The effect of the EU accession on the Hungarian beef market: a price transmission analysis

1. The effect of the EU accession on the Hungarian beef market: a price transmission analysis Supervisor: Prof. Dr. José Maria Gil Roig Presented by: Sándor Dembrovszki

2. Outline of the presentation • Background • Description of the sector • Dataset • Methodology • Results • Conclusion

3. Background • The adjustment of price shocks along the food chain from producer to retail levels • Research questions: • Are the producer and retailer prices cointegrated? • Are the changes in one market level perfectly transmitted to the other level? • Have the EU accession triggered any significant changes in the beef sector? • Which one is the dominant market level, which price’s move the prices of the other market level in both short-and long run?

4. Description of thesector • General facts: • Hungary is well endowed with high quality pasture and grazing landhigh quality extensive cattle breeding • Completely GMO free governmental regulation against GMO crop plantation • BSE free  no recorded case of infected cattle born within the country

5. Description Of thesector – Cattlestock • Within 20 years the stock reduced by almost 50%

6. Description of thesector – Trade patterns (livestock) Main export destination: Turkey Main import destinations: France, Czech Republic, Romania

7. Description of thesector – Trade patterns (beef) Main export destinations: the Netherlands, Austria Main import destination: Austria

8. Description of thesector – Consumptionhabits • Popp and Potori (2009) reveal that the barrier of quality beef consumption was the relatively low purchasing power • The ratio of beef consumption from total meat consumption is around 5% while pork and poultry together count for almos 90%

9. Dataset • Secondary data from the Hungarian Central Statistical Office • Monthly prices from 2002 January until 2011 December • Farm gate prices (cattle for slaughter) and retail prices (sirloin) given in Hungarian Forint and are referring to one kilogram product

10. Evolution of Sectoralprices

11. Methodology • Unit root test : Augmented Dickey-Fuller (1979) and DF-GLS test (1996) • Cointegration test: Johansen • Vector Error Correction Model • Impulse Response Function

12. Vectorerrorcorrectionmodel • Where: Δ indicates first differences; β is the parameter of the cointegration vector, ε is the error correction term. The α are all dynamic parameters where αp1 and αp2 indicating the speed of adjustment

13. Results – unit root In level, both time series are non-stationary the null hypothesis can not be rejected, while in case of first difference both are stationary and integrated of order one I(1)

14. Results - cointegration • Both the Akaike information criterion and the Schwarz criterion suggest using 2 lags. • Null hypothesis of there is no cointegration between the two time series can be rejected • The series are cointegrated of order one

15. Results - cointegration • Normalized cointegration coefficients derived from Johansen test suggests that an increase (decrease) in retail prices on the order of 10 % will be followed by an increase (decrease) in producer prices by 2.04%. • According to the beta value (-0.204)  price changes are not perfectly transmitted and one can assume that the price transmission is assymetric • Cointegrating parameters only allow to estimate the long-run relationship between prices while the Vector Error Correction Model assess both the short-and long-run dynamics of the series.

16. Results – VectorErrorCorrectionModel • The lagged error correction term ECTt-1 parameter is statistically significant in the retailer equation while it is not in the producer equation • This implies that only retailer prices adjust to deviations from long-run parity, while producer prices are weakly exogenous. It means that producers have enough market power to influence retail prices and thus the price transmission is cost push driven.

17. Results – study made inthisfield • This result is compatible with the final conclusion of Fertő&Bakucs (2006) • The authors are focusing on the Hungarian beef market on the transition period • They also find that causality runs from producer to the retailer prices • In their case the price transmission was symmetric while in this thesis the results suggest that the transition is assymetric and the shocks are not perfectly transmitted between the two levels

18. Conclusion • According to the Johansen cointegration test and the VECM both in the short- and long-run the prices cointegrated and tend to move together over time • Given the beta value the price transmission is not perfect, price changes are not perfectly transmitted • The EU accession did not trigger any significant changes according to the price transmission analysis (beside the increasing amount of export and import volumes) • According to the analysis, in Hungary the producer prices move the retail prices over time, the information flows from farm to retail level.

19. Thank you for your attention!