Price Transmission within selected Agricultural Markets of Latin America

Abstract

The agricultural sector plays a major role in Latin American economies, comprising up to 23 percent of GDP (e.g. Guatemala and Nicaragua). Of course, it is also very important to the labor market, the income of the poorest people and food security. The food crisis of 2008 has raised numerous questions about the impact of such variability on welfare and the economic sector which directly concerns the agricultural sector. Given the importance of the agricultural sector to the economies, if governments are to take adequate measures to ensure food security, they need to have a good understanding of the functioning of their markets. This implies, among others things, knowing the state of price transmission. While this is essential for many reasons, the most important is that price transmission determines the prices information available to agricultural producers, which is a prerequisite for good allocation of resources. Incomplete price transmission creates biased incentives to producers, which can lead to suboptimal decision-making and reduced agricultural productivity. Despite the importance of price transmission to agricultural markets in Latin America, there are only few articles which deal with this issue. This research helps fill this gap and provide policy makers better knowledge of the direct and indirect effect of their decisions. This PhD thesis consists of six Chapters; Chapter 1 includes a general introduction and Chapter 2 presents an overview and discussion of the four papers included in the thesis, with all four exploring price transmission in selected Latin American markets. Chapter 3 includes “Asymmetric Price Transmission and Structural Breaks in the Relationship between Costa Rican Markets of Livestock Cattle, Beef and Milk exploring the vertical integration between these three markets. The analysis of the price transmission between joint products (relationship between markets relying upon a different production chain) is the main contribution of this document since it is nearly nonexistent in the cointegration literature. Chapter 4 includes “Price Transmission in Latin American Maize and Rice Markets evaluating price transmission from the international to the domestic markets with a focus on rice and maize markets. The main findings point out the existence of higher relationship with the international markets of Brazil and Chile (the South American countries included) than Central America countries. Chapter 5 presents the paper “The Relationship between Spatial Integration and Geographical Distance in Brazil. The literature identifies geographic distance as a significant factor affecting the level of price transmission between markets. This paper explores explanations for this significant effect, analyzing the relationship between cointegration and of the influencing factors, likely correlated with distance. The results show that the influence of distance on integration is in part determined by the significant effect on price transmission. Finally, Chapter 6, “Spatial Price Transmission of the Rice Market of Northeastern Brazil and the Variables which affect it, is an analysis of the relationship between prices of the poorest region of Brazil and its international and national trade partners. Moreover, the factors which have a significant impact on this relationship are determined. The focus is on rice since this plays a key role in the diets of the most food insecure people in northeast region. The results suggest that the presence of a main unloading port has a positive impact on the level of price transmission. Therefore, although the northeastern states are relatively isolated it could change rapidly since the ports of this region are experiencing a noteworthy development. In general, the methodology used throughout this thesis is based in the cointegration framework used to identify the price transmission among markets. The analysis also accounts for asymmetric behavior and structural breaks. Additionally, an important contribution of this work to the spatial price transmission analysis deserves to be highlighted, the inclusion of a set of variables, apart from distance, which has not yet been used to explain integration relationships. In summary, the papers focusing on rice show that the markets which are separated by long distances are less integrated than those which are closer to each other; however, there are other variables which also affect integration, such as access to a main port. Since these variables continue to evolve, integration will continually adjust. This development occurs not only in Brazil, but also in the rest of Latin America. Therefore, it is necessary to strengthen the assessments and monitoring of national and international prices, as well as the relationships between them.