| Summary: | Over the last decade South Africa experienced two events during which food prices increased
significantly. The periods of high food prices were also characterised by a high degree of
volatility in prices. The result of the aforementioned events were that food security in South
Africa was threatened, but at the same time evidence emerged that due to the current market
structure in the agricultural industry certain role players used their market power to
manipulate food prices. In an effort to better understand pricing behaviour in the food
industry it is necessary to investigate the nature of price transmission in different agro-food
chains. It is furthermore important to understand the nature of price volatility and the degree
to which such volatility spillover from one level of a value chain to the next.
The primary objective of this study is to measure asymmetric price and volatility spillover in
the broiler value chain. The poultry (broiler) industry was chosen as a case study because
there is an increasing demand for broiler meat in South Africa, culminating in increased per
capita consumption compared to other meat categories such as the red meats. It is estimated
that the per capita consumption of broiler meat increased steadily from 2001 to 2009. The
sector is one of largest and fastest growing agricultural sectors in the country, contributing
significantly to the total gross production value of agriculture. The specific issues addressed
in measuring asymmetric price and volatility spillover in the broiler value chain includes: (i)
the identification of the direction of flow of information (causality) between producers and
retailers, (ii) examining the degree of asymmetric price transmission across the farm-retail
value chain, (iii) quantifying volatility and volatility spillover across farm and retail prices,
and (iv) investigating volatility spillover from feed materials to farm and retail market prices. The data used for this study include farm and retail poultry prices, as well as the daily nearmarket
monthly spot prices for yellow maize, sunflower seed and soybeans. Two types of
adjustment models, namely the threshold autoregressive (TAR) and momentum threshold
autoregressive (M-TAR) models were used to investigate asymmetry in farm-retail market
prices, whereas the exponential generalised autoregressive conditional heteroskedasticity
(EGARCH) model was used to measure the price volatility and the volatility spillover effect
between retail and farm prices and between these prices and poultry feed ingredients (yellow
maize, soybean and sunflower oilseed).
The result obtained with the M-TAR model shows that the relationship between farm and
retail prices is asymmetric. The retail price was found to respond asymmetrically to both
positive and negative shocks arising from changes in producer prices, but the response is
greater when the shocks are negative, i.e. when the producer price rises to lower marketing
margins in the value chain. The sizes of the adjustment parameters in the farm-retail
combination reveal that retail prices do not respond to shocks completely and
instantaneously, but respond within a distributed time lag. The results indicate that within one
month, the retail prices adjust so as to eliminate approximate 2.8 % of a unit-negative change
in the deviation from the equilibrium relationship caused by changes in producer prices. This
implies that the retailers must increase their marketing margin by 2.8% in order to respond
completely to a unit-negative change in farm prices. The results show that farm price granger
cause retail price, implying that retailers depend on what happens at the farm level in order to
form their market expectations.
The results obtained with the M-TAR error correction model were to a great extent consistent
with the results obtained with the EGARCH model. For instance, results from the volatility
model show that the magnitude of volatility in the retail and farm prices for the periods
2000M1 to 2008M8 is 1.8% and 2.8%, respectively. The volatility in the farm price was
found to approximate the volatility implied by the adjustment shocks in the farm-retail price
relationship investigated with the M-TAR error correction model. The results of the
asymmetric volatility measurement show that there is significant asymmetric volatility
spillover from the farm to the retail market implying that the response to rising prices differs
from the response to a price decline. This relationship was also observed with the asymmetric
price transmission model. An investigation into the impact of the prices of the major broiler
feed materials, namely yellow maize, sunflower and soybean, shows that there is a volatility
spillover from the yellow maize price to farm and retail prices. This implies that any change
in the price of yellow maize will have a significant impact on the retail and farm prices.
Market influence also flows from the sunflower oilcake price to the retail market price.
The presence of an asymmetric relationship between farm and retail prices signifies the
existence of concentration and market power. In a situation like this, tighter anti-competition
laws will discourage anti-competitive behaviours. It will be worthwhile to increase access to
agricultural information systems amongst the role players in order to reduce information
bottlenecks in the vertical market system.
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