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Price and Exchange Rate Transmission in Russian Meat Markets

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Abstract

This paper examines transmission between changes in (a) world trade prices for meat and Russian exchange rates and (b) Russian consumer meat prices. We find that for both trade prices and the exchange rate, the transmission is low. This indicates that Russia's integration into world meat markets is poor. The economic cost to Russia of poor transmission is that at any point in time, the country is not at its optimal volumes and mix of agricultural trade that would maximise the gains from trade. The transmission estimates are therefore important for forecasting Russian agricultural production and trade.

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Notes

  1. For more information as to how foreign trade in the Soviet Union was planned and managed, see Gregory and Stuart (1986).

  2. The main exceptions were agricultural goods produced on the private plots of state and collective farm workers and sold in farmers' markets.

  3. For example, if the US dollar rose by 10 percent vis-à-vis the Japanese yen, the Russian official exchange rates involving the dollar and yen would be adjusted such that one dollar now bought 10 percent more rubles than did one yen.

  4. For more information concerning agricultural trade restrictions during the transition period, see Organization for Economic Cooperation and Development (1998).

  5. These conditions are also discussed in the studies cited earlier as to why Russian domestic price integration for foodstuffs is poor.

  6. 6 Russia's most heavily imported agricultural good in terms of world import share has been sugar, though much of it comes from neighboring Ukraine.

  7. The border price for an imported good equals the world trade price plus transport costs (the import's cif [cost, insurance, freight] value), while the border price for an exported good equals the world trade price (the export's fob [free on board] value). As the products for which transmission elasticities are calculated in this paper are imported rather than exported by Russia, the border prices used in this paper are cif values.

  8. During 1996–2000, Russia took about 30–40 percent of all US poultry exports (US Department of Agriculture ((USDA), Foreign Agricultural Trade of the United States (FATUS), www.ers.usda.gov/db/FATUS). The reason a more precise figure is difficult to give is that during these years, much of the US poultry shipped to Russia went through Baltic ports, and was identified in the official trade data as exports to the Baltic countries rather than to Russia.

  9. This information was obtained directly from Russian agricultural specialists and meat traders.

  10. An example of this inconsistency is the following. Assume that Russia experiences a major depreciation in the ruble in nominal terms combined with high inflation (the depreciation being a likely contributor to the inflation). Assume also that in estimating the TE for the exchange rate, we use real consumer prices for foodstuffs, but the nominal as opposed to real exchange rate. We would get a large percent change in the exchange rate, but small percent changes in the real inflation-adjusted consumer prices. The calculated TEs would therefore be small. Yet, in real terms, the exchange rate TEs would be much higher. The main reason for the small calculated TE is that the rise in domestic food prices was adjusted for inflation (deflated), but the nominal exchange rate was not inflation-adjusted. If we used the real exchange rate in the TE estimations, we would be adjusting the exchange rate as well as domestic consumer prices for inflation. The change in the exchange rate would then also probably be small. Coupling the small change in the real exchange rate with the small change in the real consumer price would yield a larger TE.

  11. Although the US inflation rate during our period of calculation was not identical to inflation rates in other countries exporting to Russia, the other major exporters were also developed market economies. Inflation rates in the United States and other developed market economies over our calculation period were relatively low, typically less than 5 percent a year. Thus, the choice of which countries' CPI to use in the computations would have little effect on the results.

  12. A qualification is that a relationship can exist between stationary and non-stationary variables if all the non-stationary variables are cointegrated with each other. In our case, this would mean that if Russian trade prices and exchange rates were cointegrated, a relationship would exist between domestic prices and both the trade prices and exchange rates. In our study, however, trade prices and exchange rates are not cointegrated. The technique we use to test for this cointegration (Johansen and Juselius, 1990) is similar to that we employ to estimate our TEs. It therefore is examined later in the paper.

  13. We do two additional tests to show that stationarity exists among our domestic price data. The Levin–Lin–Chu technique tests whether all our domestic price data are non-stationary. This hypothesis is rejected at the 1 percent level of significance (with a t-statistic of −12.3). The Im–Pesaran–Shin technique tests whether any of our domestic prices are stationary. At the 1 percent significance level (with a t-statistic of −2.5), we can reject the hypothesis that there are no stationary data.

  14. If the cointegration test has n endogenous variables, the time series is T periods long, and the cointegration test uses k lags, multiplying the asymptotic critical values of the cointegration test by T/(T−nk) gives the approximate critical values for small samples (Ahn and Reinsel, 1990; Cheung and Lai, 1993).

  15. A JJ cointegration technique is also used to test whether the trade prices and exchange rates in our study are cointegrated, as discussed in footnote 12.

  16. For information concerning the agricultural trade policies of countries throughout the world, see the country trade policy reviews of the World Trade Organization. Parts of the reviews are downloadable at the WTO website www.wto.org.

  17. For example, Russia's tariffs for most agricultural imports in 2002 ranged from 5 to 20 percent, while the average “bound” agricultural tariff for the world in 2000 was 62 percent (Gibson et al., 2001). A “bound” tariff is the maximum tariff allowed by a country's membership in the World Trade Organization. Although actual tariffs for some country–commodity pairings are below bound levels, the world value-weighted average-bound tariff for agricultural products lies well above Russia's average tariff.

  18. Since high relative prices (reflecting costs) indicate comparative disadvantage, from these results Liefert concludes that Russia has an apparent comparative disadvantage in producing meat compared with grain and agricultural inputs.

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Acknowledgements

We thank Carlos Arnade, Mary Bohman, Michael Trueblood, and Thomas Vollrath for helpful comments. Any remaining errors are our own. The views expressed are the authors' alone and do not in any way represent official USDA views or policies.

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Authors and Affiliations

  1. US Department of Agriculture, Economic Research Service, 1800 M St, NW, Room 5062, Washington, 20036-5831, DC, USA

    Stefan R Osborne & William M Liefert

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  1. Stefan R Osborne
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Appendices

Appendix A. TRANSMISSION BETWEEN BORDER AND RETAIL PRICES

We begin by defining the following variables:

P c d :

the domestic consumer retail price for a foodstuff;

V a :

the value of the foodstuff from domestic primary agricultural production, which equals the domestic producer (farm gate) price;

P a f :

the border price for the primary agricultural good;

V p :

the value of the foodstuff from domestic processing, distribution, and retail sale.

We wish to derive the TE between Paf and Pcd.

Let e be the price transmission elasticity between Paf and Va, such that:

Assuming that no relationship exists between Paf and Vp, we get:

We now divide both sides of the equation (A.4) by Pcd/Paf. Given that Pcd=(Paf)e+Vp, we get:

This shows that the TE between the border price for the primary product and the retail price equals the TE between the border price and the producer price (e), times the share of the producer price in the food's retail price. (Recall from equation (A.2) that the producer price equals (Paf)e). The analysis for the TE between the real exchange rate and retail price is similar.

Appendix B. ESTIMATION OF TEs USING JJ COINTEGRATION TECHNIQUES

Estimation of transmission elasticities using JJ cointegration techniques involves running the following error-correction model (with all the variables defined as in Equation (1)):

Π and Δ are matrices of parameters to be estimated. The estimate of Π will be a 3 × 3 vector. If the JJ test finds that there is a cointegrating vector between the three variables, that means there exists at least one 3 × 1 matrix α and one 3 × 1 matrix β such that Π=αβ'. α is the adjustment vector (to shocks), while β is the cointegrating vector. Let β1, β2, and β3 be the elements of the cointegrating vector corresponding to ln(Pdt-1), ln(Pft-1), and ln(Et-1), so that the estimated cointegrating relationship is

The estimated price and exchange rate TEs are -β2/β1 and -β3/β1, respectively.

The standard deviations associated with the estimated elasticities are calculated as follows. The JJ test in most statistical software packages reports the estimates of the eigenvalues of matrix Π from largest to smallest, and the corresponding eigenvectors. The first eigenvector is β, the cointegrating vector. Let λ1 be the corresponding eigenvalue. Further, let λ2 and λ3 represent the other two eigenvalues, and v2 and v3 their corresponding eigenvectors. Johansen and Juselius find that when there is just one cointegrating vector, and the linear restriction K holds such that K'β=0, then the following quantity is asymptotically standard normal:

In other words, the asymptotic standard deviation is

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Osborne, S., Liefert, W. Price and Exchange Rate Transmission in Russian Meat Markets. Comp Econ Stud 46, 221–244 (2004). https://doi.org/10.1057/palgrave.ces.8100048

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