Analysis of Dairy Product Price Transmission in Hungary: A Nonlinear ARDL Model

Abstract

This paper addresses the assessment of the price transmission of dairy products in Hungary. Monthly prices are used in testing the hypothesis of asymmetric price transmission between farmers and retailers. The magnitude of short- and long-run asymmetric transmission between price levels is measured through a nonlinear autoregressive distributed model (NARDL). The cointegration of variables is validated through bounds test of the NARDL model. The estimated NARDL model proves the existence of long- and short-run asymmetric relationships between producer milk price and most retailer dairy product prices. Furthermore, the model confirms the presence of a significantly positive long-run price asymmetry for butter, buttercream, sour cream, and Trappista cheese. The positive long-run price transmission asymmetry results could be explained by the strong market power of milk processors, which are granted through their concentrations and the absence of competitiveness in the market. The short-run asymmetry of price transmission could be explained by implementing some policy interventions, such as the milk quotas, which limit milk production. Analyzing the asymmetric relationship between the producer milk price and the retailer dairy product prices could give a clear vision of the dairy sector and how prices move between market actors, highlighting the retailers’ purchasing power feature, and its role in determining the market price interaction.