Jean-Philippe Gervais

Disentangling nonlinearities in the long- and short-run price relationships: an application to the US hog/pork supply chain

Increased concentration at the retail, food processing and farm input manufacturing levels has brought increased attention to patterns in retail-to-farm price spreads. Most studies documenting asymmetric price transmission focus on nonlinear error correction processes, as opposed to the current study which analyses potential nonlinearities in the long-run relationship between the farm and retail prices. The null hypothesis of nonlinearity in the long-run relationship between farm and retail prices in the US hog/pork supply chain is rejected in favour of a Smooth Transition Cointegration (STC) framework. The STC framework predicts downward price stickiness in retail prices. The predicted residuals of the nonlinear model are used to investigate whether it is possible to disentangle nonlinearity in the long-run price relationship from nonlinearity in the adjustment towards the long-run equilibrium. The results underline the importance of testing for linearity in the long-run price relationship before modelling nonlinearity in short-run dynamics.

A gravity model to account for vertical linkages between markets with an application to the cattle/beef sector

A gravity model is developed to explain bilateral trade flows in primary and processed commodities within the same agri-food supply chain. It accounts for vertical production linkages, trade and domestic policies, and supply rigidities at the farm level. Our application focuses on cattle/beef trade flows between 42 countries. The estimated parameters of the model are used to simulate trade flows. We found large differences in the impacts of the full and partial liberalization scenarios. A parametric bootstrap procedure is used to generate confidence intervals around predicted trade liberalization outcomes.

Are Exports a Monotonic Function of Exchange Rate Volatility? Evidence from Disaggregated Pork Exports

Production and marketing lags in agri-food supply chains often force agricultural producers and food processors to commit to output targets before prices and exchange rates are realized. A theoretical model illustrates how the processors degree of risk aversion and domestic sales may cause the relationship between volatility of the exchange rate and exports to be non-monotonic. The relationship between exchange rate volatility and Quebec pork exports to the United States and Japan is investigated using linear and non-linear estimation methods. The results support the hypothesis that the relationship between exports and volatility is non-monotonic.

Is Exchange Rate Pass-Through in Pork Meat Export Prices Constrained by the Supply of Live Hogs?

The impact of lags in the production and marketing of agricultural products on the degree of exchange rate pass-through in export prices is investigated. The predictions of the theoretical model are tested by investigating Canadian pork export prices in the United States and Japan. The empirical methodology accounts for unit root and cointegration using the dynamic seemingly unrelated regression framework and a minimum distance estimator. Predetermined hog supplies have a statistically significant impact on export prices of two out of three Canadian provinces. The degree of misspecification involved with standard pass-through models that do not account for production lags is also illustrated.

The Value of the Initial Payment of the Canadian Wheat Board as a Signaling Device

This paper analyzes the role of the initial payment used by the Canadian Wheat Board (CWB) in the determination of export prices and sales under the assumption that the CWB has better information about realized yields in Canada than its US competitor. In the separating equilibrium of the game, the initial payment of the CWB is larger than the initial payment under complete information. There exists an incentive under incomplete information to send a signal that realized yields are greater than expected to induce a reduction in the sales of foreign competitors. We illustrate the strategic value of the initial payment for Canadian wheat producers using a numerical simulation.

Compositional Standards, Import Permits and Market Structure: The Case of Canadian Cheese Imports

The imposition of cheese compositional standards by the Canadian authorities has created divisions within the Canadian dairy industry and has motivated criticisms from several of Canada’s trade partners. The standards impose minimum limits on the percentage of casein coming from fluid milk. We develop a theoretical model to investigate the implications of Canada’s compositional cheese standards while accounting for Canada’s trade policy. We illustrate why a type of cheese that is not directly impacted by the standards might be the most affected. We show that the standards can decrease the domestic demand for milk or the value of imports. Our empirical investigation identified breaks in the processes determining import unit values shortly before or shortly after the beginning of the implementation of the standards.

Trade Liberalization in Primary and Processed Agricultural Products: Should Developing Countries Favour Tariff or Domestic Support Reductions?

Developing Countries (DCs) have remained firm in the current WTO negotiations regarding their demand for significant agricultural trade liberalization. This stance has undoubtedly delayed the conclusion of the Doha Round and one might wonder whether DCs are not depriving themselves from valuable gains from trade by holding out. In line with the theory of second best, we show that too little liberalization could be immiserizing for DCs through numerical simulations of a three-country theoretical trade model of primary agricultural commodities and processed foods. Our model departs from most other models by accounting for vertical linkages and by linking welfare outcomes to parameterized supply-side rigidities at the farm level, which imply that primary goods cannot be substituted costlessly across export destinations, and imperfect substitution between processed foods. While in simpler models DCs can get larger welfare gains from multilateral tariff reductions than from domestic support reductions, our simulations show that this instrument ranking can be reversed. Under a wide range of parameter values, the DC would support a trade agreement only if the latter calls for ambitious tariff cuts. This outcome is consistent with the positions of DCs in the current round of multilateral negotiations over agriculture.

Price equivalent tariffs and quotas under a domestic monopoly

Price-equivalent import tariffs and quotas are compared when domestic production is controlled by a monopolist, say an agricultural marketing board with the power to restrict domestic supply, under endogenous terms of trade. Welfare comparisons boil down to sourcing costs comparisons. Quotas tend to dominate at high domestic prices, ad valorem tariffs at intermediate prices and specific tariffs at low domestic prices. Welfare maxima are achieved with more restrictive policies than under perfect competition. These results rationalize separate negotiations for sensitive products in the Doha Round and the setting of tariff-rate quotas that mimic import quotas for these products. Finally, in ascertaining the robustness of our policy ranking to the choice of variable anchoring the comparisons, we found that specific tariffs unambiguously dominate ad valorem tariffs and quotas when government revenue or imports anchor the comparisons. However, some quota revenues and import levels cannot be achieved with tariffs.

Time consistent export quotas in an oligopolistic world market

Abstract We investigate the strategic behavior between exporting countries that face endogenous terms of trade on the world market. In a non-cooperative setting, if production decisions occur before consumption decisions, the ex-ante optimal export quota is not time consistent as the ex-post elasticity of the residual foreign import demand curve is lower than the ex-ante elasticity. However, we show that the exporters’ inability to irrevocably commit to their quota may be welfare superior to the precommitment solution. If exporters can sell forward a proportion of their exports before production decisions are made, they will do so even though, in equilibrium, it may decrease welfare compared to a situation in which forward markets do not exist. Moreover, the equilibrium with forward markets is welfare inferior to the commitment equilibrium for exporters.

An Analysis of a Rules-based Approach to Disciplining Export Credits in Agriculture

ABSTRACT This paper examines the comparative static effects of rules-based disciplines for government supported export credit arrangements. The arrangements provide traders in the country offering the guarantees more favourable borrowing conditions. This may provide an advantage relative to rival exporters since the supported trader may offer better financial terms to importers. Rules that discipline implicit interest rate subsidies are appropriate when an importing country does not face liquidity constraints when borrowing. However, these rules may not be appropriate with liquidity constraints because of the potential for additionality and benefits for all exporting countries. Rules on benchmarks for insurance premiums are always appropriate because insurance subsidies unambiguously have the potential to distort markets.