Price transmission analysis in the Italian fluid milk supply chain: a comparison between the conventional and organic sectors

The analysis of marketing margins and price transmission mechanism along the food chain has recently attracted considerable interest among agricultural economists, due to its welfare and policy implications. Italy is one of the largest European milk producers, and the dairy sector is key to the Italian economy as a whole. The ongoing crisis of the Italian dairy sector, characterised by very low output prices, especially for fluid milk, raises concerns whether retailers’ behaviour is fair, in view of the increasing shares of margins distribution they appear to be capturing, to the detriment of dairy processors. Moreover, the Italian Anti-Trust Agency (AGCM) forced the dissolution of the biggest retailers’ purchasing group, emphasizing the attention on the distribution level. In such a scenario, milk producers aimed to differentiate their productions, with organic fluid milk witnessing a tremendous increase in output over the recent years. The organic fluid milk chain presents a different structure compared to the conventional one, characterised by a more organized and less fragmented farm and processing level. This study aims at deepening the understanding of the economic organisation and functioning of one of the most important agri-food sector in Italy, the whole fresh fluid milk market, for both its conventional and organic supply chains. Given the growth of the latter, such a comparison allows for a deeper analysis of its efficiency in representing a sort of “safety-net” for troubled milk producers. A unique dataset has been used for analysing price transmission, featuring buying and selling price for the two types of milk, was provided by one of the most significant food distributor, granting insights on retailer’ marketing strategies for conventional and differentiated products. Moreover, while the literature most frequently employed data for aggregate categories (e.g. dairy, meat, apples), this approach has proved to be generating misleading results when the research objective concerns quality-differentiated products. Addressing such a drawback implies handling data concerning differentiated products separately, as done in this research. Furthermore, the organic sector, in general terms, and especially the organic fluid milk, had not been thoroughly analysed before. Finally, up to the authors’ knowledge, no other study centred its attention on the Italian fresh fluid milk sector. Results indicate that some differences emerge when comparing organic and conventional fluid milk, especially regarding short-run dynamics. The organic chain showed a more efficient behaviour, as both prices do react to shocks significantly, whereas they do not in the conventional chain. Marketing strategies applied to both products are then different: conventional milk is employed as a promotional product, due to the stickiness of its consumer price, while the organic is subject to market dynamics. Therefore, the structure of the supply chain seems to affect the price transmission mechanism: a more organised supply-side, characterised by Organization of Producers, is able to influence retailer’s strategies, and a more competitive retail stage pushes distributors to respond quickly and significantly to market shocks