Inefficient price transmission in the European vegetable sectors

The European Union is both the largest importer and one of the largest producers in the fresh fruit and vegetable (F&V) world market. Production is concentrated in a few countries, namely Italy, Spain, and France. A vast majority of the EU fresh fruit & veg trade is intra-EU and imports from third countries are rather limited, especially for vegetables, due to the prohibitive transportation costs for extra-EU trade. Germany and the United Kingdom are large importers, while Belgium and The Netherlands represent the main actors for intra-EU trade: the latter imports and re-exports to many EU countries.

Fabio Santeramo from Foggia University (Italy), an expert in agricultural economics and policy, has explored the characteristics of spatial price movements for fresh vegetables, especially for tomato and cauliflower prices collected on the main production and consumption European markets. Santeramo estimated an asymmetric threshold, autoregressive econometric model, to conclude on transaction costs and speeds of price transmission among spatially separated markets. The study (published in Agribusiness: an International Journal) reveals the average elapsing time for the transmission of price shocks. Santeramo explains that in eight out of ten cases, spatial price transmissions are not symmetric and concludes that in most cases tomato and cauliflower markets are not efficient.

The study, which has been recognized as the best publication by a young scholar (the "Antonio Cioffi Award"), shows that transaction costs account only for 12% of variable costs in cauliflowers trade, and for more than 35% of import prices in the tomato sector; distance and transaction costs are positively correlated. In most cases prices transmission is unidirectional, since trade flows occur from regions with large production volumes to net-importer regions.

As for price adjustments, in most cases the study found that the short-run adjustments for price rises are less than three weeks, while the long-run adjustments take up to 6 months (and even more in one case). The average short-and- long-run adjustment periods for deviations due to price decrease are, respectively, less than 1 week and up to 5 weeks. In addition, these adjustments are faster in tomato markets.

The study opens up interesting policy considerations for the fresh vegetable sector. A first consideration is that European markets for vegetables are partially integrated. In particular, since transfer costs are rather held down, European markets tend to partially adjust to price shocks in a few weeks, although they achieve a full adjustment in several months.

The conclusion is that markets are not very efficient: in particular the transmission of price signals is not efficient for distant markets.

Price rises due to scarce harvests or unexpected increases in demand tend to be slowly transmitted and might barely interest distant Regions; on the contrary, market perturbations originated by price decreases—due to unexpected overproductions, large imports increases, consumption decline, etc.—spread across several EU Regions. Such a phenomenon is more evident for the cauliflower than for the tomato sectors.

The results suggest that market stabilization policies may be planned at the EU level, but should be coordinated at a national level, in that the effects of price spikes and price decreases are only partially spanned to several Countries. The findings would suggest that markets for perishable products tend to be more sensitive to market crises, and that, for highly perishable products, public intervention at the common level, aimed at ensuring an adequate management of sudden market crises, would be desirable.

Further info: Santeramo F.G., 'Price transmission in the European tomatoes and cauliflowers sectors', 2015, Agribusiness: an International Journal, Vol 31, Issue 3, pag. 399–413. onlinelibrary.wiley.com/doi/10.1002/agr.21421/abstract

Contacts:
Fabio Gaetano Santeramo
Department of Agricultural, Environmental and Food Sciences
University of Foggia
Via Napoli 25
71122, Foggia (Italy)
E-mail: fabiogaetano.santeramo@gmail.com