Vertical and Spatial Price transmission Analysis of the Uruguayan beef chain

The aim of this research is to analyze the market efficiency in terms of price transmission, integration, asymmetry of price transmission, of the Uruguayan beef chain and the international market, in both a spatial and vertical dimension for the period from January 2000 to December 2020. Using cointegration and price transmission analysis techniques based on the Law of One Price, we aim to study the dynamics of the Uruguayan beef chain. Through the Johansen cointegration test, corrected for structural breaks detected by the Bai-Perron test and Augmented Dickey-Fuller (with Breaks), we determined the degree of cointegration between the Uruguayan beef chain and the international market. The results of the Granger Causality test indicated that, in most cases, there is no short-term causality between international market prices (represented by the US Standing steer) and domestic prices. In cases where a causal relationship was identified, VECM models were used to examine market efficiency and estimate the adjustment speed between domestic and international prices (long and short-term adjustment). In parallel, VECM models were created for the meat chains of Brazil and Canada, and the transmission of international prices to these countries was analyzed. The results showed that price transmission in the Uruguayan meat chain is slow, leading to reduced market efficiency. An adjustment speed was observed from 3% to 7.8% of domestic prices to international ones, with a return to long-term equilibrium between 14 and 22 months. The impulse response function (IRF) revealed an asymmetry in the domestic market's responses to international price shocks or impulses and a delayed effect accompanied by a low pass-through coefficient (6-26%). Through the Forecast Error Variance Decomposition and its generalized version (FEVD & GFEVD), it was determined that after a shock, the international market could only explain a limited percentage (0.4-13% (FEVD) and 0.6%-28% (GFEVD)) of the variance of Uruguayan prices in the first six months after the shock, reaching a maximum of between 3.5 to 20% (FEVD) and 4.6 to 36% (GFEVD) twelve months after the initial shock. Contrary to logical and intuitive appreciation, econometric study results indicate that the variance in prices of the Uruguayan meat chain depends more on endogenous shocks than on the repercussions of exogenous shocks from the international market. In contrast, in Brazil and Canada, international prices explain a higher percentage of the price variation in their respective domestic markets. The efficiency in price transmission in these markets was significantly higher, around 30 to 36%, with a return to long-term equilibrium in just 3 months. The results of FEVD & GFEVD indicated that international prices can explain between 34%-54% of the variance in Brazilian and Canadian prices, values significantly higher than the Uruguayan case. In summary, the low causality (Granger), delayed transmission (IRF &VECM), impulse asymmetries (IRF), and the limited influence of international prices on Uruguayan prices (FEVD & GFEVD), compared to other evaluated countries, suggest inefficiencies in the Uruguayan beef chain. Oligopsonic market structures could explain partly this inefficiency. The concentration determined by the emergence of the Minerva Foods economic group could trigger even greater inefficiency, decoupling, and potential asymmetries in price transmission.