A time series analysis of European wheat export refunds and world wheat prices

The objective of this study was to test for dynamic relationships between European wheat export subsidies and price movements in the world wheat market. Since 1980, the European policy has resulted in wheat production in excess of domestic consumption. Much of this surplus production is exported but requires subsidies to be competitive in the world market. Because they originate from a large region, European wheat subsidies are an important factor in the world wheat trade and policy models related to this trade. To control costs and manage the timing of exports, Europe employs an open market tender process to award a large portion of its wheat subsidies. During weekly meetings, the European Commission\u27s Cereals Management Committee (EC-CMC) reviews tenders from domestic exporters and awards a subsidy for a given volume of wheat to successful bidders. The open market tender process allows the EC-CMC to consider any number of domestic and international market conditions when awarding these refunds. Evidence of a dynamic or strategic relationship between European subsidy awards and international wheat prices would carry important implications for wheat trade and policy modeling. Dynamic relationships between EU wheat subsidies and wheat price are measured by pairing the published results of EU open market tenders with foreign wheat export prices in a series of bivariate non-structural regressions. From these models a feedback measure is calculated which estimates the contribution of innovations in wheat prices to the variance in export tenders and vice versa. Feedback was decomposed into patterns—short-term and long-term—that approximate patterns of strategic behavior or political strategy. Overall and short-term feedback between wheat export price changes and European restitution awards were found to be small. World export prices contribute substantially to long-term variations in EU open market tender awards, while these awards appear to have negligible effects on long-term international wheat prices. The EC-CMC appears unable to use the open market tender system to strategically price wheat in the international market. Furthermore, export wheat prices do not play a significant role in EC-CMC weekly tender awards. Over the long term, international wheat prices substantially influence European wheat export policy