What can we learn from a sanitary crisis? The ISA virus and market prices

ABSTRACT

We analyzed whether a competitive market can behave non-competitively when it is temporarily outside of its long-run equilibrium trajectory. Our data sample allowed us to examine the functioning of the Atlantic salmon market in the United States when experiencing a sharp reduction in imports because of a sanitary outbreak that affected its Chilean suppliers. We estimated the Steen and Salvanes extension of the Bresnahan–Lau model. Our results show that in the long run, the market behaves competitively. However, there is evidence of a disequilibrium effect on price in the recovery phase of the crisis. The decrease in the price observed during the recovery was caused by supply overshooting, whereas the increase in salmon’s market price observed right after the disease outbreak cannot be attributed to reduced Chilean supply.

KEYWORDS:

• Bresnahan–Lau model
• error correction model
• market power
• price determination
• salmon disease
• salmon market

Notes

However, there is concern that the elasticity of aggregate salmon demand is decreasing (see Xie, 2009; and Asche & Bjørndal, 2011).

Changes in salmon farming are perceived with a time lag of one to two years in exports due to the length of the production cycle.

As Kenneth Arrow has noted in a seminal article (Arrow, 1959), in disequilibrium, price-taking firms might act as price setters because in this context, prices lose their informational content.

Research on the effect of sanitary shocks on market power and price transmission has been made for other economic sectors. This is the case of the effect that the Avian Influenza had on the poultry industry (Park et al., 2008; Saghaian et al., 2008; Hassouneh, et al., 2012; Çamoğlu, et al., 2015), and that the Bovine Spongiform Encephalopathy had on the cattle industry (Lloyd et al., 2006; Park et al., 2008; Hassouneh et al., 2010).

Before 1990, Norway was the dominant supplier of farmed Atlantic salmon in the U.S. Nevertheless, in 1991, after several conflicts with Norwegian salmon exporters, U.S. authorities imposed an anti-dumping duty on Norwegian exports of fresh round salmon (in January 2012, that duty was repealed by the U.S. International Trade Commission). This had the effect of driving Norwegian producers out of the U.S. market. Nevertheless, since 1999 there has been an attempt by Norwegian producers to recover the market through the export of not only filets but also frozen round Atlantic salmon, product forms that were not affected by the anti-dumping policy (Asche & Bjørndal, 2011).

This view, which was known through personal communications, is widely held among Chilean salmon producers.

The U.S. market for salmon is interconnected with other major markets such as the European Union (E.U.) market and the Japanese market (see e.g., Asche, 2001). Therefore, even though Chilean producers supply a large part of Atlantic salmon consumed in the U.S. market, whereas Norwegian and Canadian farmers offer a smaller amount, this does not ensure that the Chilean salmon industry has the capability to affect price. Price arbitrage is at work between the U.S. and other salmon markets.

One possible reason that potential entrants do not participate actively in this market is that the market price is not high enough to cover their marginal costs. However, if the price increases, they will probably enter the market.

This result has been obtained earlier by Steen and Salvanes (1999) for Norwegian producers in the French salmon market. They have found that Norwegian producers exercise market power in the short run, probably due to the seasonal structure of the Pacific salmon industry. Moreover, in Steiner et al. (2011) they found incomplete substitution in their simulations of total aquaculture and capture-fishery supply of sockeye salmon, coho salmon, Chinook salmon and rainbow trout, as a consequence of the effects that the Chilean ISA virus crisis had on total supply.

An additional deterministic variable to control for the anti-dumping duty imposed on Chilean imports by the U.S. International Trade Commission in 1998 was included in the preliminary estimations. This dummy was activated at the beginning of the data sample period until June 2003, when the anti-dumping duty was repealed. However, independently of how we specified this variable (as structural break or as an interactive variable with price), the estimated coefficient was always non-significant. Thus, we decided not to include it in our final model.

For instance, the log-log functional form for demand gives a non-linear static model. This nonlinearity makes it difficult to derive a dynamic model based on the structural specification of the static equation.

A negative λ implies that the production level is higher than the competitive level (see Shaffer, 1993).

Two points are worth considering in this context. First, salmon diet includes other feed components different from fishmeal. One of the most important components is soya meal. These two components can be considered strong substitutes (Asche & Tveterås, 2004). Therefore, we considered that fishmeal prices should provide a good reflection of the behavior of salmon feed prices. Second, feed conversion rates have been decreasing (Steiner et al., 2011), which could reduce effective prices. We do not have time series information on this variable for Chilean salmon producers so we have assumed it constant over the analyzed period.

We decided to maintain D_IY only in the short run because it was not significant in the long run. This suggests that image had only a short-run effect.

According to Asche (1997a), “The dynamic multipliers can be interpreted as the adjustment that takes place i periods after the disequilibrium movement.” (p. 228).

We tested whether price transmission was complete between the fishmeal price and the Chilean Atlantic salmon price. With a p-value of 0.000, we can reject the hypothesis that the price transmission of feed is equal to one.