Price transmission analysis of pasteurised liquid milk in South Africa: Granger causality approach

Price transmission studies have become increasingly important in Sub Saharan Africa over the past decades because of its nature of providing clear and insightful information into our markets. In this study, price transmission mechanism is described with an agricultural product within the dairy industry, which is pasteurised liquid milk. The aim of the study was to investigate and analyse the nature of price transmission mechanism of pasteurised liquid milk South Africa. The study used secondary time series data that covered a sample size of 17 years (2000 -2016) of pasteurised liquid milk. Granger causality test and Vector Error Correction Model were used for data analysis. The Granger causality tests suggested a bidirectional causal relationship between processor and farm gate prices and also between retail and processor prices. On the other hand, a unidirectional causality was found from retail to farm gate prices. The VECM results showed asymmetric price transmission implying that retailers and processors react quicker to price increases than to price decrease. Price monitoring policy is suggested in order to protect the consumers from unfair prices passed on by the retailers. Keywords: Price transmission, granger causality, pasteurised liquid milk, Vector Error Correction mode