Is exchange rate pass-through in pork meat export prices constrained by the supply of live hogs?

Exchange Rate Pass-Through is broadly defined as the export price response following a movement in the relative price of the domestic currency over the currency in the export market. The analysis investigated how ERPT for processed agri-food commodities can be impacted by predetermined supplies of primary agricultural goods. It has been customary in the literature to assume constant returns to scale (e.g., Knetter 1989) in order to separate out the firms' pricing decisions across export markets. The current framework assumed that there exist significant lags between production and marketing decisions for goods such as grains and livestock. Under the assumption that processing firms commit to purchase agricultural products before marketing decisions occur, export pricing decisions in all markets for processed commodities are tied together. Even in the case when a processor relies on the spot market to purchase agricultural goods, there may be an excess demand at the prevailing hog price due to the inelastic supply of primary commodities. The theoretical model leads to simple testable predictions about the impact of the predetermined hog supply on pork meat export prices and on ERPT behavior.

Canadian pork meat export prices from three provinces to two destinations (United States and Japan) were collected to investigate ERPT. The empirical model tested the ERPT implications of predetermined supplies by regressing the export price in a given market on the exchange rate, the price of live hogs, total processed output, and the other export market's exchange rate. Potential nonstationary in the data and endogeneity bias were addressed using the DSUR framework proposed by Mark, Ogaki, and Sul (2005) and Moon and Perron (2004) as well as the MDE of the latter authors. The DSUR procedure uses generalized least squares to account for potential autocorrelation in the residuals and it corrects the endogeneity bias by introducing leads and lags of the independent variables in the equations. The MDE was used to account for cointegration between the independent variables because identical regressors appear across the three export price equations.

The estimation results strongly support the hypothesis that predetermined supplies have a significant impact on export prices for two out of three Canadian provinces. ERPT elasticity for Canadian exports to the United States is approximately in the range of -0.2 to -0.7. In the case of exports to Japan, the degree of misspecification involved with the standard ERPT equation that only includes the Canadian dollar to yen exchange rate as well as a marginal cost proxy is quite large. The standard specification yields ERPT coefficients that are much smaller in absolute value than the ERPT coefficients found in the full system approach that includes predetermined hog supplies. Hence, failure to account for the dynamic nature of agricultural supply chains may result in significantly biased estimates of ERPT.

One interesting extension to the current framework would involve using predetermined supplies to investigate the selection of export markets. In some periods, exports to particular destinations are zero and thus no export unit values are available. This seriously impedes the ability to analyze ERPT behavior in emerging markets. Zero-trade flows are not uncommon in the empirical trade literature but researchers have struggled to properly address the issue (Helpman, Melitz, and Rubinstein 2007). A promising research avenue would perhaps involve using a two-stage estimation procedure in which (1) trade flows are first explained by a set of independent variables (as in gravity models) and (2) the first-stage results are used to correct the selection bias related to missing values when estimating the ERPT equation. The existence of production and marketing lags in agri-food supply chains is likely to influence the selection rule.

[Received November 2005; accepted January 2007.]

References

Agriculture and Agri-Food Canada. 2006. Red Meat Market Information Website. Available at www.agr.gc.ca/misb/aisd/redmeat/main. htm.

Bowen, H.P., A. Hollander, and J-M. Viaene. 1998. Applied International Trade Analysis. Ann Arbor, MI: Michigan University Press.

Brown, J. 2001. "Price Discrimination and Pricing to Market Behavior of Canadian Canola Exporters." American Journal of Agricultural Economics 83:1343-9.

Bughin, J. 1996. "Capacity Constraint and Export Performance: Theory and Evidence from Belgian Manufacturing." Journal of Industrial Economics 44:187-204.

Carew, R., and W.J. Florkowski. 2003. "Pricing to Market Behaviour by Canadian and U.S. Agri-food Exporters: Evidence from Wheat, Pulse and Apples." Canadian Journal of Agricultural Economics 51:139-59.

Carrion-i-Silvestre, J.L., A. Sanso-i-Rossello, and M.A. Ortuno. 2001. "Unit Root and Stationarity Tests' Wedding." Economics Letters 70:1-8.

Choudhri, E.U., H. Faruqee, and D.S. Hakura. 2005. "Explaining the Exchange Rate Pass-Through in Different Prices." Journal of International Economics 65:349-74.

den Haan, W.J., and A. Levin. 1997. "A Practioner's Guide to Robust Covariance Matrix Estimation." In C.R. Rao and G.S. Maddala, eds. Handbook of Statistics 15. New York: North Holland, pp. 291-341.

Donnenfeld, S., and A. Haug. 2003. "Currency Invoicing in International Trade: An Empirical Investigation." Review of International Economics 11:332-45.

Floden, M., and F. Wilander. 2006. "State Dependent Pricing, Invoicing Currency, and Exchange Rate Pass-Through." Journal of International Economics 70:178-96.

Froot, K.A., and ED. Klemperer. 1989. "Exchange Rate Pass-Through When Exchange Rate Matters." American Economic Review 79:637-54.

Gervais, J-P., and N. Khraief. 2007. "AJAE Appendix: Is Exchange Rate Pass-Through in Pork Meat Export Prices Constrained by the Supply of Live Hogs?" Unpublished manuscript. Available at: http://agecon. lib.umn.edu.

Greene, W. H. 2003. Econometric Analysis, 5th Edition. Upper Saddle River, NJ: Prentice Hall.

Griffith, G., and J. Mullen. 2001. "Pricing-to-Market in NSW Rice Export Markets." Australian Journal of Agricultural Economics 45:323-34.

Helpman, E., M. Melitz, and Y. Rubinstein. 2007. Trading Partners and Trading Volumes. NBER working paper 12927. Cambridge, MA.

Hens, T., E. Jager, A. Kirman, and L. Philips. 1999. "Exchange Rates and Oligopoly." European Economic Review 43:621-48.

Klemperer, P. 1995. "Competition When Consumers Have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade." Review of Economic Studies 62:515-39.

Knetter, M.M. 1989. "Price Discrimination by U.S. and German Exporters." American Economic Review 79:198-210.

--. 1993. "International Comparisons of Pricing-to-Market Behaviour." American Economic Review 83:473-86.

--.1994. "Is Export Price Adjustment Asymmetric? Evaluating the Market Share and Marketing Bottlenecks Hypotheses." Journal of International Money and Finance 13:55-70.

Kravis, I.B., and R.E. Lipsey. 1974. "International Trade Prices and Price Proxies." In N. Ruggles, ed. Role of the Computer in Economic and Social Research in Latin America. New York: NBER.

Kwiatkowski, D., P.C.B. Phillips, P. Schmidt, and Y. Shin. 1992. "Testing the Hypothesis of Stationarity Against the Alternative of a Unit Root: How Sure Are We That Economic Time Series Have a Unit Root?" Journal of Econometrics 54:159-78.

Larue, B., J-P. Gervais, and H.E. Lapan. 2004. "Low-Price Low-Capacity Traps and Government Interventions in Agricultural Markets." Canadian Journal of Agricultural Economics 52:237-56.

Larue, B., R. Romain, J-P. Gervais, and S. Ben Salha. 2000. "The Collusion Deterring Effect of Pre-Attributed Supplies and the Hog Auction in Quebec." Canadian Journal of Agricultural Economics 48:607-22.

Lavoie, N., and Q. Liu. 2007. "Pricing-to-Market: Price Discrimination or Product Differentiation?" American Journal of Agricultural Economics. DOI: 10.1111/j.1467-8276.2006.0100x.

Mark, N.C., M. Ogaki, and D. Sul. 2005. "Dynamic Seemingly Unrelated Cointegrating Regression." Review of Economic Studies 72:797-820.

Mark, N.C., and D. Sul. 2003. "Cointegration Vector Estimation by Panel DOLS and Long-Run Money Demand." Oxford Bulletin of Economic and Statistics 65:655-80.

Miljkovic, D., G.W. Brester, and J.M. Marsh. 2003. "Exchange Rate Pass-Through, Price Discrimination, and U.S. Meat Export Prices." Applied Economics 35:641-50.

Moon, H.R., and B. Perron. 2004. "Efficient Estimation of the Seemingly Unrelated Regression Cointegration Model and Testing for Purchasing Power Parity." Econometric Reviews 23:293-323.

Pick, D.H., and C.A. Carter. 1994. "Pricing to Market with Transactions Denominated in a Common Currency." American Journal of Agricultural Economics 76:55-60.

Saikkonen, P. 1991. "Asymptotically Efficient Estimation of Cointegration Regressions." Econometric Theory 7:1-21.

Webber, A.G. 1999. "Dynamic and Long Run Responses of Import Prices to the Exchange Rate in the Asia-Pacific." Asian Economic Journal 13:303-20.

(1) Alternatively, one could assume that the domestic firm is a price follower and [[bar.p].sup.i] represents the price announcements of firms in market i. We later solve equilibrium prices as function of competitors' prices (or anticipations about these prices) to be consistent with the empirical specification generally employed in the literature (e.g., Knetter 1989, 1993).