The purpose of this paper is to estimate quantitatively the effect of price regulation of foreign-grown wheat on vertical price transmission in Japanese wheat-flour-bread markets. This study applies a static model to the case of the wheat-flour-bread chain from 1970 to the late 1990's and analyzes quantitatively the relative effects of exogenous factors, such as hard wheat policy price, wheat bran price and non-agricultural elements in the flour and bread industry, on the rate of change in the wholesale price of flour and white bread.
The results of the analysis demonstrate the practicality of the model and the findings are as follows. Potentially, the wheat policy price has had a relatively large impact on the price of bread since the mid 1980's because the cost-push-effect from the non-agricultural sector has declined since the end of the high economic growth of the 1970's. However a decrease of 43.2%in wheat policy price has only led to a decrease of 2.8%in the wholesale price of bread for the period 1986-98. One reason is that the cost of business diversification in the flour industry since the late 1980's has been passed on in the price of flour, which has decreased the degree of price transmission in the flour market. Another reason is that the wage level in the bread industry has increased more rapidly than in whole food manufacturing sector while the flour price has steadily decreased in response to the fall in the policy price of wheat and the labor cost per unit has increased in the bread industry for the same period.
The empirical results suggest the following policy implication. Negotiations at the WTO have shifted some of the emphasis of agricultural policy away from market price support to direct income support for farmers. Now that the cost-push-effect from the non-agricultural sector has relatively declined, the food economy is potentially in a situation where the benefits from the falling price of raw materials can be brought to consumers through a fall in the retail price of food. However, the allocation of the benefits from agricultural policy reform and tariff reduction will be greatly affected by corporate behavior in the agro-food system.
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