Introduction: Marketing margin, defined as the price gap between the end-consumer and the producer, is influenced by shifts in supply and demand functions across various market levels and their respective price elasticities. Consequently, any exogenous shock capable of shifting supply and demand at different stages of the market chain will affect the marketing margin. Over recent years, Iran’s agricultural and food markets have been significantly affected by various shocks, including increased energy prices, changes in the preferential exchange rate and the COVID-19 pandemic. Given the potential recurrence of such disturbances, this study aimed at systematically investigating the impact of exogenous shocks (energy prices, COVID-19, and preferential exchange rate changes) on the behavior of milk marketing margins in Iran and evaluating the market’s competitive structure.
Methods and Materials: This research employed a system of simultaneous equations approach based on the theoretical framework developed by Gardner (1975) and extended by Piggott et al. (2000) to incorporate non-competitive market conditions. The milk supply chain was conceptualized as a two-stage system comprising three interrelated markets: raw milk at the farm level, marketing services, and the final milk product at the retail level. The model consisted of four structural equations: (1) the retail demand function for milk, (2) the farm supply function for raw milk, (3) the marketing services supply function, and (4) the production technology function combining farm input and marketing services. A Translog functional form was selected for the production function to capture substitution possibilities, while log-log forms were employed for the supply and demand equations. Quarterly data spanning the period from spring 2015 to winter 2022 were utilized. Data sources included the Animal Affairs Support Company, the Central Bank of Iran, and the Economic Modeling and Information Management Office. Prior to estimation, the seasonal unit root test (HEGY test) was conducted to examine the stationarity properties of the variables. The system was estimated using both Two-Stage Least Squares (2SLS) and Three-Stage Least Squares (3SLS) methods. The 3SLS estimator was selected as the preferred approach due to its higher efficiency in estimating simultaneous equation systems by accounting for cross-equation error correlations, thereby yielding more consistent and precise parameter estimates. The model incorporated dummy variables to capture the effects of the COVID-19 pandemic, energy price shocks, and the change in the preferential exchange rate. Market power coefficients were calculated to assess the degree of non-competitiveness at different stages of the marketing chain.
Results and Discussion: The empirical findings revealed several important insights. First, the milk marketing chain in Iran deviates significantly from perfect competition. The market power coefficient for the farm-to-retail stage was estimated at 0.20, while the coefficient for the processing-to-retail stage was substantially higher at 0.75. This indicated that processing firms (dairy companies) possessed considerably greater market power and bargaining power compared to primary producers (dairy farmers), creating a structural imbalance in the distribution of market power along the supply chain. Second, the estimated substitution elasticity between the farm input (raw milk) and marketing services was 0.20, confirming limited technical substitutability between these inputs. This low elasticity implies a rigid technical structure in the short term, making the supply chain vulnerable to farm-level supply shocks. Third, regarding the impact of exogenous shocks, rising energy prices exert a positive effect on the marketing margin. The elasticity of the percentage marketing margin with respect to energy price increases was 0.029. Due to the high energy dependency of transportation and logistics within the dairy industry, this shock leads to an increase in marketing costs, thereby expanding the margin. Conversely, the change in the preferential exchange rate has a negative impact on the marketing margin, with an elasticity of -0.0026 for the percentage margin. As a production cost shock, the removal of the preferential exchange rate sharply drives up farm-level prices; given the limited substitution elasticity, this upward pressure on farm prices outpaces retail price adjustments in the short term, thereby compressing the marketing margin. Importantly, due to the statistical insignificance of the COVID-19 pandemic coefficient in the structural estimation, the corresponding elasticity for this shock was not calculated, ensuring that the final interpretations were restricted to statistically robust parameters. Crucially, the calculated shock elasticities were remarkably small in magnitude, indicating a high degree of margin rigidity. This finding suggests that recent retail price surges are rooted in fundamental cost-push factors rather than opportunistic margin expansion by intermediaries.
Conclusion and Suggestions: Based on the empirical evidence, direct and mandatory price interventions should be avoided, as margin expansion is not the primary driver of market fluctuations. Instead, policy priorities should focus on empowering upstream actors by strengthening dairy cooperatives to mitigate the structural market power imbalance and enhance farmers’ bargaining position. Furthermore, given the highly limited technical substitution between raw milk and marketing services, ensuring a stable and continuous supply of raw milk is critical to prevent processing disruptions and capacity underutilization. Policies should also aim at enhancing efficiency in logistics and distribution networks to control energy shocks, while gradually reducing exchange rate dependencies and establishing financial risk-management tools to safeguard dairy farmers against production cost volatility. Finally, acknowledging data limitations, future research on the same subject could utilize provincial panel data to capture regional dynamics for decentralized policy-making.