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Modeling Processor Market Power and the Incidence of Agricultural Policy: A Non-parametric Approach

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  • Rachael E. Goodhue
  • Carlo Russo

Abstract

This paper examines interactions between market power and agricultural policy in the U.S. wheat flour milling industry using a non-parametric approach. The analysis focuses on marketing loan and pre-1986 deficiency payment programs; farmers' payments from these programs are dependent on whether or not the market price exceeds a "policy" price. It assesses if the payments trigger a change in the underlying economic behavior of the milling industry, and any resulting change in the flour-wheat price margin. The analysis compares the outcomes of using constrained and unconstrained sliced inverse regressions in order to identify the significant factors affecting millers' pricing behavior. In both cases, the link functions are then estimated using a non-parametric regression of prices on these factors. Constraining the factors in the sliced inverse regression in order to generate coefficients that are easily interpreted using economic theory does not affect the results. Based on the SIR factors, millers were able to extract an additional $0.24/cwt. of flour by increasing their marketing margins in years farmers received program payments. Based on the CIR factors, the increase in the marketing margin was $0.23/cwt. In both cases the increase was approximately 10 percent of the estimated marketing margin in years farmers received program payments.

Suggested Citation

  • Rachael E. Goodhue & Carlo Russo, 2011. "Modeling Processor Market Power and the Incidence of Agricultural Policy: A Non-parametric Approach," NBER Working Papers 16706, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:16706
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    References listed on IDEAS

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    1. B. Wade Brorsen & Jean-Paul Chavas & Warren R. Grant & L. D. Schnake, 1985. "Marketing Margins and Price Uncertainty: The Case of the U.S. Wheat Market," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 67(3), pages 521-528.
    2. Kyle Stiegert, 2002. "The producer, the baker, and a test of the mill price-taker," Applied Economics Letters, Taylor & Francis Journals, vol. 9(6), pages 365-368.
    3. Ashenfelter, Orley & Sullivan, Daniel, 1987. "Nonparametric Tests of Market Structure: An Application to the Cigarette Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 35(4), pages 483-498, June.
    4. C.S. Kim & C. Hallahan & G. Schaible & G. Schluter, 2001. "Economic analysis of the changing structure of the U.S. flour milling industry," Agribusiness, John Wiley & Sons, Ltd., vol. 17(1), pages 161-171.
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    More about this item

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • Q18 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Policy; Food Policy

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