The impact of beef special premium on price transmission within the steer beef production chain.

CAP reform in 1993 placed much less emphasis on intervention purchasing and much more on direct payments to beef producers. This paper explores the impact of these payments on the vertical transmission of intermediate prices within the steer beef production chain in the Republic of Ireland. The various sub markets of the beef production chain generate these intermediate prices. These sub-markets exist because few farmers in ROI operate birth to finished beef production systems. Given the competitive nature of these beef sub-markets, it was expected that associated price pairs would be cointegrated. The empirical analysis in this paper confirmed this expectation, but found that it was important to take account of direct payments in doing so. Increases in direct payments were also found to cause the gap between dropped calf and store steer prices to increase and the gap between store steer and finished steer prices to decrease. The impact of direct payments on prices in each category of steer is measured. Store steer prices were found to be weakly exogenous. In terms of long-run adjustment, shocks in light and heavy store prices are not transmitted down the production chain towards dropped calf prices. The likely source of this weak exogeneity in store steer prices was changes in the levels of direct payments.