Price transmission, reserve regulation and price volatility

Abstract

Purpose The purpose of this paper is to examine whether Chinese pork reserve regulation policy fulfills its function in stabilizing market prices and simultaneously to theoretically and empirically analyze the causes leading to the failure of Chinese Government’s intervention in the market, especially in the context of asymmetric pork and hog price information transmission. Design/methodology/approach A modified Reserve-Cobweb model based on the competitive storage model developed by Muth in 1961 is employed to examine the transmission effect of hog and pork prices under the setting of Chinese Government’s pork reserve regulation policy, using the data on Chinese hog and pork prices from June 2009 to June 2015. Findings While the Reserve-Cobweb model provides theoretical insights, suggesting that the implementation of the government’s reserve policy tool to control price volatility actually leads to increased price volatility, the empirical results indicate that the policy induces hypercorrection and impels greater price volatility, especially in the context of existence of asymmetric price information transmission. Social implications The Chinese Government should reduce excessive pork price intervention and instead allow the market to play its role in the hog and pork markets. Originality/value This paper develops a modified Reserve-Cobweb model based on the price transmission effect on different links within the agricultural products supply chain, which is used to empirically validate the existence of asymmetric price information transmission between pork and hog price in China.

Quantitative Evaluation of China’s Pork Industry Policy: A PMC Index Model Approach

“…Tan and Zeng [1] found that although the reserve spider web model provides theoretical insights, it shows that the government's implementation of reserve policy tools to control price volatility will increase price volatility. Still, the empirical results show that the policy induces high correction and increases price volatility, especially in the asymmetric transmission of price information.…”

“…Still, the empirical results show that the policy induces high correction and increases price volatility, especially in the asymmetric transmission of price information. Therefore, the Chinese government should reduce excessive intervention in pork prices and let the market play a role in the pig and pork market [1]. By decomposing the structure of the pig supply chain, Lu et al [2] constructed a dynamic model of the pig industry system and found that reducing pig breeding cost is the most effective long-term strategy to stabilize pig price.…”

How One Pandemic Led To Another: Asfv, the Disruption Contributing To Sars-Cov-2 Emergence in Wuhan

“…Cobweb theorem based on pig cycle theory is still widely used as the analytic tool in recent economic studies [61][62][63] . According to the pig cycle theory in economics, cyclical fluctuations are normal for agricultural commodities with long time lags from breeding decisions to output for sale 64 .…”

“…Government storage is supposed to help the supply and expectations and thus reduce dramatic price fluctuations 72 . The competitive storage model is frequently used for analyses 63,72 . To analyze the market effects of government emergency pork reserves, this study adopts the analytic paradigm of augmented Competitive Storage model proposed by Tan&Zeng (2018).…”

“…To analyze the market effects of government emergency pork reserves, this study adopts the analytic paradigm of augmented Competitive Storage model proposed by Tan&Zeng (2018). Following their theory, marginal costs of pork reserve is considered at zero since costs were not an important consideration factor during the stockpiling period 63 . Moreover, asymmetric information effects of price transmission should be taken into consideration.…”