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Key Features of the Selected Value Chains
Staple food supply chains are characterised by a high market concentration and vertical integration. In the case of wheat to bread, there are four major players engaged in the milling and baking process. These companies are Tiger Brands, Premier Foods, Pioneer Foods and Food Corp. These four millers accounted for around 80% of the total wheat milled in 2015. In 2016, the South African grain information service (SAGIS) determined that there are 80 wheat processors. This decreased from a little over a 100 in 2008. Discussions with industry experts (SAGIS managers) however indicate that this reduction is not due to firms going out of business but rather an indication of increased consolidation since 2008.
Estimating a Long-run Relationship
Numerous methods to establish price relationships between variables have been applied in empirical studies ranging from basic correlation tests to general cointegration test as developed by Engle Granger (1987) and Johansen (1988). A drawback of the above cointegration methods is that they assume linearity and symmetry. In this regard, this essay utilises threshold models and investigate the possibility of a structural break in the long-run relationships. Boetel and Lui (2010) notes that disregarding structural breaks may result in biased estimates of price relationships.
Retail Food Price Dynamics
Although the model provides invaluable information on the long-run relationships between the identified variables, it provides very little insight on the impact of a shock in one of the regressors in terms of magnitude and duration. The NARDL could provide some insight on this through dynamic coefficients. It was however opted to analyse the dynamics with a Vector Auto Regressive (VAR) model. This is beneficial in comparison to an ARDL model in that it accounts for the possible interrelatedness between variables.
Sector Level Inflationary Features
In order to analyse the inflationary features associated with the sub-categories of food inflation, four features are considered. The first is the contribution of each sub-group to overall food inflation. This is compared to the weight assigned to each group in the food consumption basket associated with the Consumer Price Index (CPI). The relative contribution is indicative of how rapid price increases in the sub-categories could have contributed to food inflation, in excess of the weight assigned to it. The second is the coefficient of variation.
Persistence
This section considers the persistence associated with food inflation and its various subcategories. Walsh (2012) notes that it is important to regard the level of persistence associated with an inflationary series for two reasons. The first is that longer-lived shocks will result in inflation remaining at high levels for longer periods of time. The second is that there is a general perception that food prices are temporary and therefore it has a transitory effect on headline inflation.
Conclusion
The fundamental question investigated in this paper was how commodity price dynamics impact staple food inflation and to explore the associated reasons for it. The essay, therefore, aimed to address this with three objectives. The first was to obtain an efficient estimate of price transmission from commodity to retail level. The second was to consider possible asymmetry, and short run price dynamics in the two food value chains and the third was to compare the results of the two chains to ultimately infer value chain factors that could impact on price determination and transmission. All three of these objectives were considered in order to regard how value chain dynamics and price transmission processes contribute to staple food inflation.
CHAPTER 1 : INTRODUCTION
1.1 The importance of research on food inflation
1.2 A critical appraisal of the state of food inflation research
1.3 Research questions, objectives and methods
1.4 Outline of the study
CHAPTER 2 : VERTICAL PRICE TRANSMISSION IN STAPLE FOOD CHAINS
2.1 Introduction
2.2 Background and Literature Overview
2.3 Key Features of the Selected Value Chains
2.4 Estimating a Long-run Relationship
2.5 Testing for Asymmetry and Determining short-run dynamics
2.6 Comparing the results of the Chains
2.7 Conclusion
CHAPTER 3 : FUNDAMENTAL DRIVERS OF FOOD INFLATION – EVIDENCE
3.1 Introduction
3.2 Literature Review
3.3 Methods
3.4 Data, Model and Empirical Results
3.4.1 Retail Food Price Dynamics
3.5 Conclusion
CHAPTER 4 : MILK, BREAD AND MONEY – POLICY IMPLICATIONS FOR SECTOR SPECIFIC INFLATIONARY DYNAMICS
4.1 Introduction
4.2 Sector Level Inflationary Features
4.2.1 Contribution
4.2.2 Volatility of Food Inflation and its sub-categories
4.2.3 The role of sub-sector price movements during inflationary episodes of food
4.2.4 Persistence
4.3 Second round effects of food inflation
4.4 Conclusion
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