The increasing trend of food scandal crises is not well followed in recent studies of spatial price transmission.
This paper analyses the impact on the domestic market of an Aflatoxin M1 outbreak in the Serbian dairy
sector during 2013/2014 using a spatial price transmission approach. Monthly farm milk prices in Serbia
for the period 2007/2014 were contrasted with leading dairy exporting countries New Zealand, USA and
Germany, which did not have a food scare in their dairy sectors. To estimate the impacts a Markov-switching
vector error-correction model was utilized. For all four dairy markets the model identified two price change
regimes: standard and extreme. Although it was predictable, an extreme regime was not identified during the
Aflatoxin M1 crises in Serbia because of some specific characteristics of its dairy production. The results
suggest that the Aflatoxin M1 outbreak ‘froze’ the Serbian dairy market and temporally disconnected it from
the world milk market. Farmer’s prices fell below their long-run equilibrium levels. The total loss of the
Serbian farm-level dairy sector during the crisis reached up to 96.2 million EUR. These ‘missed opportunity’
significantly slowed investment in the dairy sector.