A measure of cereal market integration between Finland and European major countries

Abstract

From take-off in January 2007 to peaks in the first half of 2008, wheat prices worldwide including Finland were doubled at the highest compared to the previous years, which known as “food crisis”. Rising prices for key staples ran alarm bells. The producer price for cereal products in Finland has become much more volatile, and the price level has followed the average price in the EU more closely than earlier. This indicates that the prices have become more subject to the changes in other EU countries. Within EU, one of the key targets of the CAP is to facilitate the spatial integration of agricultural markets within the individual member states as well as within the community. In other words, on a spatially integrated market, price information should freely flow between member states. International trade and trade liberalization contribute to greater price transmission elasticities as domestic markets become better integrated into the world economy. Therefore, the integration of the Finnish cereal market in the EU has important implications for domestic agricultural policy. In EU, Germany is the most important trading partners of wheat and barley for Finland, and France is the most important consumer and producer of all cereal products in EU and the Exchange Market of cereal products MATIFF is also located in France. Thus Germany and France are the best price benchmark market for the Finnish producer to follow the prices. Our aim is to estimate the characteristics of the Finnish bread wheat and feed barley markets in relation to those of Germany and France from producer's point of view. Especially we investigate the impact of “Food Crises” on the estimates of price transmission of Finnish producer’s prices in comparison to the European bench-mark countries, which are Germany and France. Methodologically, we apply the threshold vector error correction model (TVECM) developed by Balke and Fomby (1997) Goodwin and Piggott (2001), Hansen and Seo (2002), to identify regimes, one of which cover the food crises period. A TVECM allows us to more accurately discern the existence of a long-term equilibrium relationship among the stochastic processes as well as test for price asymmetry. We focus attention on the estimation of the transmission elasticities in different regimes especially during the period of food crisis. We found that the LOP held very well in the Finnish producer’s cereal market with those in Germany and France. Noticeably, the speed of adjustment towards long-term equilibrium was found to be quite fast during “food crises” for both cases of feed barley and bread wheat. It implied that Finnish producer prices of cereal products were cointegrated to EU market faster and better during price escalation and the time of “food crises”. It seems that “food crises” brought also opportunity for Finland to open agricultural markets, which is very important after the European market liberalized policies for the agricultural markets.