Market integration and price transmission in wheat markets of India: a transaction cost approach

Abstract

PurposeWheat, which is one of the major staple food grain crops in India, continues to depict occasional fluctuation in the prices though Union government has adopted administered price policy for wheat by intervening in its procurement at assured prices and distribution. Such fluctuations in prices are usually attributed to inefficient functioning of the agricultural markets. Since spatially separated markets also play an important role to determine efficiency of the agricultural markets, the study has used market integration as one of the tools to analyze the price transmission across the spatially separated markets to identify causes of price fluctuations and suggest ways to stabilize wheat prices.Design/methodology/approachThe study utilizes monthly wholesale prices for January, 2006 to May, 2016 for dara wheat. First, the study employs augmented Dickey and Fuller (ADF), Phillips and Perron (PP) and Kwiatkowski, Phillips, Schmidt and Shin (KPSS) tests to check stationarity in wheat prices. Second, Johansen's cointegration test is applied to assess the integration of wholesale prices between selected pairs of wheat markets to determine long-run relationship among them. Third, Granger casualty test is used to find the direction of causality between the wheat market pairs. Finally, threshold vector error correction model (TVECM) and likelihood ratio (LR) tests are employed to examine long-run adjustment of prices towards the equilibrium in selected wheat markets.FindingsSince wheat wholesale prices for the selected markets are found to be integrated of the order one, that is [I(1)], Johansen's test of cointegration is employed and its findings reveal that the selected wheat market pairs exhibit cointegration and show a long-run price association among themselves. There exists a bi-directional causality among the wheat market pairs. Since LR test is in favor of threshold model (except for Etawah–Delhi pair), one and two threshold models were also performed accordingly. Findings show that wholesale prices of wheat in Delhi markets remain higher than the prices of all other regional markets as regional markets are found to adjust their prices towards Delhi market. Distance of the wheat markets from each other is directly associated with threshold parameters, which are analogous to the transaction costs. Geographically dispersed wheat markets incorporate high transaction and vice versa.Research limitations/implicationsThe study argues that there is need to improve rural infrastructure and connectivity of the agricultural markets and remove market asymmetries through unified market regulating mechanisms across the states. This will enable price adjustment process from primary wholesale markets (in production regions) to the secondary wholesale markets (in scarcity regions) quickly.Originality/valueThe contribution of the study in the existing literature lies in the fact that there are no empirical evidences in the context of India that use price transmission as a tool of market integration among spatially separated wheat markets using TVCEM as this model examines role of transaction costs in efficient functioning of the agricultural markets.