Farm Input, Farm Output, and Food Retail Prices: A Cointegration Analysis
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This paper investigates the adjustment mechanism between farm input prices, farm output prices, and food retail prices in Canada. Johansen's maximum likelihood approach is used in addition to the Engle-Granger approach to test for cointegration. Contrary to the common assumption that farm output prices are more flexible than farm input prices, it is found that farm output prices though cointegrated are weakly exogenous in the sense that they do not respond in a systematic manner to disequilibrium in farm input prices and food retail prices. Evidence was found to support "Cost Pushl! and "Demand Pull" theories but since food retail prices carry a heavier weight in the cointegration relations, it can be concluded that shocks manifesting themselves (first) at the retail level do not persist as long.