Abstract
This paper aims to study market integration in the international trade of soybeans from 1999 to 2019. The hypothesis is that the market remained integrated between genetically modified (GM) and non-GM soy, even after stringent regulations against GM soy in major importers starting in 1999. Using FOB prices from major exporters of GM soy (USA and Argentina) and non-GM soy (Brazil), I test for market integration with cointegration analysis and Granger causality tests. All tests show that the market between all three exporters remained integrated throughout the sample period. Furthermore, Granger causality tests show that USA remains the sole price leader. Short run elasticities for reactions to American price changes in Brazil and Argentina are 0.33 and 0.25, respectively. The results validate the Law of One Price and inform policy decisions and forecasts efforts in this valuable commodity.
Highlights
The purpose of this paper is to study the horizontal spatial transmission for the international market of soybeans over the period 1999-2019, in order to check for market integration under the Law of One Price (LOP), as well as report the elasticities and the directionality of the price transmission.The LOP is the basic foundational notion in economics that the prices of equal goods in different locations within an open market will tend to equalize, as market agents make use of arbitrage opportunities to close existing gaps
Product differentiation can cause deviations from LOP (Pippenger & Phillips, 2008). Such disruptions to trade have occurred in soybeans due to the development of genetically modified (GM) soy, where differences regarding the legal status of GM soy in major exporters and importers has led to the possibility of a rift between a GM soy and a non-GM soy markets
This study seeks to characterize the international price transmission of exports of soybeans, in order to check for market integration between GM and non-GM soy varieties
Summary
The purpose of this paper is to study the horizontal spatial transmission for the international market of soybeans over the period 1999-2019, in order to check for market integration under the Law of One Price (LOP), as well as report the elasticities and the directionality of the price transmission.The LOP is the basic foundational notion in economics that the prices of equal goods in different locations within an open market will tend to equalize, as market agents make use of arbitrage opportunities to close existing gaps. The purpose of this paper is to study the horizontal spatial transmission for the international market of soybeans over the period 1999-2019, in order to check for market integration under the Law of One Price (LOP), as well as report the elasticities and the directionality of the price transmission. When markets share a price under LOP they are said to be integrated. Product differentiation can cause deviations from LOP (Pippenger & Phillips, 2008). Such disruptions to trade have occurred in soybeans due to the development of genetically modified (GM) soy, where differences regarding the legal status of GM soy in major exporters and importers has led to the possibility of a rift between a GM soy and a non-GM soy markets. Brazil, the single biggest exporter, still produces a majority non-GM crop, with 32% GM cultivation the same year (ISAAA)
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