TESTING INTERNATIONAL PRICE TRANSMISSION UNDER ...

International Soft Wheat Markets Under Policy Intervention
While the EU soft wheat is a medium protein wheat, weak, the Hard Red
Winter wheat has a higher protein content and is classified as medium strong. We
mentioned already that the Hard Red Winter wheat has commonly been used to
represent the world price, but it has also been argued that the Soft Red Winter
wheat, which has a lower protein content, would indeed be a closer substitute for
European soft wheat (Barassi and Ghoshray 2007; Verga and Zuppiroli 2003).
However, remembering the considerations mentioned above, and noting that,
when the behaviours of different US wheat prices are compared, they seem to be
very close but for a constant term (figure 4.10; the Dark Northern spring, used for
the analysis in Thompson and Bohl (1999) has an even higher protein content than
the Hard Red Winter Wheat), the use of the Hard Red Winter wheat as world
representative seems a reasonable assumption.
300
250
200
150
100
50
1978:12
1980:12
1982:12
Figure 4.10 Various US wheat prices (euro/t)
1984:12
1986:12
1988:12
1990:12
Source: International Grains Council
Quality differences to a higher level of detail are not explicitly considered and,
together with transport costs for which data are not accessible, the strong
assumption for them to be stationary around a constant proportion of prices is
made (see paragraphs 2.3, 3.2.1 and 3.4). Although very strict, this assumption
seems not to be too far from reality in the period considered in the analysis.
Indeed, the ratio between freight rates and fob US prices oscillates in a quite
limited range, before starting a dramatic increase in 2004 (figure 4.11). This could
be taken as evidence of a substantial stability of the proportion of transportation
costs on prices in the years considered in the analysis.
1992:12
1994:12
1996:12
1998:12
Hard Red Winter wheat
Soft Red Winter wheat
Dark Northern Spring
2000:12
2002:12
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