The Lead‐Lag Relationship between Canadian and U.S. Wheat Prices

Abstract

In 1966, McCalla asserted that the international wheat market was a duopoly dominated by Canada and the United States. He argued that Canada was a price leader and United States was a price follower. In 1970, McCalla abandoned this model arguing that growing export supply in Australia and France also made them able to affect the world wheat price. He argued that the United Kingdom, the European Economic Community (EEC), Japan, and mainland China imported enough wheat to enable each to affect the world price. Thus, McCalla asserted the international wheat market was an oligopoly on the selling side and an oligopsony on the buying side. In 1978, Alaouze, Watson, and Sturgess extended McCalla's original duopoly model to a triopoly, with Australia as the third major exporter and Canada as the price leader. Their model was assumed to hold until 1972 when high, unstable prices and low carryover stocks suggested that the market was operating essentially competitively. They further suggested prices had begun to fall and stocks were increasing, indicating that some form of stable oligopoly was returning. In 1979, Carter and Schmitz asserted that the international wheat market was an oligopsony with Japan and the EEC as the major importers. They argued that it was irrelevant whether or not the major exporters behaved as oligopolists; the major importers held the dominant influence on prices. Lack of agreement about the structure of the international wheat market is not surprising. It probably reflects structural change in the market over time. A duopoly with Canada as the price leader might have been appropriate for some years, but a triopoly or oligopsony might have been more accurate for other periods. Changing structure creates major difficulties for empirical analysis. For estimating behavioral relationships with historical data, Rojko suggested that, where structural change occurred, one should split the time series, estimating separate equations for each sub-period. However, the problem is to determine when a significant structural change occurs in the market. This is important for splitting time periods ten or fifteen years ago where we have historical perspective, and it is also important in recent periods if we wish to make useful policy analyses or forecasts. Ideally, we would like an objective indicator of market structure. This study does not achieve such an indicator, although it may be a modest step in this direction. It is difficult, or impossible, to make definitive statements about market structure based on empirical observations. However, we use the concept of Granger causality to test for the existence of price leadership between U.S. and Canadian wheat prices. Significant price leadership is consistent with oligopolistic market behavior.