Implications of the Structural Change in Dairy Products Trade on Milk Price Paid to Producers in Chile

Alejandra Engler1* and Laura Nahuelhual2

Since 1990 row milk production has exhibited a rapid increase from 890 million liters in 1990 to 1,818 million in 2006. The excess production has allowed for the expansion of the export sector, converting Chile in a net exporter in 2001. A relevant question in this new market scenario is how this structural change can affect milk prices paid to producers in Chile. The consequences of this structural change were explored in this study using a Vector Error Correction (VEC) model and cointegration analysis. The results indicated that the domestic, CIF (Cost, Insurance, Freight) and FOB (Free On Board) prices were cointegrated, implying that changes in the import and export prices are transmitted to the domestic market affecting the milk price paid to producers. Prior to 2001, the import price (CIF) was the relevant reference dictating the movements of the domestic price. After 2001, the export price (FOB) became the reference, whereas the CIF price was no longer significant. The parameters of the VEC model suggest that the cointegrating relation between CIF and domestic prices for the first period under analysis (1990-2000) was clearer than that between FOB and domestic prices for the second period (2001-2007/3). The price elasticity for the FOB-domestic price vector had a large confidence interval, which is why it is difficult to draw strong conclusions regarding the impact of future FOB fluctuations on the milk price paid to producers in Chile after 2001.

Keywords: milk market, international trade, vector error correction, persistence profiles.
1 Universidad de Talca, Facultad de Ciencias Agrarias, Casilla 747, Talca, Chile. E-mail: mengler@utalca.cl *Corresponding author.
2 Universidad Austral de Chile, Facultad de Ciencias Agrarias, Casilla 567, Valdivia, Chile. E-mail: lauranahuel@uach.cl