Agricultural Policies

Periodical

Estimating the Pass-Through of Agricultural Policy Reforms. An Application to Brazilian Commodity Markets

OECD Food, Agriculture and Fisheries Working Papers/Documents de travail de l'OCDE sur l'alimentation, l'agriculture et les pêcheries No. 2, 11/2005, (2005)

The ultimate impact of multilateral and own-country agricultural policy reforms will depend on the extent to which those reforms “pass-through” across national borders, within countries, and from local markets down to the household level. At the heart of policy pass-through is the question of “price transmission”, i.e. the extent to which price changes in one market lead to price changes in another market. Estimates of price transmission are built, either explicitly or implicitly, into multi-market partial equilibrium models, general equilibrium models, and narrower partial equilibrium studies, such as those used to estimate the effects of reform on particular markets or categories of household. An understanding of price transmission is a prerequisite for any meaningful quantification of how different constituencies will be affected by reform. To what extent are producers actually linked into local markets? Are those markets linked to other markets nearer the border? Are urban consumers more linked to international markets than rural producers? None of these questions can be answered without estimates of price transmission. The aim of the paper is therefore to provide estimates of cross-border and within country price transmission in Brazil, and at the same time suggest an approach that can be applied relatively easily to other countries and commodities. The fundamental dilemma is that it is difficult to obtain robust estimates without good data on both prices and traded volumes, and even then the econometric techniques available may not be capable of providing accurate ex ante predictions of price transmission. This paper discusses some of the difficulties in applying time series techniques, drawing on applications using Brazilian data, and suggests some general guidelines for predicting price transmission and the pass-through of policy reforms. It therefore complements a wider OECD project examining the distributional impacts of agricultural policy reforms in which Brazil is a specific case study, and where the aim is to track the consequences of international and national policy reforms down to the micro (household) level.

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