Content uploaded by Islam Hassouneh
Author content
All content in this area was uploaded by Islam Hassouneh
Content may be subject to copyright.
The 84th Annual Conference of the Agricultural Economics Society at
Edinburgh
Mon 29th March to Wed. 31st March 2010
The Impact of Avian Influenza on Vertical Price Transmission in
the Egyptian Poultry Sector
Islam Hassouneh, Amr Radwan, Teresa Serra and José M. Gil1
CREDA-UPC-IRTA
Edifici ESAB. Parc Mediterrani de la Tecnologia.
C/Esteve Terrades, 8.
08860-Castelldefels Barcelona
In recent years, health risks have received increasing attention among consumers and
created an interest in analysing the relationship between food scares and food
consumption and prices. One of the most relevant food scares occurred recently has
been the avian influenza crisis. Apart from the obvious impact on human health, there
have been also worries about its effects on price transmission along the food marketing
chain. Egypt is considered one of the most affected countries by this crisis, with the
total recorded number of infections in humans being 87, out of which 27 died. In spite
of the strong impact of this food crisis on the Egyptian poultry sector, no studies have
tried to quantify this effect. In this study, we focus on this issue. A vector error
correction model that includes a food safety information index as an exogenous variable
is applied to monthly poultry price data to assess the effects of avian influenza on price
transmission along the food marketing chain within the Egyptian poultry sector. Our
results suggest that while consumer prices are weakly exogenous and do not react to
deviations from the long-run parity between consumer and producer prices, producer
prices respond to these deviations and adjust accordingly.
Key words: Food scare, avian influenza, price transmission, Egypt.
JEL classification: C22, Q13
1 Corresponding author: chema.gil@upc.edu
The Impact of Avian Influenza on Vertical Price Transmission in
the Egyptian Poultry Sector
Food safety has become a key issue in consumers’ demand and, consequently, a
basic objective of food policy in many countries. The increasing food scares that have
appeared in the last years (dioxins, Bovine Spongiform Encephalopathy (BSE), food
and mouth disease, avian influenza…) have contributed to increase public awareness on
this problem. Also, the increasing globalisation and international opening of the
economies, as well as the increasing speed of information dissemination, have amplified
these concerns to a worldwide dimension. As a result, consumers have become more
critical and have changed their consumption habits as a consequence of an increasing
loss of confidence. While this once was a phenomenon specific to developed countries,
nowadays it has generalised to developing countries which, moreover, are facing food
security problems.
Although Egypt was not affected by the food scares that shook Europe in the
90’s and at the beginning of the present decade, the problem of the avian influenza has
involved a hard reverse for the animal production sector of this country. The avian
influenza, originated in Southeast Asia, has quickly extended world-wide. In most
developed countries, there already existed mechanisms of defence set forth mainly as a
result of the mad cow and the foot and mouth disease scares, which have helped to
mitigate the impact of avian influenza. Nevertheless, this has not been the case in
countries like Egypt which, with the advent of the avian influenza, faced a food scare
for the first time. The crisis dramatically affected the animal production sector and,
more specifically, the Egyptian poultry sector which in 2003 generated around 8.5
billion of Egyptian pounds (LE) (24.5% of the Final Animal Production and 8.8% of the
Final Agricultural Production). The first case of avian influenza in Egypt took place in
February 2006. From this date, 87 cases of infection in humans have been reported, out
of which 27 were fatal. Following WHO, Egypt is the third most affected country by
this crisis all over the world, following Indonesia and Vietnam, and the most affected
country during 2009. The consequences on the poultry sector have been evident.
Approximate estimates of the economic damages owing to the avian influenza in Egypt
are above 2 billion LE. Apart from the obvious impact that Avian Influenza (AI) has
had on human health, there were also worries about the effects that the crisis may have
on price transmission along the food marketing chain.
The purpose of this paper is to assess the effects of avian influenza on price
transmission along the food marketing chain within the Egyptian poultry sector. Until
now and to our knowledge, no previous study has tried to quantify the effect of the AI
crisis on the Egyptian poultry market. Over the world, a few recent studies have
investigated this issue. Saghaian et al. (2008) were the first to investigate the impact of
AI on price transmission within the Turkish food marketing chain. These authors
provide evidence that the AI crisis has had an impact on vertical price transmission
processes along the supply chain. Despite their attempt to characterize price
transmission responses to the AI food scare, they did not develop a food scare
information index that reflected the consumer awareness of the avian influenza crisis,
which represents a contribution of our work to the literature. Our analysis also
contributes to previous literature in that we focus on studying the effects of avian
influenza on price transmission along the food marketing chain within the Egyptian
poultry market, a market that has not been investigated yet, although, as we have
mentioned, it is one of the most affected markets by the AI crisis.
To achieve the aforementioned objective, we estimate a Vector Error Correction
Model (VECM) that studies the dynamics of price transmission along the food chain.
An avian influenza food scare index is developed and used as an exogenous variable in
order to reflect to what extent the varying magnitude of the crisis over time can affect
price transmission along the Egyptian food marketing chain. In order to take into
account the consumer awareness of the avian influenza crisis, we use a monthly count
of newspaper articles published in the most read Egyptian newspaper, Alahram, from
January 2003 to December 2006. We then build the avian influenza scare index
following Chern and Zuo (1997) who assume that published articles should have a finite
duration and decaying effects as a source of consumer information. Our empirical
model also utilizes two series of monthly wholesale and retail poultry prices obtained
from the Central Agency for Public Mobilization and Statistics (CAPMAS).
Our specific estimation strategy can be summarized as follows. First, standard
unit root and cointegration tests are conducted in order to determine whether price series
are stationary and whether they are cointegrated, respectively. We next estimate a
VECM where, as noted, a food scare information index is included as an exogenous
explanatory variable. Ng and Perron (2001) and KPSS (Kwiatkowski et al., 1992) tests
confirm the presence of a unit root in each price series. Johansen (1988) tests provide
evidence of a long-run equilibrium relationship between poultry prices at different
levels of food marketing chain. The estimated vector error correction model suggests
that only producer prices adjust to deviations from the long-run equilibrium
relationship, while consumer prices are exogenous and do not adjust to correct
departures from the long-run parity at the 5% significance level. These results are
expected and are compatible with previous research that has suggested upstream prices
in the marketing chain do the majority of the adjustment, while downstream prices are
sticky and slowly responsive to shocks occurring at other levels (see, for example,
Heien 1980, Ward 1982, Serra and Goodwin, 2003, Lloyd et al. 2001 and Hassouneh et
al. 2009). Moreover, this result is consistent with the Egyptian context. After the advent
of the AI crisis, the government established some rules to control the crisis such as
forbidding the selling of live birds and obligating all producers to sell their production
through slaughtering houses, which have reduced capacity to absorb all production,
resulting in excess supply at the producer level and pushing prices down. Conversely,
the effect on retail prices was quite small because consumers were very well informed
that eating chicken was safe. Moreover, taking into account the low income and that
chicken is the cheapest meat in Egypt, consumers do not have much alternatives to
substitute for poultry consumption. Another interesting result is that none of the price
series adjust to the changing magnitude of the food scare information index. This result
is quite consistent with the Egyptian context and may also be consistent for similar
developing countries. This is the first attempt to apply a food scare information index to
assess food scares’ impacts on developing countries. While information indices have
been shown to have a significant effect, not only on price transmission but also in
demand studies in developed countries such as United States and Spain (see Hassouneh
et al. 2009 and Radwan et al. 2009 among others), the information indices do not have
a significant effect in developing countries, such as Egypt, because of the characteristics
of these countries that include a high level of illiteracy (27% in Egypt in 2009), a low
income that does not allow most people to buy newspapers (there are only about
250,000 newspaper readers in Egypt), and a lack of trust in public authorities and media
due to corruption.