Modeling sheep supply response under asymmetric price volatility and cap reforms

This paper investigates the supply response of the Greek sheepmeat market and examines the effects of the Common Agricultural Policy (CAP) reforms in the Greek sheepmeat industry during the period 1993-2005. The nonlinear asymmetric GARCH (NAGARCH) process is used to estimate expected price and price volatility, while supply and price equations are estimated simultaneously. Producers'' price volatility, was found to be an important risk factor of the supply response function of the Greek sheepmeat market while the negative asymmetric price volatility which was detected implies that producers have a weak market position. Furthermore, the empirical findings confirm the positive effect of the annual premium paid by EU to sheepmeat producers and indicate that the recent CAP reform will have a negative effect in the Greek sheepmeat production.