Cointegration and price transmission in wheat markets
Student name: Ms Meenal Arora
Guide: Dr Sushmita Chatterjee
Year of completion: 2012
Host Organisation: TERI University
Abstract: Since the beginning of 2006, the world has witnessed a steep increase in food prices in
general, and wheat prices, in particular, which has been a cause of concern for most countries
including India.International wheat prices in dollars during the year 2006 were 17 to 26 per
cent higher compared to 2005(USDA, ERS). At the same time, GOI booked 5.5 MT of wheat
imports,makingIndia‘s largest cereals imports in the last three decades. Thus one of the major
reasons for the high rate of increase in wheat prices in India since 2006 is expected to be the
high level of international prices, particularly U.S. prices and their transmission to domestic
prices. In the light of this background the objective of the study is to analyze the long run
integration of the wheat markets using Engle-Granger‘s Cointegration procedure and if such
relationship exists, the study seeks to evaluate if the transmission of the prices on the markets
is symmetric or asymmetric using Enders and Granger Threshold Autoregressive (TAR)
Model. The empirical analysis is based on the monthly data from Ministry of Consumer
Affairs of India and USDA,ERSfor January 2006 to January 2012. The results show that India
allowed only a small part of the increase in US prices to be transmitted to domestic
consumers.This is mainly due to high levels of government intervention in the agriculture
sector and existence of trade barriers in the U.S. wheat sales to India which weakened the
relationship between U.S. and Indian wheat prices.The objective of keeping food prices stable
has led the Indian government to adjust the MSP in such a way that only a relatively small
part of the international price changes is transmitted to farmers.
