Assessment of price formation and market power along the food chains

The aim of this report is to provide insights into price dynamics and power relationships between actors of selected Food Value Chains (FVC). Following the main focus of the VALUMICS project, provided analysis refers to salmon, tomato, dairy and wheat case studies in selected EU and non-EU countries. The analysis presented in this deliverable greatly rely on the previous deliverables (e.g. BARLING and GRESHAM, 2019, Deliverable D5.1) and work conducted in the project, and will further be used as an input for proceeding work packages that focus on quantitative modelling and foresight exercises. Thus, results presented in this report should be considered as a piece of a large puzzle that aims to provide an in-depth understanding of food value chains and network dynamics under the VALUMICS project (www.valumics.eu).

2. The report is structured in a way to cover both price transmission and market power analysis for each case study separately. Thus, the results are presented under four main sections referring to a specific case study. The section on methodology is kept separately as the same price transmission, and market power methodology has been used for each case study.

3. For the salmon case study, the aim was to analyse the transmission of price changes along the FVC, which in this case presents a global value chain, from Norway towards most important EU importing countries, i.e. France and Poland. France is one of the biggest consumers of salmon in Europe, while Poland is the largest secondary salmon processing country in the EU. Both countries have significantly different structures of their domestic salmon FVCs which was also in the focus of the analysis. The price transmission results indicate that the salmon export price in Norway influences price formation in both France and Poland. Within the French salmon fillet market, the retail sector dominates price formation. It has a strong influence on the prices at the secondary processing level, which sometimes might result in squeezed margins for the processing companies. In contrast, the retail market is disintegrated with the domestic wholesale market in Poland as the latter is exclusively focused on the re-export of processed salmon, where most of the processing companies are directly owned by Norwegian salmon producing companies. Concerning the market power analysis, the results indicate a certain level of market imperfectness. Nevertheless, identified results significantly vary depending on the current economic/political or natural events (e.g. distribution of licenses, Russian import ban, different diseases affecting salmon production, etc.).

4. For the processed tomato case study, the main focus is on price relationships and market imperfections along the processed tomato value chain. As Italy is the largest processed tomato producer in Europe, as well as the largest exporter of processed tomato products, the analysis is primarily conducted for the north Italian processed tomato value chain. The results indicate that the upstream actors of the chain, i.e. producers and processors aim at strengthening market concentration and social collaboration through Inter-Branch Organisation (IBO), ensuring higher competitiveness and sustainability through a mutual agreement that is beneficial for all. This was confirmed by both price developments and margins obtained by producers and processors after 2011 and establishment of the IBO, and in the reduction of market power imbalances between them. The results further indicate that price dynamics present at the producer and processing levels are not reflected on the retail level. This fact was confirmed again by identifying the price margin that is three times higher for the wholesale-retail level compared to wholesale-producer level. One of the reasons might be that retailers are not part of the IBO, and the price-setting mechanism is entirely different. Most of the retail purchases go through auctions where processors usually need to squeeze their margins during the negotiation process. Overall, the tomato processing case analysed in the present research shows that the sustainability, integrity and resilience of the chain are related to the managerial governance of the chain. Thus, chain actors can contribute to finding a balance between competition and collaboration, so to aim for all chain actors’ higher level of competitiveness.

5. For the dairy case study, the main focus is on getting the in-dept understanding of price dynamics and market imperfections for the three largest milk producers in the EU. Thus, the analysis considers dairy value chains in Germany, France and the UK. Understanding developments in these markets would greatly reflect the EU dairy sector in general. The obtained results indicate that milk producers face a negative price/cost ratio in the long-run, indicating that they don’t have strong bargaining power towards processors. One of the reasons could be that producer could act as shareholders of the cooperatives involved in milk processing, and thus have completely different incentives when it comes to the purchased milk price level. Concerning price dynamics along the value chain, the results indicate that changes in raw milk producer prices are almost completely transmitted towards wholesale butter and cheese prices. The short-run price dynamics show that raw milk prices are faster in adjusting the disequilibrium with the wholesale skim milk powder (SMP) prices compared to other dairy products. The results of market imperfection analysis indicate a certain level of oligopsony and oligopoly at different levels of the dairy value chains in all three countries, especially between producers and processor.

6. For the wheat case study, the analysis refers to the integration of the French wheat market with the world market, primarily focusing on integration with the Black Sea countries that are emerging as global leaders in wheat export. The results confirm that, when it comes to price formation, the French market is the leading wheat market transmitting price signals to other markets in Russia, Ukraine, Canada, the USA and Argentina. Furthermore, despite being leaders in wheat export volumes, the Black Sea wheat prices in Russia and Ukraine are adjusting to price changes in France, the USA and Canada. One of the main assumptions is that creation of the futures exchange in the Black Sea region might significantly change the current situation on the global wheat market where consequently France might lose its dominant price formation role. Concerning the analysis of market power along the French and UK wheat value chains, the results indicate a certain degree of market imperfections for milling and bakery industries in both countries. Higher market imbalances are identified for the French milling industry compared to the UK case. Similar results are obtained for the baking industry in both countries.

7. Overall, it is difficult to draw some general conclusions as each case study refers to the specific commodity, with considerably different underlying governance structures of the respective value chains. There is some evidence that producers tend to have better bargaining power in the value chains characterised with strong cooperation (coordination) on the upstream level (e.g. processed tomato and salmon case studies). On the other side, strong integration of the value chains on the upstream level, inevitably lead towards some sort of market imperfections that usually result in an unfavourable position for producers (e.g. dairy and wheat case studies).