Effect of the international price on the milk price paid to producers: transitory or permanent?

This study applied cointegration analysis and the vector errorcorrection model (VCE) to analyze the magnitude and duration of theimpact of the import price of dairy products on the domestic milk pricepaid to producers in Chile. The variables included in the analysis weredomestic price, CIF (Cost, Insurance and Freight) price, and exchangerate from January 1990 to December 2002. The results indicated that theCIF import price significantly influenced the price paid to domesticproducers, which was supported by the magnitude of the coefficients ofvector cointegration and the speed of adjustment coefficients. Thepersistence profile analysis showed that after a shock to theco-integrating vector, it took the system approximately 14 months toreturn to the long term equilibrium, while the impulse responsefunctions indicated that the CIF price had a permanent effect on thedomestic price.