Spatial Market Integration of Regional Fertilizer Markets in the Philippines and Determinants

Abstract

Purpose – While several studies focusing on the integration of rice markets in order to lower prices have been conducted, little is understood about the market integration of production inputs. Price variation in production inputs, however, is also a strong factor influencing rice prices. Fertilizer is among the major inputs in rice production, implying that any change in fertilizer prices would have implications on rice prices. As fertilizer tends to register high prices and wide disparities in domestic markets, lowering its price is deemed to be effective in increasing its uptake among rice farmers. This paper attempted to answer the following research questions: (1) How closely integrated are the domestic fertilizer markets? (2) Is there price leadership, and correspondingly, are there price followers? (3) Do higher fertilizer prices exist in more segmented markets? (4) What are the determinants of price differences and market integration across regional fertilizer markets? Design/Methodology/Approach – In order to test for spatial market integration, the correlation coefficient analysis, Granger causality and the Johansen cointegration test were employed. The Johansen cointegration test was performed on 2000-2017 price series data of urea and complete fertilizer of all 16 regions in the Philippines. Findings – It was found that 95% of regional markets for urea and 81% for complete fertilizer were integrated. Rice-producing regions tended to act as price leaders, whereas regions producing less rice were price followers. Results from OLS regression analysis suggest that lower price differences tended to prevail in integrated markets and infrastructures; distance and output difference are among the determinants of market integration. Research Implications – Identifying which markets are integrated is extremely crucial in policy development as it allows the government to fast track its interventions. In integrated markets, any price fluctuation in one market is also likely to happen in another integrated market. It therefore signals to the government in which regions to focus the interventions on, especially in its efforts to stabilize the prices of rice. For instance, it could implement centralized policies in integrated fertilizer markets, and decentralized policies in less integrated ones. Having identified the determinants that influence integration should also allow the government to decide what kind of interventions to implement in order to promote the integration of spatially segregated markets.