US and Canadian livestock prices: market integration and trade dependence

Abstract

Cointegration of Canadian and US livestock prices points to the existence of market integration in the period January 1996 to December 2004. Trade flows of livestock and beef products were nonexistent between Canada and the United States for many months in 2003 and 2004 suggesting market segmentation. This lack of trade in beef and livestock was due to livestock/beef import bans by both countries due to bovine spongiform encephalopathy. It was also determined that Canada's trade dependence in livestock and beef is cointegrated with Canadian and US livestock prices. However, as the trade dependence variable is shocked, the effects on Canadian and US prices are opposite although one would expect that in an integrated market the price responses to an exogenous shock would be similar or statistically identical. This result reinforces the case against the use of price cointegration analysis in determining presence (or absence) of market integration. Empirical results in this article raise some very difficult questions. Gains from trade are well documented. Yet, once a country becomes very trade dependent, the prices in it become much more vulnerable to exogenous shocks that reduce the trade flows.