility spillovers. We found that on average, 50% of the price forecast error variance came from spillovers. Germany had the highest contribution to the forecast error variance of the other markets, while Italy was mostly affected by the other Member States and world prices. At the same time, none of the Member States had a significant effect on the world prices. In the case of volatility, the overall spillover index is relatively low, at around 20%. Germany had the strongest influence on the prices of the Member States, while Italy had the lowest contribution, which can be explained by the relative stability of Italian raw milk prices compared to the other three markets. Over time, return and volatility spillovers showed a moderate increasing tendency which supports the hypothesis of increased price spillovers on the dairy market in recent years.