Commodity Market Integration: Case of Asian Rice Markets

A Reddy

The IUP Journal of Applied Economics, 2007, vol. VI, issue 5, 21-44

Abstract: Asia is becoming a global hub for agricultural commodity trade. Rice is an important staple food for most of the Asian population. Most of the international rice trade takes place within Asia. Efficient and integrated rice markets in Asia are essential for improving the volume of rice trade as less than 6% of the global production is traded internationally. The paper tests the extent of cointegration among rice markets by using Johansen test, examines causality by Granger causality test, and also captures the speed of adjustment to deviations from long run equilibrium in rice prices by using vector error correction model. The results reveal that international rice price indices (Thai and US), farm harvest prices and also government support prices are cointegrated in the long run, however the law of one price does not hold good. Thai II (100) Granger causes both Thai-A1 Super and Long Grain No. 2 (4%) US international price indices. There are five cointegrating vectors out of nine countries farm harvest prices. Japan, Thailand, Bangladesh and Philippines farm harvest prices are exogenous and influence other countries prices, and thereby are important sources of price formation in the Asian rice markets. Short run elasticities are quite significant for some countries (between India and Thailand, between Bangladesh and Pakistan). Long run elasticities of adjustment are quite low (only about 6-8% of total deviation in long run equilibrium will be corrected in a year in different countries). In case of government support prices, only four price series are integrated out of nine series considered. Granger causality results suggest that no single country is completely exogenous, and many countries GSPs are interlinked to some extent. Here also the short run elasticities are significant for many countries GSPs (ranging from 0.21 between India and Korea to 0.84 between Thailand and India). Long run elasticities (error correction terms) are quite low and insignificant. Overall, the paper concludes that Thailand, Bangladesh, Philippines and Japan are important sources of price formation in Asian market.

Date: 2007
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