Dynamic and Asymmetric Adjustment in Beef and Pork Prices

Beef and pork prices at farm, wholesale and retail are examined for evidence of a dynamic and asymmetric price transmission using an endogenous switching model. Dynamic adjustment means that it take time for prices to adjust to changes in the market. Price transmission is asymmetric if the speed or completeness of price adjustment depends on the direction that the price or a related price is moving. Some of the previous research on price transmission in agricultural markets attempts to use market power abuses as an explanation of price-transmission asymmetry. Other research shows that price transmission asymmetry can arise in competitive markets and that competitive and anti-competitive issues can make prices adjust faster upwards or downwards. By making stronger assumptions about the how live animal production relates to meat production and consumption and on the cost structure of packing and retailing, stronger statements about price transmission and potential market-power problems can be made. Incomplete or irreversible price transmission can be taken as evidence of market power issues given these stronger assumptions. However, these assumptions must be true or the tests will not be valid. Two potential sources of incomplete-irreversible effects were included in the endogenous switching models. The only statistically significant evidence of incomplete price transmission is in the wholesale-to-retail transmission in pork. The estimates imply that the 89½% of wholesale price changes get passed to the retail price. In beef, price transmission was complete and pricing dynamics are symmetric.