Producer price disparities in the EU agriculture: divergence or convergence?

Th e issue of price disparities in the EU commodity markets has given rise to a fair amount of empirical and theoretical research. Price convergence studies were generally on the aggregate level, and investigated the convergence of infl ation among countries. Th is study aims to investigate the convergence of agricultural price disparities among the EU member states, based on diff erent individual agricultural products. Th e analysis shows the existence of agricultural price convergence among the EU member states since 1991, even including some countries were not members of the EU. Fur- thermore, the speed of convergence diff ers among agricultural products and also between the sub-periods as 1991-2000 and 2000-2008. According to the economic theory, the law of one price is the economic principle that identical goods sell for the same price worldwide if international trade is free and without natural barriers, such as transportation costs. It is expected that the prices will converge through the integration process among countries. That prices of a good differ across countries or regions has been explained by the differences in the product attributes and the costs of local inputs, and they also mainly depend on producer prices. In this study, there is investigated the EU Member States' agricultural prices convergence to the mean level, by the producer price side and it is aimed at providing a quantitative estimate of the effect of the European economic integration on the speed of the agricul- tural prices convergence. The earlier studies about price convergence have focused on consumer prices, however, this study has focused on producer prices. When analysing the EU agriculture, it is important to make a commodity specific analysis. The EU sup- port scheme and its level vary between commodities and also the competitiveness of these commodities differs from each other. The dispersion of prices across countries is often used as a measure of market integration: large dif- ferences in the price levels indicate the existence of barriers to trade, while low price differentials sug- gest a functioning goods market arbitrage (Sturm et al. 2009). Since the early 1990s, the efforts by the EU to achieve the integration of the national markets have been intensified and the general price level convergence is a widely discussed topic. Some EU member states which are called the transition economies also had implemented extensive re- forms to move from the central planning to market economy in the 1990s. Furthermore, agricultural market integration of these countries to the EU has been continued in the accession period and also after becoming the EU member states, to decrease the disparities among regions. The EU agriculture as a whole is a major player in the world's agricultural markets. The EU mem- ber states produce large quantities of agricultural products, and a wide diversity and quality of those products. The integration of the member states' ag- riculture markets could make a contribution to the EU competitiveness in the world by the convergence process of prices. The EU Common Agricultural Policy also has been shifted from the price support policies to policies which support competitiveness since the McSharry Reform in 1992. Regional income disparities also have been taken into attention more intensively since the beginning of 1990s. However, enlargement towards the transition countries gives rise to a number of challenges as regards the national and regional disparities in the EU. Price convergence between the new member states (mostly transition economies and the Central European Countries) and the old member states has increased the transfers from consumers to producers in the new member states, but these positive effects on farming may be offset by a range of factors undermining the competitiveness of the new member states' agriculture (European Commission 2008).