Examination of the price transmission and volatility of the main agricultural and food product categories

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Παχής, Δημήτρης

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The Greek agricultural sector constitutes a major part of the national economy thus the study of the supply chain can offer valuable insights of the interactions among market participants. Especially, the price interactions among the market levels mirror the interactions between the market fundamentals namely supply and demand. Moreover, the study of the price transmission mechanisms of the agricultural markets reflects the formation of the economic decisions of the agents based on market prices which reveal the quantities they are willing to buy and sell. Furthermore, the market prices monitoring by policy makers aims at assessing the competition conditions in the market and assuming relative action when the welfare of market participants is at stake especially when they do not have the means to accommodate price changes. This study investigates the price transmission mechanisms of the Greek agricultural sector while focusing to three fresh vegetables namely potatoes, tomatoes and cucumbers. The price mechanisms are examined in conjunction to the Common Agricultural Policy framework. The price mechanisms are modeled via Vector Autoregressive processes and their Co-integrated variants for the mean and via Generalized Autoregressive Conditional Heteroskedastic processes for the variance. Three models are utilized for the examination of the price mechanisms. The first model investigated the price transmission mechanism between the producer and the consumer of the Greek food market while assessing the effects of the decoupling principle of the Common Agricultural Policy of the European Union. The empirical analysis uses the panel Vector Error Correction model for the depiction of the price mechanism. The second model investigates the price transmission mechanisms between the producer and the consumer for the fresh potatoes, tomatoes and cucumbers. The three products are selected on the base that they comprise a significant part of the vegetables production as well as of the total agricultural output while they do not need big investments for their production. The empirical analysis makes use of the Markov Switching Vector Error Correction model under the assumption that the producer and the consumer respond differently to price increases and decreases. The third model investigates the transmission of the volatility between the producer and consumer prices of fresh potatoes, tomatoes and cucumbers in Greece. The transmission mechanism of the volatility of the prices is modelled by the BEKK model while possible asymmetries are taken into consideration. The results of the study reveal that for the total agricultural sector, the producer does not respond to long-run price changes while the own effects of a shock are quickly absorbed, in contrast to the spillover effects of the shock. The implementation of decoupling seems to have benefited the consumer more in mitigating his responses to price shocks rather than the producer. Finally, the analysis of the fresh vegetable markets reveals the complexity of the price mechanisms and the diversified response of each product to price shocks.



Agricultural products, Transmission,, Prices, Volatility