Vertical and Spatial Analysis of the Uruguayan Beef Chain: Asymmetry in Price Transmission, and Risk of Spillover
Published October 2023
Abstract
The objective of this study is to examine the potential asymmetric price transmission and the risk of spillover effects between the Uruguayan beef sector and the international market. This analysis is conducted both spatially and vertically for the time frame spanning January 2000 to December 2020. In this context, the international market is depicted through the prices of the US Steer and the FAO Bovine Price Index, while the Uruguayan market is represented by prices at the farmer and industrial levels. Additionally, to provide comparative insights, prices of fat steer from Canada and Brazil were included. Employing cointegration analysis techniques and examining price transmission via the Law of One Price, this research delves into the dynamics of the Uruguayan beef chain. Through connectedness analysis based on VAR models (Diebold and Yilmaz, 2012) it was determined that the average dynamic connectedness for the domestic market system stood at 85%. This indicates a highly volatile system with a strong propensity for spillover risks, akin to a domino effect. The findings show that within the national market, the "Standing Steer UY" category and the industrial price for "Steer Half carcass" are the primary drivers, acting as net transmitters. Further analysis using TAR models revealed that cointegration in the price series, both domestic and international, was evident only after correcting for structural breaks. These adjustments unveiled a nonlinear price transmission that is predominantly symmetrical. However, an alternative model (MTAR) identified an asymmetry in price transmission between the international and Uruguayan markets. It showed that domestic prices tended to decrease more steeply in response to international price increases. In comparison, the Brazilian and Canadian markets displayed a higher degree of cointegration without the necessity for adjustments due to structural breaks, and they did not exhibit any asymmetry in price transmission. This asymmetry in the Uruguayan market may be partially attributed to imperfect market structures, tariff, and quotas.
El presente estudio examina la transmisión asimétrica de precios y el riesgo de efectos spillover entre el sector bovino uruguayo y el mercado internacional, en dimensiones espacial y vertical, para el período enero 2000-diciembre 2020. Mediante modelos TAR/MTAR y un índice de conectividad basado en VAR (Diebold y Yilmaz, 2012), se determinó una conectividad dinámica promedio del 85% en el mercado doméstico, con asimetría detectada en la transmisión internacional-doméstica bajo el modelo MTAR, evidenciando mayor velocidad de ajuste ante caídas que ante subidas de precios internacionales.