Relationship between Spatial Price Transmission and Geographical Distance in Brazil

The price transmission between markets is often interpreted as providing insights into the market’s infrastructure efficiency and transaction costs. Thus, finding a possible explanation for the degree of integration has become an issue of special interest. Recent researchers have pointed out the distance between markets as one of the possible factors. However, the distance is closely related with other elements, such as road quality and the proximity to an export point, which affect transport costs, opportunity costs and thus the integration. Therefore, what the most important factor is when determining the relationship among markets remains unclear. The cointegration framework, OLS and principal component regressions are applied in order to investigate the influence of geographical distance on the cointegration relationship between Brazil`s rice markets. In response to changes of the agricultural policies during the period of investigation, the presence of multiple structural breaks in the long run equation is allowed. The results point out a weak, negative and significant relation between distance and the elasticity of cointegration. Moreover, the region in which the market is located and a better access to export points are the main variables which defined the strength of the price transmission.