Forecasting Marketing Margins in the Australian Pig Industry

The apparent divergence between producer and retail prices in the presence of a marketing chain is a common facet in agricultural industries. There is evidence to suggest that changes in producer prices are not passed on fully to changes in retail price, especially in the situation where producer prices are in decline. In the presence of market power reductions in producer prices are not reflected in reductions in retail prices but increases in producer prices are immediately reflected in increases in retail prices. Asymmetric price transmission will result from situations where firms are facing different elasticities for their inputs and outputs. This paper looks at the Australian meat industry, in particular pigmeat, and attempts to identify whether the presence of marketing margins results in asymmetric price transmission between producer and retail prices. Error correction models suggest that the speed of adjustment of retail prices to changes in producer prices is very slow, indicating that market power in terms of intertemporal price averaging exists. When close substitutes, such as beef, chicken, and lamb are taken into consideration it seems that retail prices of pork are sensitive to changes in those retail prices, specifically changes in retail beef prices. The speed of adjustment of the retail price of pork is particularly fast when retail prices of beef are taken into consideration. This implies that pork is competitive with beef at the retail level, indicating horizontal competition exists but not vertical.