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What world price?

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  • Jamora, Nelissa
  • Cramon-Taubadel, Stephan von

Abstract

There is no consensus on what defines a reference for the world rice price. A review on rice as a differentiated commodity shed two important insights. First, it confirms that few studies have considered segmentation of rice in their price analysis. Second, Thai 5% brokens has often been considered the world reference price for rice but no empirical exercise has been carried out to validate this. This study analyzes the extent of market integration in the international rice market by generating empirical evidence on the cointegration of different export prices. We start our analysis with the assumption that rice is not a homogeneous good. In this context, we establish clusters by rice quality and determine which export markets best represent the world rice price within and across clusters. The study uses 19 monthly average export rice price quotations from January 2000 to July 2012 extracted from the FAO Global Information and Early Warning System food price database and from the Thai Rice Exporters Association. We also include FAO Export Price indices for high and low quality indica to assess their performance with other export prices. Our study contributes to the limited discussion on rice as a heterogeneous commodity. We validate Thai 5% brokens as the benchmark price for rice by examining its bivariate relationships with other export prices. We employ Johansen maximum likelihood procedure to confirm the long-run equilibrium relations and cointegration of price series. Then, we extend the error correction model to a multivariate cointegration analysis by cluster. We test for the Law of One Price, long run exclusion, and weak exogeneity to assess the dynamics of price transmission and determine how prices are related with one another. We build on this information and our knowledge of the rice market system to answer the question – What is the world rice price? We find evidence that the rice market is highly segmented. This suggests that there is no single answer to our research question. While we find that Thai 5% brokens is cointegrated with many other export prices and contributes strongly in defining long run equilibrium relations, there are several international rice prices that could be used as benchmarks. The results imply that failure to find cointegrating relations from world to domestic rice markets can be a result of failure to effectively define the appropriate international reference price. In price transmission analysis, we find that it is imperative to examine the types of rice and to discuss the relevance of specific markets to the benchmark price based on understanding of rice trade structure. This study affirms the importance of having up-to-date and reliable sources of rice prices both in the export and domestic markets, accounting for differences in quality.

Suggested Citation

  • Jamora, Nelissa & Cramon-Taubadel, Stephan von, 2012. "What world price?," Discussion Papers 142241, Georg-August-Universitaet Goettingen, GlobalFood, Department of Agricultural Economics and Rural Development.
  • Handle: RePEc:ags:gagfdp:142241
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    File URL: http://purl.umn.edu/142241
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    References listed on IDEAS

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    1. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 39(3), pages 106-135.
    2. Frank Asche & Helge Bremnes & Cathy R. Wessells, 1999. "Product Aggregation, Market Integration, and Relationships between Prices: An Application to World Salmon Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(3), pages 568-581.
    3. Friederike Greb & Nelissa Jamora & Carolin Mengel & Stephan von Cramon-Taubadel & Nadine Würriehausen, 2012. "Price transmission from international to domestic markets," Courant Research Centre: Poverty, Equity and Growth - Discussion Papers 125, Courant Research Centre PEG, revised 08 Oct 2012.
    4. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    5. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
    6. Jayne, Thomas S., 1993. "Sources and Effects of Instability in the World Rice Market," Food Security International Development Papers 54059, Michigan State University, Department of Agricultural, Food, and Resource Economics.
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    Cited by:

    1. Fazleen, Abdul & Stephan, Von Cramon, 2015. "The Policy Analysis Matrix of Profitability and Competitiveness of Rice Farming in Malaysia," 2015 Conference, August 9-14, 2015, Milan, Italy 210872, International Association of Agricultural Economists.

    More about this item

    Keywords

    rice; price transmission; cointegration; world price; Agricultural and Food Policy; Demand and Price Analysis; C32; Q11; Q17; Q18;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • Q11 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Aggregate Supply and Demand Analysis; Prices
    • Q17 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agriculture in International Trade
    • Q18 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Policy; Food Policy

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