TESTING INTERNATIONAL PRICE TRANSMISSION UNDER ...

International Soft Wheat Markets Under Policy Intervention
completed by the elaboration of various empirical models, all with specific
reference to cointegration models (which have been dealt with in paragraph 3.3),
that will be used in the analysis which will follow in chapters 5 and 6.
Following the existing literature (for example, Thompson and Bohl 1999,
Thompson et al. 2000, Thompson et al. 2002a and 2002b, Verga and Zuppiroli
2003), we will assume that the LOP hypothesis do apply on international soft
wheat markets, and on this basis we will try and focus on the effects of policy
intervention. In a certain way, our main hypothesis is then that the LOP holds but
for policy intervention.
As explained in the previous paragraphs, analyzing how policy regimes affect
international price transmission is a crucial issue. This analysis assumes particular
relevance in light of the ongoing policy debate concerning the viability and the
effectiveness of intervention policies on agricultural commodity markets.
The fundamental problem to tackle is the following one. Despite the fact that
EU domestic and border policies aimed at insulating domestic markets from the
world ones have, in practice, always been in place, we nonetheless aim at building
a sensible framework to test for co-movement between EU domestic prices and
the world ones. Indeed, because of trade barriers (namely, import variable levies
and export restitutions), we expect domestic EU prices to be isolated from the
world ones 50 ; while, in turn, we suppose that EU export (i.e., freight on board,
fob) prices are cointegrated with the world ones right because of the use of export
restitutions (Barassi and Ghoshray 2007; Ghoshray 2002; Ghoshray et al. 2000).
In fact, export subsidies are set with the objective of making EU exports
competitive on world markets, bridging the gap between the internal (high) price
and the world one.
Basically, different price transmission mechanisms will be in place according
to the various combinations of the domestic and border policies described in the
previous paragraph. A simple scheme is reported in table 4.2.
Intuitively, since in the period covered by the analysis the EU is a net
exporter 51 (figures 4.5 ad 4.6) we expect that what occurs on the export side is
more relevant to the analysis. We could think that the EU price will interact with
the world one only if it is high enough to make export restitutions go to zero; i.e.,
at least higher than the intervention price.
50 Van Meijil and van Tongeren (2002, p. 457) model the European market price as a weighted average of the
entry and the intervention price, depending on the entity of net exports. The more the net exports, the closer
the market price to the intervention one, and the other way round.
51 This is true also for France, whose price will be assumed to be the representative price for the EU. Its selfsufficiency
rate for soft wheat, between 1978 and 2000, was on average 218%, with a minimum of 168% and
a maximum of 277% (Eurostat).
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