Prce lnkages n value chans: methodology Prof. Trond Bjorndal, CEMARE. Unversty of Portsmouth, UK. and Prof. José Fernández-Polanco Unversty of Cantabra, Span. FAO INFOSAMAK Tangers, Morocco 14 March 2012 Introducton The ex-vessel prce of fsh defnes the profts and welfare of fshermen and ther communtes and s ultmately set by the end-user/retal demand for the commodty. Demand and supply functons are commonly specfed for both farm and retal sectors, and the equlbrum s solved under general compettve condtons Gardner (1975). The assumpton of perfect competton seems approprate when appled to settng the ex-vessel prce of fsh but napproprate for settng prce at the processng-dstrbuton-retalng (PDR) sector of the fsh market. In many ndustralsed countres a few supermarket chans account for a very large share of retal sales and seafood products. Therefore, non-compettve prcng at the PDR sector of the market may have mportant welfare mplcatons for fshermen and fsh farmers.
Theoretcal framework: Assumptons The demand for fsh from the fsherman or fsh farmer s derved from demand for the end-user/retal commodty. The retal prce wll reflect the fsh prce plus the cost of marketng the commodty from the vessel or fsh farmer to the retal level. Marketng n ths context ncludes transportaton, processng and dstrbuton to the pont of end use. The mpact of a shock to fsh landngs on retal prce wll depend on the structure of the relatonshp between the two sectors. Let the retal/vessel prce margn be the dfference between the retal and vessel prce Theoretcal framework: fxed proportons relatonshp Perfectly elastc supply of marketng nputs. The cost of usng these nputs s constant per unt produced. Supply of the fsh commodty at the retal level S(r) s the sum of fsh suppled S(f) and the fxed supply of marketng nputs S(w).
Theoretcal framework: fxed proportons relatonshp Gven the demand functon for fsh at the retal level (Dr), ths gves the derved demand for fsh at the vessel level (Df). The ex-vessel prce (Pf) s set by the ntersecton of the ex-vessel supply of fsh (Sf) and the derved demand for fsh product (Df). The retal prce (Pr) s set by the ntersecton of the retal demand (Dr) for fsh and the retal supply of fsh (Sr). Tangers, Morocco, 15 March 2012 Theoretcal framework: Varable marketng cost Non-constant relatonshp between fsh supply and marketng nputs. Increases n fsh supply wll cause changes n the margn. The upward slopng (Sw) represents the need to use proportonally larger amounts of marketng nputs to process ncreased levels of fsh supply. Decreases n fsh supply cause an ncrease n both ex-vessel and retal prce but a decrease n the margn.
Theoretcal framework: Substtuton between commodty and marketng costs Assumng that the ntal supply of fsh s constant and set at Q, a decrease n harvest to Q under fxed proportons wll ncrease the prce to Pf. If t s possble to substtute marketng nputs for the hgher prced fsh the derved fsh demand curve (Df ) s more elastc and the prce of fsh ncreases to only Pf,. A decrease n fsh supply can be assocated wth an ncrease n margn. The attrbutes of products may change over tme, or at the same pont n tme. Modellng Imperfect Competton n the PDR Sector In sectors wth hgh concentraton ratos, t s possble that ndvdual frms play an actve role n prce-settng and that n settng prces, each frm pays close attenton to the lkely reactons of other frms. The outcome of such nterdependent or olgopolstc behavour wll be determned by the extent to whch the major players n an ndustry can coordnate actons to take advantage of whatever monopoly rents are avalable. The more concentrated an ndustry, the more lkely t s n achevng the jontproft maxmsng prce and capturng monopoly rents. Prce s set to equate margnal revenue to margnal cost, and thus s hgher than margnal cost, snce demand s not perfectly elastc (Holloway, 1991).
Modellng Imperfect Competton n the PDR Sector Lerner mark-up rule, relates retal prce (Pr) to margnal cost (c) for a proftmaxmsng mperfect compettor by the formula. P R ( 1 1 ) c where s the prce elastcty of demand perceved by the prce setter. If elastcty does not depend on other varables, we can wrte: P R mc where m s a constant proportonal markup. In a compettve market, m=1 and n an mperfectly compettve market, m>1. A shft n the retal demand curve wll have no effect on prce, and a change n costs wll have the same effect, regardless of whether m s equal to or exceeds one. Modellng Imperfect Competton n the PDR Sector f elastcty s not constant proft maxmsng quantty and prce can be derved as, Q* = (a-c) / 2; Pr* = (a+c) / 2 Where a s a constant and margnal cost, c, s also constant. The elastctes of Pr* wth respect to shfts n demand and n costs wrtten: ( PEx ) = a / (a+c); P ) = c / (a+c). ( c can be If elastcty ncreases wth prce then mperfectly compettve prce-settng behavour should result n larger prce responses to demand shfts and smaller responses to cost changes than would be generated by perfect competton.
Structural model A compettve equlbrum three equaton model to measure varatons n the marketng margn (M), retal prce (Pr) and ex-vessel prce (Pe) s due to Holloway (1991). Explanatory factors, whch are the same for each equaton, are defned as: a) Marketng costs (MC). b) Retal demand shfter (RD). c) Fsh supply (L) The Holloway model can be wrtten as: M pr m pr pf pf mmc prmc pf MC mrd MC MC prrd RD mq RD RD L Lnear restrctons wll test for compettve condtons. pfrd prq pfq 1 L L 2 1 Structural models: varables & data Ex-vessel, ex-farm (Pf) and retal prces (Pr) for 10 dfferent speces have been collected weekly n Span by the Mnstry of Food and Agrculture (MARM) from 2004 to 2011. Hake; sardnes; anchovy; flounder; horse mackerel; blue whtng; mackerel; trout; and mussels. Import prce from EUROSTAT used for salmon. Marketng costs (MC). Estmatons of total labor costs and expenses n servces and products dfferent that merchandse n the wholesale and retal sectors are collected yearly (2006 2009) n a survey conducted by the Spansh Insttute of Statstcs (INE). Retal demand shfter (RD). Summarzed n the evoluton of the Consumer Prce Index. Includes all foodstuffs and the general non-food ndex reduced to a sngle factor usng prncpal components analyss. Supply (L). Monthly traded quanttes n the largest Spansh wholesale market of MercaMadrd for each of the selected speces were used n an attempt to have a proxy of landngs and mports.
Structural models: Results Goodness of ft Equaton 1 Equaton 2 Equaton 3 R2 0.704 0.785 0.726 Blue whtng DW 1.440 1.372 1.412 F 15.067*** 5.736*** 14.390*** R2 0.471 0.812 0.553 Anchovy DW 1858 2376 1945 F 3.242** 6.155*** 4.167** R2 0.558 0.688 0.584 Mackerel DW 1852 1402 1842 F 12.423*** 7.271*** 14.077*** R2 0.385 0.819 0.392 Hake DW 1.878 1.959 1.918 F 4.231** 5.572*** 2.782* R2 0.812 0.983 0.805 Salmon DW 1.780 1.187 1.739 F 4.835*** 2.654** 2.595** Parameters Equaton 1 Equaton 2 Equaton 3 MC -2.000*** 0.253** 2.259*** Blue whtng RD -0.436 0.475*** 0.900 L 0.443*** -0.017-0.461*** MC 0.457-0.065-0.470 Anchovy RD 0.294 0.308-0.373 L 0.205*** -0.051*** -0.260*** MC -3.204*** -0.021 3.157*** Mackerel RD 0.928 0.234* -0.749 L 0.485-0.042*** -0.529*** MC -0.897 0.002 0.952 Hake RD 1.082*** 1.510*** -1.143** L 0.084 0.009-0.063 MC -0.185-0.073*** 0.115 Salmon RD 0.456 0.719*** 0.231 L 0.122*** 0.003-0.120** Structural models: Results Fve speces resulted n sgnfcant F test for all the three equatons and only salmon shows relatvely hgh R 2 values. Prces and margns appear to be affected by other non ncluded varables. These effects vary from one speces to another. There s not a common prcng behavor for all seafood products.
Structural models: Testng for perfect competton To consder perfect competton verfy H 1 and reject H 2. A A Equaton 1 Equaton 2 Equaton 3 Blue whtng A Anchovy A Mackerel A Hake A Salmon A 0.133 4.911** 0.007 3.084* 1.354 3.133* 0.76 2.814 0.525 2.074 0.597 5.984** 2.007 2.531 3.051* 2.393 15.728*** 12.591*** 10.966*** 16.853*** 7.155** 1.297 1.343 4.822 1.707 77.192*** 0.056 1.708 8.079*** 0.582 None of the fve speces satsfy the condtons for all three equatons. Perfect compettve market can be rejected. Reduced form model Rely on statstcal technques to capture prce lnkage, where some form of contegraton among the prces defnes the market and allows for predctng the consequence of prce and random shocks n the prce chan (Asche et al, 2007). If contegraton s proven, perfect competton stands and a shock n ex-vessel prce wll lead to a shock of smlar magntude n the rest of the chan. Otherwse, non-compettve prcng s n effect. Ths requres tme seres data on prces at dfferent stages of the supply chan. For estmaton, a suffcent number of observatons s requred.
Reduced form models: varables & data Ex-vessel, ex-farm (Pf), wholesale (Pw) and retal prces (Pr). Monthly seres from the Mnstry of Food and Agrculture (MARM) from 2004 to 2011. Import prce. Monthly seres of key speces collected from EUROSTAT (2004 2011). Speces. Four wld speces (hake, anchovy, mackerel, blue whtng) and one farmed (trout). Share of mports. Hake 60,5%, anchovy 61,9%, mackerel 33,1%, blue whtng 6,7%, trout 5,7%. Reduced form models: results A Domestc prces only Imports ncluded A Rank Trace test Lmax test Rank Trace test Lmax test 0 0.0001 0.0001 0 0.000*** 0.000*** Blue whtng 1 0.2103 0.2477 1 0.000*** 0.000*** 2 0.4500 0.4510 2 0.2727 0.1768 0 0.5639 0.4831 0 0.000*** 0.000*** Anchovy 1 0.7982 0.6965 1 0.096** 0.045*** 2 0.8794 0.8808 2 0.6648 0.6287 0 0.0094 0.0124 0 0.000*** 0.001*** Mackerel 1 0.2544 0.3113 1 0.001*** 0.001*** 2 0.4458 0.4468 2 0.2690 0.2550 0 0.0358 0.0065 0 0.000*** 0.000*** Hake 1 0.7446 0.8009 1 0.003*** 0.008*** 2 0.6381 0.6398 2 0.1532 0.1487 0 0.002*** 0.008*** 0 0.000*** 0.000*** Trout 1 0.084** 0.070** 1 0.000*** 0.000*** 2 0.5145 0.5158 2 0.010*** 0.006***
Reduced form models: results Wld fshery products do not contegrate when only local prces are taken nto account. Incluson of mports results n contegraton n almost all speces. Aquaculture products result n contegraton n any case. Prce lnkages operates whenever mports are consdered or not. All successful models lnk retal prce wth mports. Local prce also affect retal n all cases but hake and trout. Wholesalers are sgnfcant for all speces retal prce wth the excepton of hake. Conclusons When consderng domestc seafood producton and retalng, a perfect compettve framework does not ft wth observed data. Results from structural models are confrmed by lack of contegraton between local ex-vessel prce, wholesale and retal. Incluson of mport prce seres result n sgnfcant contegraton across prces of the value chan for almost all wld speces. Imports mprove prce transmsson along the value chan. Prnce lnkages are verfed n aquaculture speces even n markets domnated by far by local producton (mussels). Prce transmsson s more effectve n aquaculture than n wld fsheres. Despte of dfference across speces, all retal prces are affected at a larger or shorter extent by mport prces more than what they are by local supply.