Market integration for apples in South Africa

158 Pages·2006·0.92 MB·English

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MEASURING MARKET INTEGRATION FOR APPLES ON THE SOUTH AFRICAN
FRESH PRODUCE MARKET: A THRESHOLD ERROR CORRECTION MODEL

by

DAVID IFEANYI UCHEZUBA

Submitted in partial fulfillment of the requirement for the degree of

M.Sc (Agric)

in the

Department of Agricultural Economics
Faculty of Natural and Agricultural Science at the
University of the Free State
Bloemfontein

November 2005

Supervisor
Dr Z.G. Alemu

Co-supervisor
Prof A. Jooste
ACKNOWLEDGEMENT

I give thanks to almighty God for the strength and fortitude to complete this study.

I owe my gratitude to my promoter Dr. Z.G. Alemu and my co-promoter Prof. A. Jooste. You
contributed immensely to the successful completion of this dissertation.

Special thanks to my wife Mrs. M.A. Uchezuba for her support and contribution. Mrs. Annely
Minnaar and Mrs. Louise Hoffman contributions are immeasurable. Also a word of thanks to
Prof J.A. Groenewald for proof reading parts of this thesis.

i
MEASURING MARKET INTEGRATION FOR APPLES ON THE SOUTH AFRICAN
FRESH PRODUCE MARKET: A THRESHOLD ERROR CORRECTION MODEL

By

DAVID IFEANYI UCHEZUBA

Degree: MSc (Agric)
Department: Agricultural Economics
Supervisor: Dr Z.G. Alemu
Co-supervisor: Prof A. Jooste

ABSTRACT

Apples constitute the bulk of deciduous fruit produced in South Africa, i.e. in 2000, apples
made up the largest percentage of the deciduous fruit crop (43%). From 1991/92 to 2002/03
production averaged 574 850 tons per annum with a standard deviation of 43 922 tons. The
average distribution of the apple crop between the local market, exports and processing is
more or less even. Because of its potential lucrative nature much emphasis in the apple
industry is afforded to exports, but relatively little is known about how price transmission
takes place on the domestic fresh produce markets (FPMs). Moreover, it is increasingly
recognized that the formulation of market-enhancing policies to increase the performance of
the local market requires a better understanding of how the market functions. Aggregate
market performance is better understood by studying the level of market integration that
exists, which in turn is affected by transaction costs in the value chain.

Hence, the primary objective of this study was to measure market integration for apples on the
South African FPMs to determine the existence of long-run price relationships and spatial
market linkages. Specific issues addressed in this study include, (i) determination of the effect
of deregulation of the marketing of agricultural products in 1997 on average real market
prices, price spread and volatility (risk), (ii) determination of how FPMs where apples are
sold are linked and how prices are transmitted across these markets, (iii) determination of the
threshold prices beyond which markets adjust and return to equilibrium, and (iv) establish the
response of the FPMs to price shocks and how long it takes for shocks to be eliminated.

ii
The FPMs included in this study are Johannesburg, Cape Town, Tswhane, Bloemfontein, Port
Elizabeth, Durban, Kimberley and Pietermaritzburg. The criteria for selecting the FPMs were
based on net market positions (surplus or deficit area), geographical distribution, the volume
of trade and the importance of the market to the national apple trade flow.

The investigation revealed a statistically significant decline in real prices in six of the eight
markets investigated, a statistically significant relation in prices (price spread) between the
Johannesburg FPM and five other FPMs, as well as that the price spreads between these
markets declined after deregulation, and that the variation in real apple prices declined for five
of the eight markets after deregulation. Standard autoregressive (AR) and threshold
autoregressive (TAR) error correction models were compared to determine whether
transaction cost has significant effects in measuring market integration. Larger adjustment
coefficients were found in the TAR model. This is an indication that price adjustments are
faster in threshold autoregressive TAR models than in AR models. Also half-life deviations in
the TAR model are much smaller than in the AR model. The TAR model requires less time
for one-half of the deviation from equilibrium to be eliminated than the standard AR model.
Therefore, it is better to use TAR models than AR models because TAR models give a more
reliable result.

In addition, the parameter estimates of the threshold vector error correction model were
analyzed. The results show that bidirectional and unidirectional causality exist between
Johannesburg FPM prices and other markets. Regime switching estimates to investigate
market integration in the selected markets show that no persistent deviation from equilibrium
existed for all but one market pair and no clear evidence was found to support improved
market integration after market deregulation in 1997.

A nonlinear impulse response function to investigate the impact of positive and negative price
shocks in the Johannesburg FPM on other FPMs revealed that it takes about six to twelve
months for positive and negative shocks to be completely eliminated in all the markets.

Generally, the results obtained confirmed strong market integration in terms of apples for
selected FPMs.

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Key words: Half-life, Threshold Error Correction, Cointegration, Market Integration,
Autarky, Arbitrage, Impulse Response, Market Segmentation
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MEASURING MARKET INTEGRATION FOR APPLES ON THE SOUTH AFRICAN
FRESH PRODUCE MARKET: A THRESHOLD ERROR CORRECTION MODEL

By

DAVID IFEANYI UCHEZUBA

Graad: MSc (Agric)
Departement: Agricultural Economics
Studieleier: Dr Z.G. Alemu
Mede-studieleier: Prof A. Jooste

UITTREKSEL

Appels maak die grootste gedeelte uit van sagte vrugte wat in Suid-Afrika geproduseer word.
In 2000 byvoorbeeld, het appels die grootste persentasie van die sagte vrugte opbrengs (43%)
verteenwoordig. Vanaf 1991/92 tot 2002/03 is ‘n gemiddelde produksie van 574 850 ton per
jaar behaal met ‘n standaard afwyking van 43 922 ton. Die gemiddelde verspreiding van die
appel-oes tussen die plaaslike mark, uitvoere en prosessering is min of meer eweredig. Weens
die potensiële winsgewendheid daarvan, word die aandag in die appelbedryf veral op die
uitvoermark toegespits, maar relatief min is bekend oor prysoordrag op die plaaslike
varsprodukte markte (VPM’e). Verder word al hoe meer erken dat die formulering van
markopheffende beleidsrigtings om die doeltreffendheid van die plaaslike mark te verhoog,
beter begrip vereis van hoe die mark bedryf word. ‘n Beter begrip van markprestasie in die
geheel word verkry deur die bestudering van die bestaande vlak van markintegrasie, wat weer
deur die transaksiekoste in die waardeketting beïnvloed word.

Die primêre doelwit van hierdie studie was dus om markintegrasie van appels op die Suid-
Afrikaanse VPM’e te bepaal om vas te stel of daar bestaande langtermyn prysverwantskappe
en ruimtelike markskakeling is. Bepaalde sake waaraan in hierdie studie aandag geskenk is,
sluit in (i) die vasstelling van die uitwerking van deregulasie van die bemarking van
landbouprodukte in 1996 op gemiddelde reële markpryse, prysverspreiding en onsekerhede
(risiko), (ii) die vasstelling van hoe VPM’e waar appels verkoop word gekoppel is en hoe
pryse tussen die markte oorgedra word, (iii) die vasstelling van die drempelpryse waarná
v
markte aanpassings maak en die balans herstel, en (iv) om vas te stel wat die reaksie van die
VPM’e op prysskokke is en hoe lank dit neem om die skokke te verwerk.

Die VPM’e waarna in hierdie studie verwys word is in Johannesburg, Kaapstad, Tswhane,
Bloemfontein, Port Elizabeth, Durban, Kimberley en Pietermaritzburg. Die maatstawwe
waarvolgens die VPM’e gekies is, is gebaseer op netto mark posisies (surplus of te kort
gebied), geografiese verspreiding, die omvang van die handel en hoe belangrik die mark vir
die nasionale handel in appels is.

Die ondersoek het ‘n statisties beduidende afname in reële pryse aan die lig gebring op ses
van die agt markte wat ondersoek is, asook ‘n statisties bepalende verwantskap in pryse
(prysverspreiding) tussen die Johannesburg VPM en vyf ander VPM’e. Dit het ook daarop
gedui dat die prysverspreiding tussen hierdie markte ná deregulasie afgeneem het en dat die
variasie in reële appelpryse by vyf van die agt markte ná deregulasie afgeneem het. Standaard
outoregressiewe (OR) en drempel outoregressiewe (DOR) foutregstellingsmodelle is vergelyk
om te bepaal of transaksiekoste ‘n beduidende uitwerking op die meting van markintegrasie
het. Groter aanpassingskoëffisiënte is in die DOR model gevind. Dit dui daarop dat
prysaanpassings vinniger plaasvind in DOR modelle as in OR modelle. Halflewe afwykings
in die DOR-model is ook heelwat kleiner as in die OR-model. Die DOR-model kan die helfte
van die balansafwyking gouer uitskakel as die OR-model. Dit is daarom beter om die DOR-
modelle, eerder as die OR-modelle te gebruik, omdat die DOR-modelle meer betroubare
resultate lewer.

Daarbenewens is die parameterskattings van die drempelvektor foutregstellingsmodel ontleed.
Die resultate toon dat twee- en eenrigting oorsaaklike verbande tussen die pryse op
Johannesburg se VPM en ander markte bestaan. Ramings ten opsigte van regime wisselings
om markintegrasie in die verkose markte te ondersoek, het behalwe vir een markpaar, geen
volgehoue afwyking van die ewewig aan die lig gebring nie. Daar is ook geen duidelike
bewys gevind ter ondersteuning van verbeterde markintegrasie ná markderegulering in 1997
nie.

‘n Nie-liniêre impuls respons funksie om die uitwerking van positiewe en negatiewe
prysskokke op die Johannesburg VPM op ander VPM’e te ondersoek, het daarop gedui dat dit
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op al die markte ongeveer ses tot twaalf maande neem voordat positiewe en negatiewe skokke
geheel en al uitgeskakel is.

Die resultate behaal bevestig oor die algemeen sterk markintegrasie ten opsigte van appels vir
uitgesoekte VPM’e.

Sleutelwoorde: Halflewe, Drempelfoutregstelling, Gelyktydige integrasie, Markintegrasie,
Outarkie (selfversorgend), Arbitrage, Impuls Respons, Marksegmentasie.

vii
TABLE OF CONTENTS
Pages
Acknowledgements......................................................................................................................i
Abstract........................................................................................................................................ii
Uitreksel.......................................................................................................................................v
Table of contents..........................................................................................................................viii
List of Tables................................................................................................................................xiii
List of Figures..............................................................................................................................xiv
List of Acronyms..........................................................................................................................xiv

CHAPTER 1
INTRODUCTION

1.1 Background......................................................................................................................1

1.2 Problem statement ...........................................................................................................2

1.3 Objectives of the study....................................................................................................3

1.4 Data and methodology.....................................................................................................3

1.5 Outline of the study..........................................................................................................4

CHAPTER 2
LITERATURE REVIEW

2.1 Introduction .....................................................................................................................5

2.2 The concept of market and price analysis........................................................................5
2.2.1 Spatial arbitrage price analysis.............................................................................5
2.2.2 Spatial market integration.....................................................................................7
2.2.3 Necessary and sufficient conditions for efficient market arbitrage......................8
2.2.4 Economic justification for market integration......................................................8

2.3 Measures of market integration.......................................................................................10
2.3.1 Bivariate correlation approach..............................................................................10
2.3.2 Variance decomposition approach........................................................................11
2.3.3 Radial market integration approach......................................................................12
viii