The Influence of the International Price on Brazilian

The Influence of the International Price on Brazilian Exports of Milk Powder Lucas Campio Pinha 1, Marília Fernandes Maciel Gomes 2, Viviani Silva Lírio 3, Guilherme Fonseca Travassos 4 1 Universidade Federal de Viçosa. E-mail: lucascpinha@gmail. com 2 Universidade Federal de Viçosa 3 Universidade Federal de Viçosa 4 Universidade Federal de Viçosa Until the late twentieth century, Brazil was an increasing importer of dairy products. However, from the 1990 s, the domestic dairy sector observed the major changes that would alter significantly the Brazilian scenario of dairy products. Brazilian dairy exports began the XXI century in a complete expansion, and the country obtained, in 2004, the first surplus in the dairy trade balance. According to Sistema Aliceweb (2013), milk powder was the principal dairy product in the Brazilian exports in this period. However, with the financial crisis of 2008, Brazil returns to show deficit in dairy trade balance in the following year, mainly caused by a drop in exports of milk powder. According to data from the USDA (2013), it is seen that international prices were at high levels in the period of growth of Brazilian exports of milk powder. However, with the economic crisis, there was a drastic reduction and the country could not maintain the level of foreign sales. Thus, it is important to check how external factors influence the decisions to export, as the international price for milk powder. The objective of this study was to analyze the main determinants of Brazilian exports of milk powder between 2000 and 2011, under the hypothesis that international prices were the main determinants of export volume of this product. üAugmented Dickey-Fuller (ADF ) test: the series of the real exchange rate and the retail price were stationary in level, without the need for differentiation, but in the other series, the presence of unit root at 5% significance level could not be rejected, so they are included in the model with one differentiation. üExogeneity and Granger causality: It was found that the series of international prices and the exchange rate cause, in the Granger sense, brazilian exports of milk powder at the 10% and 5% of significance level, respectively. ü Variance decomposition of prediction errors (Table 1): This analysis makes it possible to check the variation over time of a data series on the basis of shocks in itself and in function of the shocks to the other variables which comprise the VAR. From the seventh month after the shock, a series of international prices of Oceania is responsible for more than 9% of the variations in exports, remaining at this level until the end of the twelve months, therefore, representing the most explanatory variable. This result is consistent with the Granger causality test in the short term. üImpulse response elasticities (Table 2): With this instrument, the sensitivity of the economic variables is analyzed by means of the simulation to specific shocks in a given period. It was found that a rise of 10% in the international prices generated a fall of 0. 36% in exports of milk powder in the first month. This is possibly due to the fact that companies make contracts of milk powder sales, which takes some time to be accomplished. Thus, a rise in the international prices could lead to a stock of milk powder so that the contracts were subsequently treated (although dairy products are perishable, milk powder is one of the only non-perishable and able to storage). In the third and seventh months, the shock becomes responsible for raising exports by 0. 31% and 0. 26% respectively, and after the seventh month, it is absorbed, maintaining stability during the subsequent months. The theoretical model used is in this study is based on the estimation of export supply, in which it is assumed that the exported amount of the product depends on the surplus of the domestic market, i. e. , it is named in literature as small economy. Based on the proposed theoretical model, the following econometric model was used where QXt is the exports of milk powder, PDt domestic price; Yt is the logarithim of the national income; Wt is the shifter supply logarithim; TCt is the logarithim of the real exchange rate; PEt is the international price logarithim in a foreign currency; Ct is a representative dummy of the international economic crises, and ut is the random error term. The data are monthly and the inclusion of a dummy variable for the global economic crisis from September 2008 is justified by the fact that it has changed the national scenario of exports of milk powder. The Vector Auto Regressive (VAR) methodology was chosen to be used in this work to estimate the model above. In analyzes involving time series data, it has to be firstly identified if the series have a unit root or if they are stationary in level. Thus, one way of testing the stationarity of a given series is to use the Augmented Dickey-Fuller test (ADF) proposed by Dickey-Fuller (1981). Afterwards, tests for exogeneity and Granger causality were conducted to check the order of variables in the estimation of the model and the degree of causality between the determinants in the short term. Finally, with the estimation of the model, the decomposition of the prediction errors and the impulseresponse functions, it was possible to analyze the degree of influence of the explanatory variables in the variable of interest. Table 1. Variance decomposition of prediction error of Brazilian exports of milk powder. Month 1 2 3 4 5 6 7 8 9 10 11 12 Oceania international Milk powder exports price 6. 73 4. 24 7. 21 7. 15 7. 35 7. 42 9. 14 9. 16 9. 15 9. 16 9. 17 9. 18 93. 27 93. 68 90. 03 89. 52 86. 16 84. 96 82. 37 81. 88 81. 14 80. 96 80. 83 80. 66 Exchange rate Domestic retail price Acquired milk Gross domestic product 0. 00 0. 30 0. 65 0. 76 3. 07 3. 14 3. 07 3. 05 3. 12 3. 13 3. 19 3. 22 0. 00 0. 19 0. 22 0. 26 0. 25 1. 05 1. 42 1. 89 2. 03 2. 07 2. 12 2. 19 0. 00 0. 27 0. 55 0. 54 0. 64 0. 76 1. 27 1. 67 1. 68 1. 69 0. 00 1. 31 1. 35 1. 77 2. 52 2. 67 2. 73 2. 74 2. 90 3. 01 3. 06 Table 2. Impulse response elasticities of the exported amount of milk. Months Oceania international price Exchange rate Domestic retail price Acquired milk Gross domestic product 1 2 3 4 5 6 7 8 9 10 11 12 -0. 36 0. 00 0. 31 -0. 04 0. 14 -0. 08 0. 26 -0. 05 0. 03 -0. 03 0. 04 0. 00 -0. 09 0. 11 -0. 06 0. 28 -0. 06 0. 03 -0. 01 0. 06 -0. 03 0. 05 -0. 04 0. 00 -0. 08 -0. 03 0. 04 0. 02 0. 16 -0. 12 0. 13 -0. 07 0. 04 -0. 05 0. 00 -0. 09 0. 00 0. 07 -0. 14 -0. 02 -0. 12 0. 03 -0. 01 -0. 02 0. 00 0. 20 0. 05 -0. 12 -0. 17 0. 08 0. 07 0. 03 -0. 08 -0. 06 0. 00 0. 05 Source: Research results. The hypothesis of this study is accepted with theoretical model and the estimation of the VAR, i. e. , the series of the international prices for milk powder in Oceania is the variable that has the greatest influence in Brazilian exports of milk powder among the others incorporated into the model (exchange rate, domestic price in retail, acquired milk and gross domestic product). This is a exogenous variable to the national milk production chain, in which agents have no or very little control. Thus, the observed behavior conveys concerns since Brazilian exports of milk powder are influenced by exogenous and cyclical factors, not associated with the internal environment of the companies and subject to changes, which is not healthy for the national export industry. ü DICKEY, D. A. & FULLER, W. A. . Likelihood Ratio Statistics for Auto-regressive Time Series with a Unit Root. Econometrica, v. 49, 1981. p. 1057 -1072. ü SISTEMA Alice. Web, SECEX/MDIC, Brasília, DF, 2013. Available at: <http: //aliceweb. desenvolvimento. gov. br>. Accessed on: Feb. 20, 2013. ü USDA. United States Department of Agriculture. 2013. International Dairy Market News Reports. Available at: <http: //www. ams. usda. gov/AMSv 1. 0/getfile? d. Doc. Name=STELPRDC 5081840>. Accessed on: Feb. 8, 2013.