Impact of trade liberalisation on dairy market price co‐movements between the EU, Oceania, and the United States

Abstract

This study investigates the impact of trade liberalisation on the spatial price co‐movements between the dairy markets of the EU, Oceania, and the United States. We consider two main dairy products, namely butter and whole milk powder (WMP), and employ R‐Vines to assess the development of the tail dependence between the price series. We split the time span (i.e. 2000‐2017) in December 2007 to capture the change in the tail dependence as well as in the potential of each region to act as the central market. Our findings indicate that the EU acts as the central market for butter in both sub‐periods, whereas the EU succeeds Oceania in acting as the central market for WMP from the first sub‐period to the next. Further findings highlight slightly increasing tail dependence in the butter market and in the WMP market for the EU‐OCE and EU‐US pairs. However, the tail dependence for the WMP prices between Oceania and the United States weakens, in which we attribute to the 2013 Chinese ban on milk powder imports from Oceania.

On the joint volatility dynamics in international dairy commodity markets*

“…This might be because the dairy markets under consideration are not perfectly integrated, as suggested by the current literature. In particular, the paper by Fousekis and Trachanas (2016) supports the idea that the law of one price does not hold in SMP markets in the regions under consideration (the EU, Oceania, and the United States), while the study by Rezitis and Rokopanos (2019) finds that the dairy markets of the three regions (the EU, Oceania, and the United States) are segmented rather than well integrated.…”

“…First, it reduces the high‐dimensional data (i.e., 12 international dairy prices) to a lower dimensionality by estimating a small number of latent factors (i.e., 4 factors), which are themselves able to exhibit heteroscedasticity. For this reason, the present paper is able to analyze more dairy products than previous studies (e.g., Fousekis et al 2017 ; Rezitis & Rokopanos, 2019 , among others). Second, these factors can be interpreted as the main driving forces of the international dairy market, being allowed to display volatility clustering and time‐varying volatilities.…”

“…In other words, the literature's focal point lies on the co‐movement (and transmission) of price levels or changes instead of volatility, as opposed to the present paper, in which volatility transmission is modeled and examined explicitly. For example, Fousekis and Trachanas ( 2016 ) investigate price linkages in SMP for the three major exporters (the EU, Oceania, and the United States) using a nonlinear autoregressive distributed lag model; Fousekis and Grigoriadis ( 2016a ) study price co‐movements in the main SMP‐producing regions (the EU, Oceania, and the United States) using wavelet analysis; Fousekis and Grigoriadis ( 2016b ) examine price dependence in the international butter markets using the copula and wavelet methodologies; Fousekis et al ( 2017 ) assess the integration of the international SMP market by examining the price relations among the three main producing regions (the EU, Oceania, and the United States), applying nonparametric and time‐varying copulas; and Rezitis and Rokopanos ( 2019 ) examine the impact of trade liberalization on butter and WMP price co‐movements between the EU, Oceania, and the United States using R‐vine copulas.…”

“…The study by Rezitis and Rokopanos ( 2019 ) provides a discussion of regional dairy policies, mainly in the EU and the United States, and a summary of the various trade agreements around the world. These are considered as some of the main causes of international dairy price volatility changes, apart from some natural factors, such as the seasonality of milk production, the perishability of the milk commodity, the inelastic demand, diseases, and adverse weather conditions.…”

“…Among the various trade agreements are the trade agreement between China and New Zealand in October 2008; the EU and India, Korea, and the ASEAN countries in April 2007; and the North American Free Trade Agreement (NAFTA) in January 2008; and the Central America Free Trade Agreement (CAFTA) in March 2007. It is worth mentioning that in 2008 Fonterra established Global Dairy Trade delivering electronic auctions (twice a month) in internationally traded dairy commodities like WMP and butter allowing sellers from Europe, North America, Oceania, and India to associate with registered international bidders and thus providing an efficient way for price discovery (Rezitis & Rokopanos, 2019 ).…”