Leading properties of GDT auctions for dairy prices

Abstract

PurposeProfessionals from the dairy sector commonly believe that the results of Global Dairy Trade (GDT) auctions are a good leading indicator for prices of dairy commodities. The purpose of this paper is to test that hypothesis for prices of key dairy commodities (skimmed milk powder (SMP), whole milk powder (WMP), butter and cheddar) in the main dairy markets (the US, EU and Oceania).Design/methodology/approachThe leading properties of the GDT auctions are investigated using vector error correction models (VECM).FindingsThe results show that prices at GDT auctions may be treated as a benchmark for global prices of WMP and SMP as they affect prices in all considered markets. However, in case of EU market the relationship with the GDT is bidirectional. GDT prices reveal some leading properties also in cheddar market, however price relationships in this market are much more complex. In case of butter market, GDT can be regarded as a benchmark only for Oceania.Practical implicationsThe results of this paper improve knowledge on price transmission in dairy markets, show the role of the GDT auctions in the price setting process, and thus may help professionals from the dairy sector to formulate their price expectations more precisely.Originality/valueDespite the fact that many professionals from the dairy sector treat GDT auctions as a benchmark, so far their leading properties have not been scientifically proven.