Dairy Price commodity in Italy: volatility and forecast after milk quotas

Abstract

The EU dairy industry is facing an unprecedented change since the removal of milk quotas has exposes the sector to the world competition with strongly organized multinational traders. The basic question of this paper is if the milk quota expiration will have any impact on market equilibria and decisions of agents operating at various market levels. This paper has been preceded by two other papers discussing various issues about dairy market in Italy: market asymmetries and consequences for price transmission and presence of oligopoly competition and consequences for price setting. The present analysis uses the time series analysis of weekly dairy prices to test the market behavior before and after quota regime. Volatility was tested with simple CV, SD indexes and more complexes Arch-Garch models including the breaks and changes in market regime correlated to policy adjustments. Results suggest a moderate change in volatility; our explanation is the Italian dairy sector was for long time protected from world market competition and a consistent amount of raw milk processed for cheese production was managed by the coop organization that transferred to the dairy farms the margins realized at other market levels. The future scenario is more pessimistic in absence of any protection: some structural changes needed to face the world competition could have been postponed in this protected market with the OCM. The expected growth of milk supply after quota will determine a decline in the raw milk price becoming closer to the marginal costs of the most efficient dairy farms in the world. This will cause the exit of a great number of dairy farms, the restructuring of the dairy industry and more concentration at retail level.