Research on World Agricultural Economy

Modeling price transmission from a price leading country to domestic markets is crucially important for projecting food supply and demand in global agricultural markets using simulation models, such as agricultural partial equilibrium (PE) models. However, few prevailing agricultural PE models explicitly represent such price transmission or just simply impose naïve assumptions in the model. In the empirical literature, only a few attempts have been devoted to modeling such price transmissions for their feasible implementation in simulation models. To fill that knowledge gap and to promote the modeling in agricultural simulation models, this study particularly addresses income level and self-sufficiency as key determinants of world domestic transmission to support empirical investigation of determinants of world-domestic price transmission for 13 agricultural products in 140 countries worldwide. Trade liberalization pursuits following increased demand driven by income growth could engender narrowing of price differences. Furthermore, efforts at increasing the self-efficiency of agricultural products under the income compensation policy could lead to higher domestic production and lower domestic prices. These would decrease the price gap with the leading exporting country. Methods for estimating functions are determined based on stationary tests. Estimated results showed varying patterns with respect to countries and commodities. For instance, results show decreasing price gaps for wheat in Brazil, with its trade liberalization promoting the government. However, price gaps are increased in Mexico, which supports small farmers. Such price transmission relations and estimated parameters can be implemented for simulation easily in agricultural PE models and can contribute to the development of simulation and forecasting models for agri-food markets.