Asymmetric Price Transmission along the European Food Supply Chain and the CAP Health Check: a Panel Vector Error Correction Approach

Abstract The 2003 CAP Reform commenced a liberal shift on the policies designed to protect farmers across Europe. The CAP Health Check of 2008 and the 2013 CAP Reform confirmed this change, adopting measures including the further decoupling of production, the abolishment of set-aside and the phasing-out of milk quotas. It is therefore expected that price transmission has been affected radically. This study investigates the price transmission mechanism along the European food supply chain, based on an asymmetric panel vector error correction model (VECM). Panel data on agricultural commodity (farmer), producer (processor) and consumer (retailer) prices from nineteen European countries are considered. The sample is split into two sub-periods, before and after the CAP Health Check, to examine how the price transmission mechanism has been affected. Cointegration is confirmed among the price series through the Pedroni tests and the long-run relationship is obtained with two estimation methods (i. e. fully modified OLS and dynamic OLS). Prior to the CAP Health Check, positive asymmetry is detected from farmer to processor and from processor to retailer. However, after the CAP Health Check price transmission becomes symmetric, thus suggesting that decreased support has resulted in a more efficient price transmission mechanism.