Volatile world market prices for dairy products and their influence on domestic price formation: The German cheese market

The foreclosure of the internal milk market has been significantly reduced with the stepwise reduction of intervention prices and the suspension of export refunds of the European Union. Thus, price developments of the world market could now affect all levels of supply chain. Previous studies on price transmission of milk and milk products refer to the relationship between retail and producers or producers and world markets. Therefore, the objective of this paper is to analyse price transmission along the total supply chain. With a focus on the German cheese market. For the analysis monthly data is used ranging from January 1997 to October 2011. Applying different error correction model specifications asymmetries are analysed. The results indicate that retailers balance seasonal variations of producers' and wholesalers' prices. In addition, it can be noted that seasonality is becoming increasingly important for international prices due to higher shares of grassland based milk production. It can also be shown that the time lags in which price changes are passed on between the different levels differ. Thus, within the supply chain of milk and milk products there exist price asymmetries.