The Integration of the Indian Wheat Sector into the Global Market

Type:

SCID Working Paper 353

Author(s):

Published:

05/1/08

Region:

India

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Abstract:

World food prices have risen rapidly in recent months. The trend has brought up concerns about how markets in developing nations respond to international conditions. In this paper, I try to determine whether the price of wheat in India converges to the world level. Using monthly prices from the United States of America, Canada, Australia, Argentina, and India over a period of thirteen years, I look for evidence of cointegration among the series. Cointegrated series follow a common stochastic process, and thus can be said to move together. I first test for cointegration without restrictions to identify the number of cointegrating vectors and common trends, and then impose restrictions to see how quickly markets adjust to disequilibria. I find evidence that the world wheat trading centers are integrated, with Australia being the most dominant. The Indian wheat price does not converge with the other four. I next use the Granger Representation Theorem to model the adjustment of the markets to shocks. I find that the Indian market adjusts more slowly to a new equilibrium, but the total magnitude of adjustment is greater. Possible explanations include poor infrastructure, regional segmentation within India, and high levels of government intervention.