Modeling the Farm-Retail Price Spread for Beef

A new model for the farm-retail price spread, which accounts for both farm supply and retail demand changes, is introduced. This model is applied to beef, and its empirical performance relative to the markup pricing formulation is evaluated using nonnested testing procedures. The results are consistent with theory and indicate the markup pricing model is misspecified. Key words: beef, marketing margins, markup pricing, nonnested testing. In recent years the real farm price of beef has declined despite a secular decline in beef pro-duction. This suggests demand as well as sup-ply changes are important in explaining price changes. Farm-level demand for beef is influ-enced by changes in both consumer demand and the farm-retail price spread for beef. This paper focuses on factors affecting the price spread by estimating and testing alternative empirical specifications of the farm-retail price spread for beef. A common approach to modeling price spread behavior is to assume the price spread is a combination of both percentage and con-stant absolute amounts (Waugh; George and King). This suggests an empirical specification in which the price spread is related to retail price and marketing input prices. This mod-eling approach has been applied to beef by Freebairn and Rausser, Arzac and Wilkinson, and Brester and Marsh. As emphasized by Gardner (p. 404) the problem with this ap-proach is that the relationship between farm Michael K. Wohlgenant is an associate professor of economics at North Carolina State University; John D. Mullen is a senior econ