Vertical price transmission and its inflationary implications in South African food chains

Various studies interrogate the issue of food inflation from a commodity level vantage point but fail to relate how commodity prices manifest in retail prices, and ultimately, how it impacts food inflation. This study uses vertical price transmission analysis, with time series econometric techniques, to determine how underlying commodity prices manifest in final retail prices and the associated reasons for it. Implications for food inflation are also reflected on. Two value chains, namely wheat-to-bread and maize-to-maize meal are considered due to their importance as staples in low(er) income consumer diets in South Africa. Results indicate full price transmission in the wheat-to-bread chain but incomplete price transmission in the maize-to-maize meal chain. In addition, prices in the wheat-to-bread chain are determined at producer and consumer level and bi-directional transmission takes place, whereas maize prices are determined at retail level and transmitted through the chain, to commodity level. Symmetry in price adjustment was not rejected in both chains. Implications of the findings for staple food inflation is that it does not seem that the price determination and price transmission processes in these chains are contributing factors to the inflationary pressures that these chains have experienced over the past decade. Symmetric price transmission in both chains seems to suggest no opportunistic behaviour on the part of firms to exploit situations where commodity prices decrease.