Disentangling nonlinearities in the long- and short-run price relationships: an application to the US hog/pork supply chain

Abstract

Increased concentration at the retail, food processing and farm input manufacturing levels has brought increased attention to patterns in retail-to-farm price spreads. Most studies documenting asymmetric price transmission focus on nonlinear error correction processes, as opposed to the current study which analyses potential nonlinearities in the long-run relationship between the farm and retail prices. The null hypothesis of nonlinearity in the long-run relationship between farm and retail prices in the US hog/pork supply chain is rejected in favour of a Smooth Transition Cointegration (STC) framework. The STC framework predicts downward price stickiness in retail prices. The predicted residuals of the nonlinear model are used to investigate whether it is possible to disentangle nonlinearity in the long-run price relationship from nonlinearity in the adjustment towards the long-run equilibrium. The results underline the importance of testing for linearity in the long-run price relationship before modelling nonlinearity in short-run dynamics.