INTERCOMMODITY PRICE TRANSMITTAL: ANALYSIS OF FOOD MARKETS IN GHANA
| Date | 01 February 1993 |
| DOI | http://doi.org/10.1111/j.1468-0084.1993.mp55001003.x |
| Author | Harold Alderman |
| Published date | 01 February 1993 |
OXFORD BULLETIN OF ECONOMICS AND STATISTICS, 55,1(1993)
0305-9049 $3.00
INTERCOMMODITY PRICE TRANSMITTAL:
ANALYSIS OF FOOD MARKETS IN GHANA
Harold Alderman*
I. INTRODUCTION
A number of studies of markets in developing countries have analysed the
relationship of the price of a single commodity across markets. With proper
caveats, such studies are used to make inferences on the spatial flow of infor-
mation and commodities. Ravallion (1986), for example, uses a dynamic
model of market integration to show that the efficiency of rice markets in
Bangladesh not only varies over seasons but during a famine period as well.
The current study begins with an application of Ravallion's model to prin-
cipal maize markets in Ghana. The main interest of the study, however, is to
expand upon the model to investigate the transmittal of information acoss
commodities. We investigate one property of an efficient market, the full
utilization of available information. While studies of spatial price integration
simultaneously investigate the flow of information and commodities, it is
often difficult to distinguish between the two. For example, while a low corre-
lation of prices between two markets may indicate either poor flow of infor-
mation or economic inefficiency, the observation may also be indicative of
competitive trade and linked markets which are seasonally separated due to
high transport costs (T immer 1974).
For this reason the current study also presents an investigation of the flow
of information within a single spatial market. This allows a test of the prin-
ciple that if a market is efficient with respect to the information available,
then the information conveyed by the price of commodity j in period t will
not improve the prediction of the price of commodity j in period (+1 over
the information already conveyed in the price of commodity j in period t.
This property has been studied mainly in regard to capital markets (Malkiel),
but Granger and Escribano's study of speculative prices for silver and gold
acknowledges that the concept is valid for commodities that are close sub-
stitutes.
*The author would like to thank Chris Delgado, Meyra Mendoza, Stephen Mink, Mark
Rosegrant, Alexander Sarris, Gotz Schreiber and Steven Younger for helpful suggestions on the
topic and to Gerald Shivley for excellent research support.
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44 BULLETIN
Our purpose, however, is not solely to study the efficiency of markets. The
results can be considered in the context of commodity price stabilization,
using either trade or storage policies. While storage remains an expensive
means to achieve a moderate amount of stabilization (Pinckney, Siamwalla),
implementation of such policies is made easier to the degree that internal
markets are integrated. Similarly, if price movements are efficiently trans-
mitted across commodities, stabilization policies can reduce the management
burden by concentrating on one commodity. Moreover, since ecological
conditions often dictate that regions of greatest food deficits consume differ-
ent staple crops than those produced in surplus regions, even when stabiliza-
tion programs are not attempted, governments may be interested in knowing
the relationship of price movements of the surplus commodity and the staples
in the deficit region. For example, regions of Ghana that are food insecure by
a number of measures are in the northern savannah where sorghum and mil-
let are primarily consumed (Alderman 1990). There is a need to know how
the markets for these commodities link with the markets for maize, on which
government policy is likely to focus.
II. METHODOLOGY FOR ANALYSIS OF MARKET INTEGRATION
Theoretical Considerations
As mentioned, the analysis proceeds in three distinct stages. First, we apply a
standard one-commodity model of price transmittal to a West African setting.
Second, we use the same structure to investigate price transmittal across
commodities. To a degree, this application is primarily statistical; theory does
not give an unambiguous expectation for the magnitude of the parameters of
the model. Nevertheless, as discussed below, theory does indicate that the
model is appropriate and day-to-day policy concerns indicate that it may be
useful. Third, we apply a separate set of analyses, consistent with the former,
which allow for testing hypotheses of information flows which are only
meaningful in a multi-commodity framework.
While this study does not aim to modify the basic theory and, hence, aims
for brevity in this section, a few points need to be addressed to justify the
approach followed. In particular, one needs to address both the relationship
that would exist across commodities and the potential insights that can be
gained by broadening the core model to a multi-commodity framework. In
doing so, we also reiterate some of the well-known reasons for considering a
dynamic structure (Hendry, Pagan and Sargan).
Takayama and Judge lay out a set of optimization models to prove that
when trade takes place, regional prices will differ by the transport cost. When
the optimal amount of trade is zero, the difference in price is less than that
cost. Furthermore, if supply or demand conditions in the two markets change,
it is possible that trade can shift so the price differential is the transport cost
with the sign reversed.
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