Price Formation, Transmission and Transparency in the Food Chain: Overview of Critical Issues Professor Steve McCorriston University of Exeter OECD Food Chain Network Meeting 13 th September, 2011

Transparency of Food Pricing TRANSFOP 3 year FP7 project ( ) funded by the EU involving 13 partner institutions from 10 EU countries Engagement with stakeholders and policymakers Overall objective of TRANSFOP: to develop a greater understanding of pricing issues in food supply chains throughout the EU regarding the mechanisms of price signal transmission and the determinants of food pricing. Covers many of the areas outlined in the FCN plans

Structure of the Presentation Challenges in addressing retail price behaviour (reference to UK data) Price transmission: on-going challenges New directions in understanding retail prices Consolidation in the food sector Leave aside more standard though important issues

Mention these in passing Price formation at different stages, in different chains and across countries Price transmission through the vertical chain at different stages Characterising differences in food supply chains Food price monitoring

Domestic ag. inputs World Markets Processing Sector Retailing Sector Consumers Something we will come back to

Food Price Inflation (CPI) of Selected OECD Countries

Annual Inflation for All Goods, Food and Non-food CPI 1989(1)-2010(1) (%)

Price transmission and retail price dynamics

Domestic ag. inputs World Markets Processing Sector Retailing Sector Consumers Price Transmission HPT VPT Various aspects of price transmission

Price Transmission Issues A lot of work on price transmission lacks a theoretical basis What factors give rise to the different experience of price transmission? Competition and Regulation …how does the structural characteristics of the food chain impact on price transmission? …competition at each stage and the nature of contracts between stages It is not a question of just characterising market structure but understanding how competition within and between between stages affects outcomes

Domestic ag. inputs World Markets Processing Sector Retailing Sector Consumers Price Transmission Competition and Regulation throughout Food Chain

Price Transmission Issues Competition and regulation The nature of responses: asymmetry and non-linearity Other factors: labour costs, exchange rates, etc...these are seldom accounted for Duration of commodity shocks-important if the aim is to explain food price inflation

Impact of a One-period 10% Shock to different factors on Annualised UK Food Price Inflation.

The Predicted Percentage Effect on UK Food CPI of a 10% Shock to World Food Commodity Prices by Duration of the Shock

Price transmission and retail price dynamics

Breakfast Cereal: Weetabix Original 24s Yoghurt: Muller Light Pot Cheery Single 200g Sliced Bread: Kingsmill Medium Sliced White 800gJam: Streamline Strawberry 400g Jar A Different View of Retail Price Dynamics

Some new questions What is the nature of price adjustment using high-frequency, dis-aggregated and firm- specific data (this is a growing area in the macroeconomics area where they are addressing the issue of inflation dynamics)? Sales and promotions Behaviour of the underlying Reference Price? Common factors or idiosynchratic behaviour?

Domestic ag. inputs World Markets Processing Sector Retailing Sector Consumers Price Transmission Competition and Regulation throughout Food Chain and how the structure of the food chain changes Market structure of not necessarily static

M&As in the Global Food Sector (number of deals)

Questions to address What is the nature and characteristics of the consolidation and change in the food sector? What does the restructuring process look like? What factors drive it? Macro-factors, or sectoral/firm-specific aspects? Is it efficiency enhancing? Horizontal and vertical issues.

Summary Combination of standard analysis and new directions will help us better understand the functioning of food supply chains How shocks are transmitted throughout the food supply chain-a more complete picture needed What aspects of competition and regulation (and the cross-country differences) impact on the functioning of food supply chains and the different experience of food price inflation? What is the process of change and restructuring in the food sector, by country and globally.