Price Formation, Transmission and Transparency in the Food Chain:

Overview of Critical Issues

Professor Steve McCorristonUniversity of Exeter

OECD Food Chain Network Meeting13th September, 2011

Transparency of Food PricingTRANSFOP

• 3 year FP7 project (2011-2013) 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• www.transfop.eu

Food Pricing Transparency

Competition and Regulation in EU Food Markets

Analysing Pricing in EU Food Markets

Experience of Price Adjustment

in EU Member States(WP 2)

Econometric Models of Price Transmission

in EU Food Chains(WP 3)

Price Dynamics at Retail Level

(WP 4)

Retailer-Manufacturer Pricing Relations

(WP 4)

Characterising Competition and Regulation in EU Food Markets

(WPs 2, 5,6)

Food Supply Chains:Imperfect Factor Markets And Contract Enforcement

(WPs 2,5,7)

Food Supply Chains: The Role of SMEs

(WPs 2,5,6,7)

Consolidation and Restructuring in the EU Food Sector(WP 2,7)

Drawing Evidence Together: The Case of the

EU DairySupply Chain

(WP2,3,4,5,6, 7)

Action Plan

(WP 8)

Price Transmission with Imperfect Factor Markets andContract Enforcement

(WP6)

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

ProcessingSector

Retailing Sector

Consumers

Something we will come back to

Food Price Inflation (CPI) of Selected OECD Countries 1960-2009

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

ProcessingSector

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

ProcessingSector

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.

0

0.5

1

1.5

2

2.5

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

Perc

ent

Months following the shock

D=1 D=3 D=6 D=9 D=12 D=18 D=∞

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

50

70

90

110

130

150

1 11 21 31 41 51 61 71 81 91 101 111 121 131

TESCO SAINSBURY ASDA SAFEWAY SOMERFIELD KWIK SAVE WAITROSE

75

100

125

150

175

200

225

1 11 21 31 41 51 61 71 81 91 101 111 121 131

TESCO SAINSBURY ASDA SAFEWAY SOMERFIELD KWIK SAVE WAITROSE

40

50

60

70

80

1 11 21 31 41 51 61 71 81 91 101 111 121 131

TESCO SAINSBURY ASDA SAFEWAY SOMERFIELD KWIK SAVE WAITROSE

80

100

120

140

160

1 11 21 31 41 51 61 71 81 91 101 111 121

TESCO ASDA SAFEWAY SOMERFIELD KWIK SAVE

Breakfast Cereal: Weetabix Original 24sYoghurt: Muller Light Pot Cheery Single 200g

Sliced Bread: Kingsmill Medium Sliced White 800g Jam: 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

ProcessingSector

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.

• www.transfop.eu