Food Price Pass-Through and the Role of Domestic Margin Services

The recent volatility in international agricultural markets has drawn attention to the impact of rising international agricultural prices and the induced price-insulating measures on consumer food prices. Analyses based on simulation models on this topic typically ignore the role of domestic margin services. We extend the standard Global Trade Analysis Project (GTAP) model to allow for variations in the share of domestic margin services in consumed food across countries. This approach enables us to differentiate consumer prices from producer prices. Following the extension, the results show that domestic margin services reduce the consumer food price volatility for all countries, especially in high-income countries, where the share of domestic margin services in final food consumption is higher. The effect of price-insulating border policies is also reduced in the extended model. We find that our extension of the GTAP model greatly improves simulations of the 2007 surge in international agricultural prices. We validate our extension of the GTAP model by showing that the econometrically estimated food price pass-through is decreasing with income and thus, is smaller in high-income countries.