Implications of the structural change in dairy products trade on milk price paid to producers in Chile

Abstract

Since 1990 row milk production has exhibited it rapid increase from 890 million liters in 1990 to 1818 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 producer,; 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 Oil 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 200 1, 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 SLIcroest that the conitegrating 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 Oil the milk price paid to producers in Chile after 2001.