The impact of diesel price on upstream and downstream food prices: Evidence from São Paulo

The literature on the transmission of oil price shocks to prices along the food supply chain has widely ignored how shocks upstream differ from downstream ones. This article examines this issue by modelling upstream and downstream diesel price shocks along the nutritional high-value food supply chain in São Paulo. Using a Vector Error Correction approach and monthly data from July 2001 to December 2013, we estimate short-run and long-run dynamics in producer and retail prices of meat, eggs, dairy and fats & oil due to changes in the average monthly price of diesel. The results of the Granger causality analysis show that the price of diesel cannot be used to predict the behaviour of producer prices in all the markets under study, and the price of diesel predicts retail price only in the egg market. This result is in line with the nature of price controls in Brazil. As of January 2002, the prices charged by distributors and retailers have been liberalized, although wholesale prices of the derivatives, including that of diesel, continue to be set by the state oil company with the objective of controlling inflationary pressures. The results of the response of food prices to diesel price shocks show a positive response of both upstream and downstream prices of egg and dairy products both upstream and downstream, while the opposite direction occurs in the fat and meat markets albeit the initial positive shock of the producer price of meat. The findings of the study show the important role of public policy in determining the nature of price transmission along the food supply chain.