Studies of market integration show that price changes are transmitted spatially through arbitrage. Transmission across differentiated agricultural products is important to investigate, but it has not been explored given its complexities for assessment.

Using data from Australian cattle markets, we examine the dynamics of Meat Standards Australia price premium transmission between states.

An impulse response function analysis using Bayesian vector autoregression with sign restriction identification shows that shocks to prices and price premiums are partially transmitted contemporaneously between markets and it takes several weeks to complete transmission. In addition, we find an asymmetry of price and price premium shocks originating in Southern Queensland (QLDS) that have an inverse immediate impact in New South Wales (NSW), and take months to transmit the usual price response.

This outcome may be explained by a concurrent decrease in cattle availability in QLDS and increase in NSW due to several reasons, including differences in the markets served by both regions, variable demand from export markets, more seasonal and extreme weather conditions in QLDS than in NSW, variations in competition from the processing sector, and movement of feeder stock between both regions. Based on these results, producers can forecast fluctuations on price premiums, and adjust their cattle supply accordingly.

Morales, L. E., Hoang, N. and Stuen, E. (2017). Spatial Price Premium Transmission in Australian Cattle Markets: The Vulnerability of Price Premiums to Outside Shocks. In Print. Australian Journal of Agricultural and Resource Economics.