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. In recent years, Iran's agricultural and food markets have been significantly impacted 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 aims to systematically investigate the impact of exogenous shocks (energy prices, COVID-19, and preferential exchange rate changes) on the behavior of milk marketing margins in Iran and to evaluate the market’s competitive structure.
In light of the per capita milk consumption gap in the country and the inadequacy of single-equation models for analyzing simultaneous markets, this research emphasizes the necessity of a systemic approach to analyze the complex relationships between supply and demand. Accordingly, to examine the effect of exogenous shocks on marketing margin behavior, the Piggott et al. (2000) marketing margin model was employed, which allows for a precise analysis of shifts in supply and demand curves resulting from various shocks. For this purpose, a system of simultaneous equations was developed, incorporating non-competitive conditions and utilizing quarterly data for the period 2015–2022.
The estimation results from the system of simultaneous equations reveal that the milk market structure in Iran deviates from perfect competition, characterized by a structural imbalance in the distribution of market power. Specifically, processing firms possess significantly higher bargaining power and market power compared to primary producers (dairy farmers). Analysis of substitution elasticities confirms that while substitution between the farm input (raw milk) and marketing services is possible, it remains limited. This finding underscores the necessity of technological upgrades in the processing sector and the employment of skilled labor to enhance overall chain efficiency.
Regarding the impact of shocks, the results indicate that rising energy prices exert a positive effect on the marketing margin. Due to the high-cost nature of transport and logistics within the dairy industry, this shock leads to a reduction in the farmer’s share of the final retail price. Conversely, shocks related to the preferential exchange rate transition and the COVID-19 pandemic exerted a negative impact on the marketing margin. The negative effect of COVID-19 is primarily attributed to the high perishability of milk and the associated risk of product accumulation in the distribution chain, which compelled intermediaries to absorb a portion of the increased costs. Crucially, the negligible magnitude of these shock coefficients suggests that recent price surges in the dairy market are not driven by marketing margin expansion or rent-seeking behaviors; rather, they are rooted in fundamental supply-and-demand forces and escalating production costs at the farm level. Therefore, the current market structure implies that any mandatory price interventions without a comprehensive understanding of these market dynamics could lead to capital flight from the production sector and disrupt the sustainability of supply.